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New Ban on Non-Competition Agreements – A Deeper Look

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New Ban on Non-Competition Agreements – A Deeper Look Aquilina Law May 31, 2022

New Ban on Non-Competition Agreements – A Deeper Look

On December 2, 2021, Ontario’s Working for Workers Act, 2021 (the “Act”) became law. The Act, which seeks to amend various statutes with respect to employment and labour matters, makes Ontario the first province in Canada to ban non-compete agreements.

A non-compete agreement, also known as a non-competition agreement, is defined by the Act as an agreement, or any part of an agreement, between an employer and an employee that prohibits the employee from engaging in any business, work, occupation, profession, project or other activity that is in competition with the employer’s business after the employment relationship between the employee and the employer ends. While Canadian court decisions have been displaying in recent decades an ever-growing reluctance to enforce non-compete agreements, particularly in a post-employment context, this is to our knowledge the first time that a Canadian legislator has taken the bold step of legislating in this area of the law.

All non-compete agreements entered into from October 25, 2021 (which is the date the Ontario government first tabled the Act) onwards are prohibited except in two situations:

The first is the “chief executives” exception whereby non-compete agreements are permitted for any person who holds the office of chief executive officer, president, chief administrative officer, chief operating officer, chief financial officer, chief information officer, chief legal officer, chief human resources officer, chief corporate development officer, or any other chief executive position.

The second is the “sale of a business” exception. If there is a sale of a business or a part of a business and, immediately following the sale, the seller becomes an employee of the purchaser, the purchaser and seller may enter into a non-compete agreement prohibiting the seller from competing with the purchaser’s business after the sale.

The second exception is most interesting. A first reading would suggest that purchasers of businesses are well protected, but a closer inspection reveals that the protection is not as broad as it seems. Given that this exception targets situations where the seller becomes an employee, it presupposes that the seller is a physical person since in Ontario (as in the rest of Canada), as a matter of law employees can only be natural persons. Therefore, unless the term seller is to be expansively construed so as to include the ultimate beneficial owner or higher executives of the seller – the Act is silent on that point – it could be argued that the “sale of a business” exception will not apply to all sale structures. For instance, in an asset deal, the seller will be the owner of the assets, and for all but the smallest of businesses, the owner will not be a physical person. In such a case, the physical person who becomes the purchaser’s employee immediately following the sale is not the seller itself (unless an expansive interpretation of the term employee is put forward). Also, in the case of a share deal, if the target’s shares are owned by a holding company, partnership and/or trust, the seller will likewise not be an individual and there will therefore not be identity of persons between the seller and the employee of the purchaser, as the new law seems to require. In both scenarios, non-compete agreements intended to protect the purchaser would be prohibited under the Act, as one of the conditions of application of the “sale of a business” exception – namely that the seller become an employee of the purchaser – is not met. It is doubtful that this was the intended result though until a court rules on the question, uncertainty will remain.

It is also worth noting that the Act does not limit or prohibit non-disclosure, confidentiality, or non-solicitation agreements. Therefore, it remains possible in Ontario to enter into a contract with any employee, regardless of his or her rank, to prevent the employee from soliciting the employer’s clients or employees once the individual’s employment ceases. Nonetheless, non-solicitation clauses should be drafted carefully, as such clauses may be found to be non-competition clauses if their wording effectively prohibits competition (see Donaldson Travel Inc. v Murphy, 2016 ONCA 649).

Finally, it is interesting to note that non-compete agreements have been statutorily prohibited in varying degrees by over half the states of the United States. For example, California, one of the most restrictive states, prohibits most non-compete agreements, whereas Illinois, Maine and Maryland prohibit such agreements for low-wage workers only.

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