NON-COMPETITION CLAUSES IN EMPLOYMENT LAW: WILL THEY STAY OR WILL THEY GO?

On December 2, 2021, a bill received Royal Assent in Ontario enabling new statutory provisions to be included in the Employment Standards Act, 2000, S.O. 2000, c. 41 (the “Act”). The new statutory provisions effectively ban the use of non-competition clauses in employment contracts.

Of course, there are some circumstances where the ban does not apply. For example, a non-competition clause in an agreement may be enforceable if the agreement is for the sale of a business and certain criteria are satisfied. Similarly, if an employee is an executive, the ban does not apply.

As of February 26, 2022, there has been only one judicial decision in Ontario that has analyzed the new law against non-competition clauses in employment contracts: Parekh et al v. Schecter et al, 2022 ONSC 302 (“Parekh”). In Parekh, the plaintiffs purchased a dental practice from the defendants. It was agreed between the parties that one of the defendants would continue working with the new owners of the practice for four years following the sale. The same defendant signed an agreement, which included the following non-competition clause:

Non-Competition. The Associate shall not during the Term of this Agreement and for two (2) years thereafter, either directly or indirectly, whether as a proprietor, partner, shareholder, employee, associate or otherwise, carry on or be engaged in the practice of dentistry anywhere within a five (5) kilometer radius of the Premises.

The defendant subsequently began employment as a dentist at a location within a five kilometer radius, therefore constituting a breach of the agreement. The question before the court was whether or not the non-competition clause should be enforced. The court determined that the recent law against non-competition clauses in employment contracts did not apply in this case because the agreement was signed by the defendant before the new law came into effect. The court clarified that the new law does not apply to employment agreements signed on any date before October 25, 2021. The court subsequently determined that, at common law, the non-competition clause was unambiguous and the plaintiffs would suffer if the non-competition clause was not enforced. Ultimately, the court determined that the non-competition clause should be enforced and issued an injunction restricting the defendant from continuing to breach the non-competition clause.

The Parekh decision is advantageous towards employers, as it means employers may enforce non-competition clauses in employment agreements so long as such agreements are signed by the employee before October 25, 2021, or the clause satisfies the common law rules. In other words, employers have the benefit of reducing competition in their industries by way of employment agreements signed before October 25, 2021.

Alternatively, employees who sign employment agreements on or after October 25, 2021 and who subsequently work elsewhere contrary to non-competition clauses in those agreements, may argue in court that the clause is unenforceable as it violates the new statutory law and/or common law. In effect, new employees now have a greater ability to challenge restrictive restraints on trade and to work more flexibly within the bounds of their industries.

Non-competition clauses were once here to stay. However, thanks to changes in the law, they may now be here to go.