Non-compete agreements are commonly entered into by firms to safeguard their trade secrets, customer relationships, and competitive lead. Nevertheless, their enforceability has been remarkably limited in Ontario by the Working for Workers Act, 2021, prohibiting such contracts on the whole but exempting only executives and transactions involving the sale of a company. Ontario courts have in the past been hesitant to enforce extremely broad non-compete agreements, with preferential measures being taken in the form of non-solicitation and non-disclosure agreements. Familiarity with the law is essential for employers as well as employees to maximize compliance as well as safeguard their interests.
Organizations use many methods to safeguard their interests in today’s competitive business world, one of which is through the employment of non-compete agreements. The agreements limit employees from doing things that compete with the previous workplaces upon termination of work. The enforceability of these agreements, however, differs in various jurisdictions. In Ontario, recent legislative changes and court decisions have significantly impacted the validity and enforcement of non-compete agreements.
What is a Non-Compete Agreement?
A non-compete agreement is a provision in a contract that forbids an employee from being employed by a competing company or beginning a competing business for a set period and within a set geographic region after resigning from their existing employer. The purpose of such agreements is to safeguard the legitimate business interests of the employer, including confidential information, trade secrets, and customer relationships.
Although non-competition agreements can help businesses protect themselves, they may also place very important limitations on workers’ freedom to find another job. For that reason, the courts of Ontario tend to examine them carefully to be sure that they are reasonable and not too restrictive.
The Game-Changing 2021 Ontario Ban
Here’s where things get interesting. On October 25, 2021, Ontario essentially pulled the emergency brake on non-compete clauses. The provincial government enacted the Working for Workers Act, 2021, which inserted Section 67.1 in the Employment Standards Act, 2000 (ESA).
It was not a simple update, but a dramatic change in employment law. In the new provision, it is explicitly mentioned:
“An employer shall not enter into an agreement, or any portion of an agreement, with an employee that is, or that contains, a non-compete agreement.”
In plain English? Are non-competes enforceable in Ontario for most employees? No. They’re banned.
Why did Ontario do this? The government recognized that non-compete clauses were creating unnecessary barriers for workers trying to advance their careers. They were particularly harmful to workers in specialized industries who found themselves effectively locked out of their field for months or years after changing jobs.
Before you tear up that non-compete clause contract you signed, know this: the ban isn’t absolute. Ontario made two major exceptions in which the non-compete agreement will be considered valid and enforceable.
Exception 1: Executive-Level Employees
When you are in the C-suite, the rules are not the same. The prohibition does not extend to executives, namely those who hold titles of:
- Chief Executive Officer (CEO)
- President
- Chief Administrative Officer (CAO)
- Chief Operating Officer (COO)
- Chief Financial Officer (CFO)
- Chief Information Officer (CIO)
- Chief Legal Officer (CLO)
- Chief Human Resources Officer (CHRO)
- Chief Corporate Development Officer
- Any other “chief executive position”
Why the exception? The bargaining power of executives is much higher, and they have access to sensitive strategic information and typically bargain the terms of their employment process through legal counsel. They are presumed to be advanced parties capable of safeguarding their own interests.
Exception 2: Sale of a Business
The second exception applies when a business is sold. If you’re selling your business and agree to work for the buyer afterward, a non-compete clause in Ontario can be part of that deal.
This makes practical sense. Imagine buying a popular restaurant for $500,000, only to have the previous owner open an identical restaurant next door six months later, taking all their loyal customers with them. The buyer needs protection for their investment.
The case of Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388 (CanLII), illustrates this perfectly, in the case of the sale of a dental practice, which was negotiated between two dentists and had an accompanying condition that the selling dentist would not be allowed to practice within 15km of the sold practice during a period of five years.
When the seller violated this agreement by opening a competing practice nearby, the Ontario Court of Appeal enforced the non-compete agreement. The court emphasized that restrictive covenants in commercial sale contexts deserve different treatment than employment contracts because both parties typically have equal bargaining power and sophisticated legal advice.
What Happens to Old Non-Compete Agreements?
This is the million-dollar question many employees and employers are asking: “I signed a non-compete clause in 2019. Does the 2021 ban invalidate it?”
