The Working for Workers Act, 2021 (the “WWA”) passed into law on December 2, 2021. One of its more notable aspects was to ban the use of non-compete agreements in Ontario. Non-compete agreements restrict how workers may conduct themselves both during and after employment. Most importantly, they can prevent employees from working at competing businesses for long periods (often for several months or years) after the employee’s job has ended.

In our experience, the use of non-compete clauses had grown significantly in recent years. It had gotten to the point where it was commonplace to see such language in most employment agreements. Even entry level workers were being made subject to non-compete obligations.

At common law, non-compete agreements are considered presumptively unenforceable. They prohibit what would otherwise be lawful economic activity and can have a negative financial impact on workers. As such, to enforce a non-compete restriction, employers are required to demonstrate: 1) there is a legitimate business interest underpinning the non-compete; and 2) that the non-compete is drafted narrowly to avoid being ambiguous or overbroad in application. In practice, many non-compete agreements fail to meet these stringent requirements.

Notwithstanding the difficulty of enforcing a non-compete clause, their mere existence in employment contracts often has a chilling effect on workers. Many employees adhere to the terms of even unenforceable non-compete agreements out of ignorance of their legal rights or fear of employer retaliation.

What exactly is banned?

Ontario’s non-compete ban has a few quirks:

• It only applies to provincially regulated employers and employees;
• There are two carve-outs from its application – non-compete agreements are still allowed in the context of a sale of business and for executive level employees; and
• The WWA specifies that the non-compete ban took effect retroactively as of October 25, 2021.

Other restrictive covenants (such as non-solicitation, confidentially, and intellectual property clauses) are unaffected by the ban.

What happens to old non-compete agreements?

Given that the non-compete ban has a specified start date, many have wondered what will happen to agreements entered into before October 25, 2021. The WWA is itself silent on the subject. The Ontario Ministry of Labour, however, quickly took the position that old non-compete agreements remain valid despite the new ban.

Now the Ontario Superior Court of Justice has also answered the question. In the case of Parekh et al v. Schecter et al, 2022 ONSC 302, Justice Sharma ruled that Ontario’s non-compete ban does not invalidate old non-compete agreements.

Specifically, Justice Sharma was presented with a non-compete agreement dated January 20, 2020. It restricted an employee’s right to practice dentistry for a 2-year period within a 5-kilometre radius of his then employer’s place of business. In late October 2021, the employee left to work for a competing dentistry within the restricted 5-kilometre radius.

In defence of his apparent breach of contract, the employee argued that the WWA rendered all non-compete agreements in Ontario invalid (including those entered into before October 25, 2021).

Justice Sharma rejected this interpretation of the law, and instead concluded (at paras. 46-48):

Section 34(3) of the WWA states that section 4 (containing the new ESA provisions prohibiting non-compete clauses) “is deemed to have come into force on October 25, 2021.”   Typically, legislation comes into effect when a Bill receives Royal Assent, or on a date to be named by proclamation by the Lieutenant Governor.  But here, the legislature selected a specific date before Royal Assent happened on December 2, 2021.

Faced with this express legislative intent to make the ESA amendments applicable as of October 25, 2021, and not earlier, it cannot be said the provisions with respect to the non-compete clause applies to contracts of employment with non-compete clauses entered into before October 25, 2021.

At most, and in respect of this case, the new ESA provisions confirms the public policy against restraint of trade, which has already been accepted in the common law. [emphasis added]

Takeaway

It remains to be seen whether the Parekh decision will be appealed. For the time being, however, it is advisable to assume that old non-compete agreements remain valid. Such agreements will still be subject to common law scrutiny as to their reasonableness and scope. Accordingly, employers and employees would be well served to seek legal advice whenever confronted with a non-compete agreement.