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Non-compete agreements stifle innovation and the incentive to learn

Ontario is the first province in Canada to ban non-compete agreements

The days of working for one employer for an entire career are over. But for many employees changing jobs isn’t easy if they’re restricted by a non-compete clause in their employment contract.

What is a non-compete agreement?

A non-compete agreement typically specifies that for a period of time, within a specific geographic area, an individual will not work for a business that competes with their current employer. Employment lawyer Peter McSherry said, “While the primary rationale for non-compete agreements is to prevent workers from sharing trade secrets with rival companies, it often comes at the expense of workers and the entrepreneurial spirit.”

How do the courts view non-compete agreements?

Non-compete agreements could have a huge impact on the career trajectories of many workers. McSherry said, “The courts would ask if it’s unfair to an employer to suddenly have to face off against an employee who could use the knowledge that they’ve acquired to gain a competitive edge against their former employer.”

Non-compete clauses are typically written into the contracts of top tier directors. For example, it could be the head of marketing who knows the product, the place, the price, the promotion, and all the costs of products and programs. McSherry said, “The way the courts have looked at it is, if the employer wants to protect their interests, they must "use a rifle, not a shotgun” They won’t let an employer use a spray gun approach.”

The court would frown on an employer who tried to prevent an employee from working anywhere in North America for the next 10 years.

Let’s say a business in Guelph, with 99% of its customers in Guelph prevented an employee from starting the same kind of business in Toronto. McSherry said, “The courts would rule that there is no legitimate interest in preventing the former employee from doing business in Toronto.” The more specific the agreement, the shorter the time frame, and the more rationally connected it is to what the company wants to protect, the more likely the clause would be upheld.

Non-compete agreements are banned in Ontario

Effective October 25, 2021, the Ontario government banned non-compete agreements, however employers can still protect their intellectual property and confidential information through properly worded, non-solicit agreement and confidential information clauses. The government sees non-compete agreements as limiting the job opportunities of highly skilled workers, inhibiting the incentive to develop new skills, and deterring workers from striking out on their own to start their own companies.

Stripping workers of their right to move among employers can also suppress wages. McSherry said, “It puts an employer in a much stronger bargaining position. They could pay their employees less because they wouldn’t have to necessarily remain competitive with what somebody else is prepared to pay them.

The province says banning non-compete agreements would help workers advance their career and earn more money while giving Ontario a competitive edge in attracting global talent. Prohibiting non-compete agreements will give workers, start-ups, and small businesses a fairer shot at advancement.

It was not only highly paid professionals who were being hamstrung by non-compete clauses. McSherry said, “We were starting to see a practice of non-compete agreements starting to creep into lower wage sectors that you never thought would be covered by such an agreement.”

Exceptions to the rule

Employers are permitted to sign non-compete agreements with company executives and with the seller of a company who was then hired back as an employee. The prohibition does not apply to non-compete agreements signed before October 25, 2021.

Beware of ignoring the non-compete ban

If companies do not comply with the new non-compete rules, they risk invalidating employment contracts. McSherry said, “If an employer tries to put the provision in after October 25th, then all bets are off as to whether they will be able to enforce a termination provision without running afoul of the Employment Standards Act.”

Peter McSherry believes banning non-compete agreements for most employees while continuing to protect intellectual property is good for everybody. And it codifies what has been the practice of our courts.

Contact Peter McSherry at (519) 821-5465 or visit: