Written on behalf of Peter McSherry
Employers have certain tools available to them to limit the type of employment activities their workers engage in after the employment relationship ends. Two examples of these mechanisms are non-competition and non-solicitation clauses. These are provisions which are included in an employment contract that restrict the employee’s work-related activities once they’re no longer working for the employer. But how enforceable are these clauses?
Non-competition clauses intended to insulate employers from competition
A non-competition clause is an agreement intended to prevent employees from competing with their employer’s business after their employment relationship ends. It generally prohibits the employee from engaging in any work, business, occupation, profession, project or other activity in competition with the employer’s business after they’ve left the job.
From the employer’s perspective, it is beneficial as it protects them from the possibility of their former employees leveraging their unique skills and experience and joining a competitor’s business or starting their own venture in the same line of work.
For employees, a non-competition clause can be a serious impediment to their career prospects. Accordingly, the Ontario government has restricted when a non-competition clause can be used.
Ontario prohibits non-competition clauses with few exceptions
In December 2021, the Ontario government amended the province’s Employment Standards Act (the “ESA”) to prohibit employers from entering into an employment contract with their employees that includes a non-competition clause. The prohibition came into effect in October 2021, although there are a few exceptions to the rule.
Non-competition agreements entered into before October 25, 2021, are not prohibited. However, the courts have generally been very reluctant to enforce non-competition agreements even before the ESA amendments. In fact, they are generally presumed to be unenforceable unless the employer can demonstrate that they’re reasonable in the circumstances. If you have any questions or concerns about the enforceability of a non-competition clause, it is a good idea to seek legal advice from an experienced employment lawyer.
Prohibition applies to all stages of employment relationship
The prohibition against non-competition clauses in the ESA applies before the employment relationship begins, during employment, and after the employment is terminated. For example, the following situations are barred under the ESA:
- An employer requests that a potential employee sign a non-competition agreement before being hired,
- An employer amends a current employee’s contract during the course of employment to include a non-competition clause, or
- An employer asks an employee to sign a non-competition agreement as a condition of receiving their severance package on termination.
Two situations where non-competition clauses are permitted
The ESA sets out two circumstances where the inclusion of a non-competition clause in an employment contract is permitted:
- In the sale of a business, where the seller becomes an employee of the purchaser immediately after the sale; and
- When the employee holds an executive title, such as CEO or president of the employer.
What is the difference between a non-competition and non-solicitation clause?
A non-solicitation clause in an employment contract restricts an employee from soliciting their employer’s clients, customers, staff, accounts or vendors. Generally, the restriction applies during the course of employment and for a specified period after the employment relationship has ended.
Unlike non-compete agreements, non-solicitation agreements are not prohibited under the ESA. Courts have often declared that non-solicitation clauses generally suffice to protect an employer’s interests where a non-competition clause goes too far. As such, courts tend to uphold reasonable non-solicitation clauses that fairly balance the parties’ interests. The Supreme Court of Canada outlined the key factors determining whether a non-solicitation clause is reasonable in Elsley v. JG Collins.
Determining whether a non-solicitation clause is reasonable
In Elsley v. JG Collins, the Court highlighted three factors that must be considered in deciding whether a non-solicitation clause is reasonable:
- Did the employer have a proprietary interest entitled to protection? In other words, did the employer have a valid reason to protect something?
- Were the temporal or spatial aspects of the clause overly broad? Did the clause cover too large a geographical area or too long a period?
- Is the clause unenforceable as restricting competition generally, and not limited to proscribing solicitation specifically?
Reasonableness analysis usually turns on spatial and temporal terms of the clause
In most cases, the question of whether a non-solicitation clause is deemed reasonable depends on the temporal and spatial dimensions of the clause. Concerning the time period for which the clause applies, what is considered reasonable largely depends on the industry norm. This could range from a couple of months to several years in more specialized business sectors. The shorter the duration, the more likely it is that the clause will be found to be reasonable.
If the non-solicitation clause is limited to customers or clients of the employer, a geographic term may not be relevant or required. If a spatial term is included, it should be in unambiguous language and specify exactly which customers and clients are off-limits.
Contract terminology is not always determinative
The language used in an employment contract does not determine whether a non-competition or non-solicitation clause is enforceable. Rather, the courts will look to the substance of the provision in determining its proper characterization.
Contact Peter A. McSherry Employment Lawyer in Guelph for Help with Non-Solicitation and Non-Compete Clauses
At Peter A. McSherry Employment Lawyer, our dedicated employment law team has years of experience helping clients understand their employment contracts and shed light on key provisions, such as non-solicitation and non-compete clauses. We can help you understand the agreement you’ve signed and evaluate whether the clause is valid. If you have questions about your employment contract, contact us online or by phone at 519-821-5465.