Many Ontario business owners wonder whether they can use non-compete agreements with their employees. In some cases, these agreements can help businesses protect their interests and maintain a competitive edge – but it’s important to understand their enforceability and when a non-compete agreement may be appropriate.
This blog post will explore non-compete agreements, why businesses use them, and discuss their enforceability in Ontario and other Canadian jurisdictions.
What is a Non-Compete Agreement?
Non-compete agreements often appear in contracts between employers and employees. These agreements specify that employees cannot compete with their employer after employment ends. This agreement may specify the nature of the competition (for example, specifying that the employee cannot work with competitors or start a competing business) and the duration of the agreement (for example, stating that the employee cannot compete with their former employer for one year following the termination of their employment).
Why Do Businesses Use Non-Compete Agreements?
Non-compete agreements aren’t for everyone – they are much more popular in some business areas. Businesses typically use non-compete agreements for the following reasons:
Protecting Trade Secrets, Special Expertise, or Other Information
In some business areas, employees may obtain information regarding trade secrets, proprietary information, or other confidential information. Naturally, these businesses will have concerns about their employees leaving to work for competitors and potentially using or sharing this confidential information. In these situations, non-compete agreements can prevent employees from using or disclosing confidential information by working for or starting a competing company.
Protecting Customer Relationships
Both businesses and their employees often create strong client or customer relationships – so what happens when an employee leaves to work for a competitor and takes clients or customers with them? Non-compete agreements can help businesses by preventing employees from going to work for a competitor (along with loyal customers).
Protecting Employee and Project Investments
Investing in employees can be a lengthy – and often expensive – endeavour for businesses. But businesses invest in more than their employees – they also invest in projects and research by putting resources towards these efforts. A non-compete agreement can help protect a business’s investment by preventing employees from leaving for competitors (along with what they’ve learned from their former employer) and protecting sensitive project information.
Can I Use Non-Compete Agreements in Ontario?
As of October 25, 2021, Ontario employers are generally prohibited from using non-compete agreements in employment contracts.
Under s. 67.1 of the Employment Standards Act, 2000, SO 2000, c 41, any agreements between employees and employers that prevent an employee from engaging in any business, work, occupation, profession, project, or other activity in competition with the employer’s business after the employment relationship ends is prohibited.
Exceptions to Prohibition on Non-Compete Agreements
However, some exceptions to s. 67.1 of the Employment Standards Act, 2000, SO 2000, c 41 apply.
For example, businesses can enter non-compete agreements with “executives” (essentially, anyone with a chief executive position at the company).
Non-compete agreements may also be valid in limited circumstances relating to business sales. For example, if a business owner sells all or part of their business and, as a part of the sale, the buyer and seller agree that the seller will not compete with the business, and the seller becomes an employee of the buyer, a non-compete agreement may form part of the employment agreement.
What if I Entered a Non-Compete Agreement Before October 25, 2021?
Remember that the general prohibition against non-compete agreements applies to those entered after October 25, 2021 (when the Employment Standards Act, 2000, SO 2000, c 41 amendments were enacted). If you entered a non-compete agreement before October 25, 2021, whether as an employer or employee, the agreement may still be enforceable.
For further information on the rules applicable to your situation, consult an experienced business lawyer for guidance.
As non-compete agreements are prohibited, employees who believe they have entered into a non-compete agreement after October 25, 2021, can file an Employment Standards Act claim with the Ministry of Labour, Immigration, Training and Skills Development.
Additionally, employers and employees can bring disputes relating to the enforceability of non-compete agreements to court.
What if an Ontario Business Asks Me to Sign a Non-Compete Agreement?
Ontario employees are not required to sign a non-compete agreement, as they are prohibited under the Employment Standards Act, 2000, SO 2000, c 41. And, if you believe that you have been penalized by your employer (or a prospective employer) because you refused to enter into a prohibited non-compete agreement, you can file an Employment Standards Act claim with the Ministry of Labour, Immigration, Training and Skills Development.
Non-Solicitation and Non-Disclosure Agreements
For example, non-solicitation and non-disclosure agreements are not prohibited by the Employment Standards Act, 2000, SO 2000, c 41. These types of agreements work as follows:
- In a non-solicitation agreement, an employee is prohibited from actively pursuing clients, customers, or other stakeholders from their employer during or for a specific period after the employment relationship ends.
- In a non-disclosure agreement, employees are prohibited from sharing sensitive information about their business or its processes.
Final Thoughts on Non-Compete Agreements in Ontario
Ontario businesses can use non-compete agreements to protect their interests (including their competitive edge) in limited circumstances. However, even if a business is not eligible to use non-compete agreements in their employment agreements, other tools – such as non-solicitation or non-disclosure agreements – can play an important role in defining the limits of what former employees can do with sensitive information.
It’s worth noting that drafting legally-binding non-compete, non-solicitation, and non-disclosure agreements can be complicated. If you have questions or concerns about implementing these tools in your employment agreements, speak with an experienced business dispute lawyer.
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At Tierney Stauffer LLP, we leverage our considerable litigation experience to provide advice that is always in your best interests and the best interests of your company. Our business dispute lawyers take the time to understand your business before deciding on a course of action, keep you well-informed throughout the process, and ensure you make the best strategic decisions at every stage.