New year, new law. Now is the time for contract reviews

By Tony Poland, LegalMatters Canada • With the legislative change to non-compete clauses brought about by the Working for Workers Act, 2021, employers should be reviewing employment agreements to ensure they are in compliance, says Toronto employment lawyer Ellen Low.

“I have been seeing a huge uptick on new contract reviews since the second half of January. People are getting new jobs, they are getting new offers and they are getting those employment agreements, all of which is great,” says Low, principal of Ellen Low & Co. “People have been raising questions about non-compete provisions on both the employee and employer side since last fall when the legislation was introduced. We now have some clarity on who the new rules affect. So, from a very practical level, employers are going to want to have their employment agreements reviewed.”

In an amendment to the Employment Standards Act (ESA) that went into effect last October, the provincial government all but prohibited non-compete clauses “in order to make it easier for workers to advance in their career.”

‘These types of contracts often restrict employees’

“These types of contracts often restrict employees from taking new jobs with another business in the same field after they leave the company,” the province stated in a release when Bill 27 was introduced. Restricting the use of the clause will “also give the province a competitive advantage in attracting global talent.” 

Low tells LegalMattersCanada.ca that pre-existing non-compete agreements remain unaffected, but new employment contracts will be unenforceable if they contravene the new provisions. 

Under the amendment, there is an exception to the prohibition if a business is sold or leased and for certain executives, which are defined as “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 or chief corporate development officer, or any other chief executive position.”

“When this legislation was proposed there was concern about who is actually going to be exempt,” Low says. “The language is clear and it is basically anybody who has the title ‘chief,’ which is fair. The only question might be whether or not the person is truly an executive.

“It stands to reason then, that employment standards officers will no doubt be examining substantively what the executive is actually doing rather than just looking at the title alone,” she adds. “Traditionally in evaluating the Employment Standards Act, the Ministry of Labour has taken a holistic approach. Slapping a ‘chief’ in front of someone’s title is probably going to get seen through relatively quickly for what it is, which is trying to bargain for non-compete where one would be totally inappropriate.” 

Legislation led to new questions

Low says there was a question of whether all non-compete clauses, even those agreed to prior to October 2021 when Bill 27 was passed, might be cause to void a contract. However, the issue was addressed last month by the Ontario Court of Justice in Parekh et al v. Schecter et al, a case involving a non-competition agreement.

“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,” writes Justice Mohan D. Sharma.

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“It seems this theory has been tested and came up as wanting for clauses entered into before the retroactive enactment date,” Low says. “There is still, though, a live question in my mind about whether you can use an old, or post October 25, 2021 contract which has a now ‘illegal’ non-competition provision in it to challenge the legality of the contract as a whole, subject to a severability clause.”

She says one of the main problems with non-compete clauses is they “started off for executives but then trickled down to everybody.”

‘There were definitely tricky aspects to it’

“Literally, every contract had a non-solicit and a non-compete. Because of the nature of the law in Ontario, you could agree contractually to a non-solicit and a non-compete provision even if you weren’t a fiduciary,” says Low. “There were definitely tricky aspects to it because we know from common-law principles that fiduciaries are going to be and were at all times subject to these restrictive covenants with respect to duty of loyalty. But what can be complicated is determining who is properly a fiduciary such that these implied obligations of loyalty apply even after the employment relationship has ended. 

“Now what we have from the Working for Workers Act is defining language which is helpful,” she adds. “The intent of Bill 27 is to ensure that while you could have a contractual non-competition provision, it really is only going to be applicable to specific executives.”

Lows says now is a good time for employers to revisit their agreements.

“You certainly want to make sure that your contracts are reviewed and up to date,” she says. “There are all sorts of things to consider. Are you including a layoff and a rehire provision? Are you including a vaccination policy provision? And now do you have old contacts for mid-level executives who aren’t chief anything but who, otherwise, do have a contractual non-competition provision? If so, can they properly either be ignored or removed?”