The answer came in the pivotal case Parekh et al v. Schecter et al, 2022 ONSC 302 (CanLII). In this case, dentists purchased a practice for $5.6 million in 2020. The selling dentist agreed to continue working there and signed a non-compete agreement restricting him from practicing within 5 kilometres for two years after leaving.
When he resigned and opened a competing practice nearby, he argued the 2021 legislation voided his agreement. The Ontario Superior Court disagreed, ruling that the ban only applies to non-compete agreements entered into on or after October 25, 2021. Agreements signed before that date remain subject to traditional common law enforceability standards.
This means if you signed a non-compete clause before October 25, 2021, it might still be enforceable, but only if it meets the strict common law requirements.
How Courts Evaluate Non-Compete Agreements Under Common Law
Even before the 2021 ban, Ontario courts were notoriously tough on non-compete clauses. They start with a presumption that these restrictions are unenforceable unless the employer can prove otherwise.
To be enforceable, a non-compete agreement must satisfy a three-part test established by Canadian courts:
1. Clear and Unambiguous Language
The clause must clearly define what’s prohibited. Vague language like “you cannot work in a similar industry” won’t cut it. The restriction must specify exactly what activities are forbidden.
In Martin v. ConCreate USL Limited Partnership, 2013 ONCA 72 (CanLII), the Court of Appeal struck down a restrictive covenant because it lacked a “clear outside limit”, meaning it didn’t clearly define its scope.
2. Reasonable in Scope, Duration, and Geography
Courts examine whether the restriction goes further than necessary to protect the employer’s legitimate interests.
Let’s illustrate with examples:
- Unreasonable: A junior marketing coordinator at a small Ottawa company signs an agreement that states they cannot engage in marketing activities within the province of Ontario for three years. Such a clause is too broad for application.
- Reasonable: An executive in a company with national operations who has access to strategic plans and lists of customers is not allowed to work with/for the direct competitors in particular major cities where the company conducts business for 12 months. This has a high probability of enforcement.
3. Safeguarding Legitimate Proprietary Interests
The employer should show that he/she has business interests that would be worth protecting, including:
- Confidential information and trade secrets.
- Business process or proprietary business methods.
- Customer relations which were developed and to which the employee had direct access.
- Developed training investments.
Courts won’t enforce a non-compete clause simply to prevent normal marketplace competition or to punish departing employees.
Non-Compete vs. Non-Solicitation: Understanding the Difference
Since non-compete agreements are now banned for most Ontario employees, smart employers have shifted to non-solicitation agreements, and these remain perfectly legal and enforceable.
Here’s the key difference:
- Non-compete clause: “You cannot work for any competitor or start a competing business.”
- Non-solicitation agreement: “You cannot actively reach out to or pursue our clients, customers, or employees after you leave.”
Think of it this way: A non-compete agreement says you can’t enter the arena at all. A non-solicitation agreement says you can enter the arena, but you can’t recruit players from your old team or poach their fans.
Example: Sarah works as an account manager at a Toronto marketing agency, managing relationships with 15 major clients. She decides to join a competing agency.
- Under a non-compete clause (now banned), Sarah couldn’t work for any marketing agency in Toronto for a year, even if she never contacted her former clients.
- Under a non-solicitation agreement (still legal), Sarah can work for the competitor immediately, but she cannot contact, email, or solicit business from the 15 clients she worked with at her previous agency.
The Ontario Court of Appeal validated this approach in MD Physician Services Inc. v. Wisniewski, 2018 ONCA 440 (CanLII). The court imposed a non-solicitation agreement which banned a former employee from soliciting clients whom they had served in the course of employment. The court found this restriction reasonable because it protected the employer’s legitimate client relationships without preventing the employee from working in their field.
The Legal Framework for Non-Compete Agreements in Ontario
Ontario’s policy on non-compete agreements received a major change with the coming into force of the Working for Workers Act, 2021. The statute modified the Employment Standards Act, 2000 (ESA) by adding Section 67.1, under which employers are expressly forbidden to enter into non-compete agreements with employees subject to certain exceptions.
