Use of Employee Non-compete Agreements About to Become Void in Ontario
The Ontario government introduced draft legislation[1] that will void non-compete agreements for most employees.
The Non-Compete Agreement
Non-compete agreements between a company and an employee usually come into play when an employee quits and wants to work for a competitor or start their own competing business. However, the previously signed non-compete agreement prohibits the former employee from competing with their ex-employer in a certain area of business. There is usually a specified time limit and geography[2]. For example, an agreement may prohibit competition in a specified field of business within Ontario for a period of 12 months after employment.
Most commonly, the non-compete agreement is not a stand-alone agreement. It is usually found in the form of a non-complete clause in a larger agreement. Non-compete clauses may appear in an employment contract, a contract for services, or as part of a transaction, such as a sale of a business.
Non-Compete Agreements Were Already on the Ropes in Ontario
I have previously written about how non-compete agreements must be used with caution. Under current Ontario law, there is only a narrow pathway to having a valid non-compete agreement with an employee. They are valid and enforceable only in exceptional circumstances[3] Non-compete agreements have long been unpopular with Ontario courts because of public policy interests in employee mobility and competition.
These agreements are still used by some employers, despite the validity issues. These employers either don’t know or care about validity issues, or they plan to take their chances on establishing validity later if challenged in court. The employee has the choice to decline an employment offer or negotiate against the clause, but the employee may have limited knowledge, or lack bargaining power compared to the employer. Even if a clause is likely to be invalid, the uncertainty can make a former employee feel restricted from taking a new job with a competitor company. At a minimum, there has been a need to stop employers from abusing non-compete agreements to restrict job mobility of low-paid workers that don’t possess company confidential information.
Most Non-Compete Agreements Will Become DOA
Once the new law is passed, if an employer enters into an Ontario employment contract or other agreement that includes a non-compete agreement, that non-compete agreement is void. Even exceptional circumstances will not save the non-compete agreement. The only valid non-compete clause will be if there is a sale of a business and the seller becomes an employee of the purchaser.
The legislation may be retroactive, which will be determined in eventual litigation[4]. However, grandfathering is not a significant issue for many existing non-compete agreements, which were already likely to be of dubious validity based on the current law established in Ontario court cases.
IP-Focused Non-Compete Agreements Should Have Also Been an Exception, but are Not
There is a justifiable benefit to a narrowly drafted non-compete agreement that focuses on protecting intellectual property (“IP”), for example, by preventing work with a competitor on specified, key subject matter. I have previously written about how such restrictive covenants are fair in some circumstances involving intellectual property. A goal of the non-compete agreement would not be to inhibit competition or employee mobility, but to reduce the risk that valuable IP, such as trade secrets, could leave the company with the employee. It often takes much time, expense, effort and research to develop IP.
How to Protect IP without a Non-Compete Agreement
Companies can still protect IP without Non-Compete Agreements. Confidentiality clauses in employment agreements help protect IP. A company may also have patent or copyright protection on its IP, which provides another measure of control. In some cases, an IP-focused non-competition clause would simply have been an additional, reasonable contract term to further protect IP.
The Future
The policy balance in the use of non-compete agreements is about to shift significantly in favour of employees. This should have been more balanced against permitting narrower non-compete clauses that focus on intellectual property. The Ontario government hopes that the proposed ban of certain non-compete agreements will provide clarity and a competitive advantage in attracting employees to Ontario. Employers will likely have mixed feelings about the new rules since many do not use non-competition agreements.
