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Non-competes: What are they good for?

Far from uncommon in Canada, they're not much help to anyone. And probably even less so now that FTC is proposing to ban them in the U.S.

Crossing the street
Photo by Ryoji Iwata on Unsplash

You can get a lot of free cradle-to-grave legal advice on the internet these days — simple document templates covering everything from setting up trusts to writing wills. But as with many things that come cheap, the price tag sometimes tells you all you need to know about the product.

Case in point: non-compete contracts. They’re “restrictive covenants” that bar an employee from working in a particular profession or field, in a specific geographic area, for a set period of time. They’re typically associated with the professions, or with employees in executive positions.

But you can find them in all sorts of workplaces in Canada, from retail to health care to food services, because they’re part of boilerplate contracts drafted by head offices, or because somebody downloaded a free contract template — or because nobody bothered to find out whether they could make a non-compete clause stick.

Typically, they can’t. Non-compete clauses were tough to enforce in Canada under common law well before Ontario became the first jurisdiction in the country to expressly outlaw them in most circumstances, through the Working for Workers Act in 2021. Expect them to become even more scarce now that the U.S. Federal Trade Commission has introduced a rule barring companies from imposing non-compete clauses on employees.

“If asked, I’d tell employees that they can probably ignore [non-compete clauses], that they can say no,” says Christopher Deehy, a partner in labour and employment law at Lapointe Rosenstein Marchand Melançon in Montreal. “In most circumstances, these agreements are unenforceable.

“And to companies, I’d say such agreements are not exactly a brilliant HR move, certainly not in this employment climate.”

Ontario’s 2021 legislation merely codified how courts in Canada were approaching non-compete clauses already. The provincial law bars employers from binding employees to non-compete agreements in almost all circumstances. Non-competes can be imposed in Ontario on only two classes of employees: company presidents, CFOs and other C-suite types; and anyone who sells all or part of a business and then goes to work for the purchaser as an employee.

That reflects Canadian caselaw, which tends to treat non-competes as a restriction of trade that must be justified in every case. That means the remedy (barring someone from making a living in a certain field, in a certain place, for a certain time) must be proportional to the alleged harm facing the employer (the sudden emergence of a former employee as competition).

And the terms of the remedy must make sense. A court might accept a six-month non-compete for a departing executive on Bay Street. It’s highly unlikely to swallow a non-compete agreed to by a sales rep at a big-box store, or the manager of a franchise sandwich shop — neither of whom can be expected to hold the lives of entire corporations in their hands.

And yet, non-compete agreements are far from uncommon in Canadian workplaces — presumably because those workplaces aren’t being told they probably can’t be enforced.

“A lot of companies are simply copy-pasting standard form contracts and just changing the salary and the start date,” says Jennifer Koschinsky, senior counsel at Stikeman Elliott’s employment and labour group in Calgary.

“They’re not necessarily giving any consideration to whether the terms of the contract are actually appropriate for the employee. At some point, they came up with a standard contract, and they’ve just been copying and forwarding it on ever since. But such contracts can lead to trouble down the road.”

The 2022 Labour Force Survey pegged Canada’s unemployment rate at just 5%. Hourly wage growth remained above 5% for seven consecutive months last year. Many sectors are facing recruitment shortfalls; a shortage of trained staff is worsening the crisis in provincial healthcare systems.

So non-competes can send exactly the wrong signal at the worst possible time to prospective employees. They also can leave those prospective employees with leverage they wouldn’t otherwise enjoy.

“If you tell someone that, as a condition of their employment, they have to stay out of the field for 12 months after leaving the job, that employee could respond, ‘Fine, you want me at home for 12 months, pay me for 12 months,’” says Koschinsky. “That’s where I see pushback from employees manifesting itself.”

However, not every job-seeker has the sophistication and patience to parse the fine print. Neena Gupta, a partner in employment and human rights law at Gowling WLG, says the Ontario law recognizes that many people may feel bound by a non-compete deal — even one that is completely unreasonable.

“It’s not fair to expect, say, tech workers to understand the intricacies of labour law when they negotiate the terms of their employment. Most people want to be honourable, to live by the commitments they make,” she says.

“One of the things the legislation achieved, I think, was to relieve employees of the anxiety they might feel when seeking other employment. It also will reassure employers who might look at a non-compete agreement and assume it isn’t even worth talking to the prospective hire.”

And it’s not as if employers don’t have other means of protecting themselves from a departing employee. Businesses can lose customers and confidential information to former workers looking to establish themselves elsewhere — it’s happened before. But the solution typically isn’t to attempt to force the former employee out of the market altogether.

Non-solicitation agreements can prevent a former employee from poaching a firm’s clients for a period of time. Non-disclosure agreements can protect a former employer’s private business plans. Both types of agreement avoid the flaw in non-competes —they don’t amount to a restraint of trade. So courts are more likely to let them pass.

And non-competes are blunt instruments that can distract a company from its real problems, says Koschinsky.

“What I ask employers is, what exactly are you trying to protect? And are there other ways to protect it?” she says.

“If you’re worried about losing an employee’s clients when the employee moves on, build up the team around the employee so that doesn’t happen. Consider a non-disclosure agreement or a non-solicitation agreement. Why put yourself at risk?

“And is it reasonable to bar someone from working in their field or profession for a year, two years? Frankly, if you need two years to repair your relationship with your customers, you’ve probably lost them already.”