Ontario’s war against non-compete clauses is all for show

As part of an attempt to give the impression of reforming the law in a way that benefits Ontario workers, the provincial government recently passed legislation “banning unfair non-compete agreements that are used to restrict work opportunities, suppress salary increases and wage growth” (an exception was made for executives).

In my opinion, this legislation is largely all for show.

The drafters of this legislation likely realize that non-compete agreements – which limit an employee’s right to work for a competitor after leaving their employment – are generally unenforceable. They will only be enforced in exceptional circumstances and only where the clause’s inclusion is “reasonable between the parties and with reference to the public interest”.

Supreme Court defined what is reasonable

That wording is from a 1978 Supreme Court of Canada ruling that laid out what the court should consider when determining whether a restrictive covenant is reasonable. The three factors, summed up in a 2019 Ontario Superior Court ruling, are:

•  Is there a proprietary interest entitled to protection?
• Are the temporal or spatial features of the clause too broad?
• Is the covenant unenforceable as being against competition generally and not limited to proscribing solicitation of clients of the former employer?

In short, a “no non-competition” law essentially bans clauses that are already largely worth little.

• Many workers will emerge from the lockdown in a better position
• Workers still have rights when facing layoffs or pay cuts due to COVID-19
• $2.5M class-action settlement gives private school teachers their due

What is interesting in the debate this law solicited is that very few individuals stood up for the non-compete agreement. There are in fact some instances where employees can rely on these agreements to leverage other valuable benefits. They can be used as a strategic tool to secure more money and other benefits in exchange for an agreement not to compete when the employment ends.

Let’s say an employee is joining company X to sell a product. That firm might benefit from having them sign a non-compete clause. Upon termination, the employee might be somewhat affected but not unreasonably so, thanks to the power of social media. However, in order to give the employer additional assurances around a promise not to compete, the employee could bargain early on for better termination provisions, such as more severance pay in their contract.

Non-compete clauses a useful tool

In short, the non-compete clause can be a tool that both parties to an employment agreement – in some limited cases – can gain mutual value from. For those people, the proposed legislation may take away some leverage and a tool that can provide for a “win/win” in some cases.

However, returning to the legislation and the comment to the effect that the law is largely designed for optics, it should not be ignored that, just because a ban on non-compete clauses is enshrined in provincial statute, that does not mean employers won’t try to rely on such clauses. Placing a clause that is later deemed unenforceable may have the same impact as whether the unenforceability stems from legislation instead of, formerly, judge-made common law.

It is difficult to legislate away a practice that can largely be engaged in with few consequences save for a later paper tiger of a judgment declaring a clause unenforceable. For instance, if an employee’s employment is terminated and they, unaware of the clause’s legality, simply obey the strictures of the clause, the damage to their ability to secure new work is done and little after the fact can cure this. I simply make this obvious point to state that real change for the benefit of employees cannot come from looking at something that is already illegal most of the time and declaring this to be the case by legislation. Such legislation is virtuous but is largely a solution looking for a problem.

Overall, the ban on most non-compete clauses has been dressed up as a boon to workers but it is really little more than empty rhetoric.

More from Cavalluzzo LLP:

Time will tell if new worker protection legislation is effective