Section 67.1(1) of the ESA states that:
“An employer shall not enter into an agreement, or any portion of an agreement, with an employee that is, or that contains, a non-compete agreement.”
This ban took effect on October 25, 2021. But there are certain exceptions to this rule:
- Executives: Officers in executive roles, including chief executive officers, presidents, and other C-suite officers, are exempted from this ban.
- Sale of Business: Non-compete agreements are permissible when they are part of a sale or lease of a business, where the seller becomes an employee of the purchaser or lessee immediately after the transaction.
Are Non-Compete Agreements Enforceable in Ontario?
In light of the legislative reforms, non-compete agreements made on or after October 25, 2021, are generally not enforceable in Ontario, with the stated exceptions being the exception. Employers seeking to enforce such agreements beyond the exceptions risk having them declared void under the ESA.
For non-compete agreements entered into prior to October 25, 2021, their enforceability is subject to common law principles. Courts consider the reasonableness, geographic reach, duration, and the particular duties of the employee. Historically, Ontario courts have been reluctant to enforce non-compete clauses, particularly where less restrictive alternatives, such as non-solicitation or non-disclosure agreements, would be sufficient to protect the employer’s interests.
What Employers Should Do Now?
As an employer in Ontario, the changes that have taken place in 2021 make you completely reconsider your approach towards defending the interests of the business. Here’s your action plan:
1. Audit Your Present Employment Contracts
Check all the employment contracts that were signed since October 25, 2021. Any non-compete agreements of non-executive employees are now invalid and non-binding. The invalidity of such clauses in your contracts may lead to legal liability.
2. Substitute Non-Competes with Enforceable Alternatives.
Focus on these legally sound options:
- Non-Solicitation Clauses: This is to ensure that your former employees do not steal your clients and employees. Make sure that they are specific to those clients that the employee has worked with.
- Non-Disclosure Agreements (NDAs): Protect confidential information, trade secrets, and proprietary data. These are quite enforceable, and they tend to be more efficient as compared with the conventional non-competition agreements.
- Confidentiality Provisions: It ensures effective confidentiality provisions which survive the termination.
3. Get Legal Review
The legal landscape for restrictive covenants is complex and constantly evolving. Having an experienced team of non-compete lawyers makes your contracts enforceable, and they must not be in violation of the existing Ontario laws. A single error in writing may make your whole deal a sham.
4. Think Over Executive Compensation Packages
For executive-level employees, where non-compete clauses in Ontario remain permitted, ensure the restriction is reasonable and adequately compensated. Courts scrutinize even executive agreements if they appear one-sided or oppressive.
What Employees Should Do?
If you’re an employee facing a non-compete clause, here’s how to protect yourself:
1. Know Your Rights
Understand that most non-competition agreements signed after October 25, 2021, do not apply in Ontario. Never allow an invalid clause to come in your way and try to take away career opportunities from you.
2. Review Old Agreements Carefully
If you signed a non-compete clause before October 25, 2021, it might still be enforceable under common law. Have an employment lawyer review it to assess whether it would hold up in court.
3. Document Everything
If you’re leaving a job where you had a non-compete clause contract, document:
- When you signed the agreement
- Your actual job duties and responsibilities
- What confidential information did you genuinely have access to
- The geographic area where you actually worked
This is what a non-competitive attorney can use to determine the enforceability.
4. Don’t Assume, Get Legal Advice
Never assume a non-compete clause is either automatically valid or automatically void. The enforceability depends on numerous factors, including timing, your position, how it was negotiated, and the specific wording. Seek the advice of professionally trained non-competition lawyers before taking a new job.
5. Watch out for Non-Solicitation Agreements
Although non-solicitation provisions are not as strict as non-competition restrictions, the violation of such agreements may have severe repercussions, including suits and injunctions. When you are bound by one, be sure what it prohibits.
The Consequences of Violating Enforceable Agreements
It is important to be explicit: breaching a non-competition or non-solicitation contract can have a drastic effect:
- Injunctions: Courts have the power to make you cease employment with the new employer. Just to imagine that you have embarked on a dream job, only to be forced to resign after two months.
