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Ontario Bans Employee Non-Competition Agreements: What Does This Mean for Trade Secret Protection?

Fasken
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Overview

Trade Secrets & Data Security Bulletin

On December 2, 2021, Ontario’s Bill 27, Working for Workers Act, 2021 [PDF], received Royal Assent, making Ontario the first jurisdiction in Canada to ban non-competition agreements, in the context of employment, via legislation. Among its many features, Bill 27 has created a new statutory prohibition of non-competition agreements between employers and employees under the Employment Standards Act, 2000 (Ontario). According to an October 25, 2021, Ontario government press release, this new statutory prohibition is intended to “help workers in Ontario advance their careers and earn more money” and “give the province a competitive advantage in attracting global talent”, while also ensuring that “[e]mployers [will] still be able to protect their intellectual property through narrower clauses.”[1]

The Use of Non-Competition and Other Covenants to Protect Trade Secrets

While there are many forms of trade secret protection available, two of the most common forms of trade secret protection are: (1) restrictive covenants in employment contracts such as non-solicitation covenants and non-competition covenants; and (2) contractual confidentiality provisions.

Notably, the enforceability of the second of these, confidentiality covenants, has not been changed by the new legislation and so can continue to be used by employers, and also in a variety of commercial contexts, to prevent the misuse and disclosure of trade secrets and other confidential information. These confidentiality covenants allow businesses and employers to exercise control over the dissemination and use of their trade secrets and confidential information by setting out express terms regarding what constitutes confidential information and the manner in which such information may be used and disclosed.

A non-solicitation covenant may be used by employers to prevent departing employees from soliciting the former employer’s potential customers, existing clients, and employees. In the commercial context, a purchaser of a business may also use a non-solicitation covenant to restrain the vendor from later improperly taking away the businesses’ potential customers, existing clients, and employees. Non-solicitation covenants are not prohibited by the new legislation; however, the long-established case law in Ontario makes it clear that the courts will only enforce such a restrictive covenant if it is demonstrably reasonable (e.g., in terms of its scope, duration, etcetera). 

Finally, a non-competition covenant is a more drastic tool that, in the employment context, seeks to preclude former employees from working in the same industry or business as their former employer (usually with express time, scope and geographic limitations) or, in the commercial context, precludes the vendors, after the sale of their business, from competing with the business that was acquired by the purchaser.

The New Statutory Prohibition

Under the new legislation in Ontario, the Employment Standards Act, 2000 (Ontario) (the “ESA”) now prohibits an employer from entering into an agreement with an employee that includes a non-competition clause that restricts the employee from engaging in “any . . . activity that is in competition with the employer’s business after the employment relationship between the employee and the employer ends”, unless:

  • the employee sold or leased the business to the employer but, immediately following the sale or entering into the lease, became an employee of the business; or
  • the employee is the president of, or holds any chief executive position within, the employer’s business.[2]

Unless one of these exceptions applies, the new statutory prohibition precludes non-competition clauses in agreements entered into with employees on or after October 25, 2021. While the prohibition clearly applies to agreements between employers and employees, it also extends to agreements between job applicants and prospective employers. Importantly, the prohibition does not apply to commercial agreements (i.e., outside the employment context), nor does it apply to agreements with independent contractors (or other individuals who are not employees under the ESA).[3]

The new statutory prohibition is consistent with the longstanding common law presumption that a non-competition covenant in an employment agreement was contrary to public policy and generally unenforceable. Ontario courts have long differentiated between commercial (e.g., sale of a business) and employment contexts concerning non-competition provisions, and have long taken a much less tolerant view of non-competition covenants in employment agreements. For example, Ontario courts would rarely enforce a non-competition covenant against a mere employee (i.e., someone who is not a senior executive) and especially where a confidentiality or non-solicitation covenant would have adequately protected the employer’s interests. In commercial agreements (e.g., between vendors and purchasers), the courts were, and presumably will continue to be, more willing to enforce reasonable non-competition covenants. Manifestly, there is a lower likelihood of a power imbalance existing between the parties in such a context as compared to the employment context.

The exceptions to the new statutory prohibition are also consistent with the common law. For example, where a vendor remained an employee of a business that had been purchased, courts were willing to enforce a reasonable non-competition covenant for a period of time after the employee-vendor left the business. In addition, a non-competition covenant was more likely to be enforced in the case of a senior management employee, for example, where the senior employee had discretionary power over important aspects of the business. This concept is reflected in the exclusion of chief executives and other senior executives from the new statutory prohibition on non-competition covenants in employment agreements. 

Key Takeaways

The new statutory prohibition codifies and re-enforces important common law principles regarding non-competition covenants in employment agreements. Such covenants were generally unenforceable and now clearly are, absent the exceptions expressly provided for in the new legislation. In both employment and commercial contexts, express contractual provisions remain one of the most effective and proactive ways to protect trade secrets, confidential information and other legitimate business interests.

If you have questions about protecting your confidential business information and trade secrets, please contact a member of Fasken’s Trade Secrets & Data Security team. Fasken has extensive experience with advising and assisting clients, across a wide variety of industries, regarding how to protect their business interests, including, where appropriate, through injunctions and other extraordinary remedies.


[1] Ontario, Labour, Training and Skills Development, News Release, “Ontario Creating a Better Future for Workers: Province to Introduce Legislation to Help Make Ontario the Best Place to Work, Live and Raise a Family” (25 October 2021), Ontario Newsroom.

[2] See Employment Standards Act, 2000, SO 2000, c 41, ss 67.1, 67.2(1)–(5).

[3] See Employment Standards Act, 2000, SO 2000, c 41, s 1(1).

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