Plot Twist: New Exceptions Water Down Ban on Employee Non-Compete Agreements

We previously wrote about the Ontario government’s Bill to ban most non-compete clauses in employment agreements.  That Bill was passed on Dec. 2, 2021, but there was a last minute plot twist to broaden the exceptions to the ban.

Background

Non-competition contract clauses were already on shaky ground in Ontario due to judge-made law in court decisions.  These cases have typically disapproved of non-competition clauses as anti-competitive and against public policy to the extent that they restrain an employee from legitimately seeking a new job.  A non-compete clause may still be upheld by the courts in exceptional circumstances.   Non-compete agreements were often considered reasonable and enforceable in the case of a sale of a business, to prevent the former owner of the business from competing with the business that was just sold and undermining the value of the sale. 

The Ontario government decided to try to add further clarity on non-competition agreements and made a policy decision to prohibit use of non-compete agreements with employees in almost all cases. Under the prohibition of non-competition agreements, companies would have to rely on other clauses to protect their business against departing employees, such as clauses regarding non-solicitation of customers and non-disclosure of information.  Certain key senior employees also have a common law duty of trust, called a fiduciary duty, not to act in bad faith and divert opportunities from the company they left.

The Bill’s Path to Approval

The first iteration of the Ontario Bill prohibited entering into non-compete agreements except where used in in a sale of a business, when the seller stays on as an employee.  There was some uncertainty as to the scope of application in a sale situation, but the prohibition was very clear that use of non-competition clauses in other situations was not permitted.

The Bill was passed and is now in force.  However, the law now has significant new exceptions.  The prohibition on non-compete clauses no longer applies to an employee that is an executive.  The term “executive” is specified to include the chief executive officer, president, chief administrative officer, chief operating officer, chief financial officer, chief information officer, chief legal officer, chief human resources officer and chief corporate development officer. It will also catch any other chief executive position.

The amendments  appear to be motivated by general business concerns, rather than intellectual property considerations, otherwise, the common science and technology company roles of chief technical officer or chief scientific officer roles would have been specified.  However, these roles are caught by the catch all reference to chief executive positions.  It will be interesting to see how some companies may amend some job titles in future to align with the new law, where a company wishes to try to have a valid non-compete clause.  Prospective employees applying for executive positions will need to carefully consider the wording of any non-complete clauses in their offer letters.  Those applying for non-executive roles should push back if there is a prohibited non-compete clauses in an offer letter.    

This exception does not modify the judge-made law that raises a cloud over validity where there are no exceptional circumstances.  It will be interesting to see how companies try to use this new law in future court cases to try to breathe more life back into non-competes clauses against executives.  

The sale of business exception also now includes lease of a business.

Companies will have to take the new law into account before using non-compete clauses in employment agreements.  Regulations may also follow that affect the scope of the ban.  The last minute amendment has created new uncertainties in the formerly clear law.  These new rules will likely be contested in the courts and in the Ministry of Labour^[1].