- Financial Damages: You, and perhaps your new employer, may have to pay good money in terms of lost business, lost clients and legal expenses.
- Reputation Damage: Legal disputes follow you. Employers in future are not ready to give an opportunity to a person who has broken restrictive covenants.
- Career Disruption: A court-ordered injunction could force you out of work entirely until the restriction period expires.
In M & P Drug Mart Inc. v. Norton, 2022 ONCA 398 (CanLII), the Court of Appeal dealt with a case where the non-compete agreement was found unenforceable because it was overly vague and broad. However, the mere existence of the legal dispute caused significant disruption to the employee’s career and imposed substantial legal costs on both parties.
Case Law on the Enforceability of Non-Compete Agreements
Ontario courts have considered the enforceability of non-compete agreements in a number of leading cases:
- Dr. C. Sims Dentistry Professional Corporation v. Cooke (2024 ONCA 388)
The Ontario Court of Appeal upheld a non-compete provision that was included in an agreement for the sale of a business between two dentists. The court noted that restrictive covenants negotiated as part of the sale of a business are distinguished from those in employment agreements. - M & P Drug Mart Inc. v. Norton (2022 ONCA 398)
The court declared that the non-compete agreement was not enforceable since it was too broad and unreasonable in limitation. In such a decision, the Court of Appeal reaffirmed the finding by an application judge, holding that a non-competition covenant contained in an employment contract was not enforceable because it was too vague as well as overbroad. - MD Physician Services Inc. v. Wisniewski (2018 ONCA 400)
The court enforced a non-solicitation clause, stressing that such provisions are enforceable when reasonable and clear.
Why Do Companies Employ Non-Compete Clauses?
Employers include non-compete clauses to safeguard their business in the following manners:
- Protection of Confidential Information: Keeps former employees away from using trade secrets, proprietary knowledge, or confidential data.
- Retention of Client Relationships: Precludes employees from using client relationships for rival businesses.
- Shielding Investments: Upholds the capital spent on employees’ training and development.
Non-Compete Agreement Alternatives
As non-compete contracts are mostly voidable in Ontario, companies have begun using the following alternative clauses:
1. Non-Solicitation Clauses.
- The clause bars prior employees from contacting the firm’s customers or personnel for a reasonable duration.
- Judges find it more reasonable and easier to enforce than non-compete clauses.
2. Non-Disclosure Agreements (NDAs)
- NDAs preclude workers from making or utilizing confidential data received throughout the term of their employment.
- They are ubiquitous and stronger to enforce compared to non-competes.
How Can Pacific Legal Help?
Navigating the complexities of non-compete agreements, non-solicitation agreements, and other restrictive covenants requires specialized legal knowledge. Whether you’re an employer trying to protect your business interests or an employee concerned about your career mobility, Pacific Legal provides what you need.
Our experienced legal team understands the nuances of Ontario employment law. We stay current with the latest legislative changes and court decisions affecting non-compete clauses in Ontario. We’ve helped countless clients understand their rights and obligations under these challenging provisions.
For Employers: We draft enforceable restrictive covenants that protect your legitimate business interests while complying with Ontario’s strict legal requirements. We help you transition from outdated non-compete agreements to modern alternatives like non-solicitation agreements and comprehensive NDAs.
For Employees: We review your employment contracts to determine whether restrictive covenants are enforceable. If you’re facing a lawsuit or threat of injunction, we provide vigorous representation to protect your right to earn a living in your chosen field.
Our approach is straightforward: we explain complex legal concepts in plain language, provide honest assessments of your situation, and develop practical strategies tailored to your specific circumstances.
Need help with a non-compete or non-solicitation agreement? Contact Pacific Legal today for a consultation with our experienced employment law team.
Conclusion
In Ontario, non-compete clauses are now almost unenforceable since the Working for Workers Act, 2021, brought about legislative amendments. Except in the case of executives and sales of businesses, employers have to look for other measures of protection, e.g., non-solicitation and non-disclosure contracts. With the intricacies involved in employment law, companies and employees should consult lawyers so they can comply with the most recent developments in the law.
For professional legal guidance on non-compete contracts, schedule an appointment today.
