Update on Bill 27: Ontario bans non-competes

9 minute read
16 December 2021

It's been nearly two weeks since the Ontario government gave Royal Assent to Bill 27, Working for Workers Act, 2021 ("WWA"), and therefore, we've had some time to think about some issues that are not entirely clear from the legislation. The purpose of this bulletin is to try to address those issues.



Are existing non-compete agreements caught by WWA?

We had previously written that there was no grandfathering under the WWA, which we need to clarify.  WWA provides that section 4, which prohibits employers from entering into an employment contract or other agreement with an employee that includes a non-compete agreement, was deemed to be effective on October 25, 2021.  Following passage of WWA, the Ontario Ministry of Labour posted the following on its website:  Employers are prohibited (with some exceptions), from entering into a non-compete agreement with an employee. "Non-compete agreement" is defined in the ESA.  This prohibition does not apply to non-compete agreements entered into before October 25, 2021.  [bold added]. 

While published "guidance", even from the Ministry of Labour, is not binding, meaning tribunals/courts may still interpret the legislation in a different manner, we are of the view that this provision should be taken at face value, and employers may reasonably take the position that any non-competition agreements entered into with their employees prior to October 25, 2021 will not automatically be deemed void.

It is significant to note, however, that this does not mean that all non-competition agreements entered into prior to October 25, 2021 will be enforced. To the contrary, non-competition agreements/provisions remain unlikely to be enforced absent exceptional circumstances, and must still pass the usual scrutiny of our courts.  This legislation really changes nothing in that regard and frankly, codifies what has historically been the practice of our courts.

The importance of clarifying the date at which non-competes are clearly deemed void stems from prior decisions dealing with contractual provisions which were deemed contrary to the ESA with the result that an entire employment agreement or other provisions in an employment agreement were found to be void/unenforceable.  There is, therefore, concern that continuing to include non-compete provisions in existing employment agreements may result in a future finding that the entire employment agreement is void/unenforceable or at least other provisions (such as other restrictive covenants or termination provisions) are void.  This remains a risk; however, for the time being, and until there is further clarification on this issue by regulation or court/tribunal decision, we believe that both the rules of interpretation, and guidance from the Ministry of Labour militate in favour of not applying this provision to any non-compete agreements entered into prior to October 25, 2021.

If changes are made after October 25, 2021, to other terms of an existing employment relationship, can we still rely on non-compete agreements that were entered into prior to October 25, 2021?

All language that prohibits competition after employment ends should be deleted from employment agreements that are entered into after October 25, 2021 with all employees unless the employee falls within one of the 2 exceptions discussed below. In our opinion, this includes amendments made to existing employment agreements.

In other words, if an employer changes, after October 25, 2021, any material term of employment, which may include salary, incentive compensation, termination provisions, work location, etc., of an existing employee's employment and/or requires an existing employee to sign/acknowledge/accept/or receive a notice of a change in terms, and the employer still intends to rely on the balance of the existing terms entered into prior to October 25, 2021, there is significant risk that WWA is triggered, and the non-compete provision in the pre-October 25, 2021 will be deemed void, and therefore, risk the enforceability of other provisions in the agreement. Accordingly, where there is a change in terms, we recommend incorporating deletion of the prior non-compete language as part of the amendment.  This is particularly so where the new agreement, amendment or notice provides "all prior terms set out in your existing employment agreement continue to apply."  Think of this like a building that no longer complies with certain zoning by-laws.  So long as no changes are made to the building, the owner has an allowable, legal, non-conforming use.  But, as soon as the owner renovates that building, it must be brought into compliance with present day zoning by-laws.

Will we still be able to impose non-competes on our top people if we don't call them "Chief"?

WWA allows employers to enter into non-competes even after October 25, 2021 with Executives, which the Act defines as "any person who holds the office of chief executive officer, president, chief administrative officer, chief operating officer, chief financial officer, chief information officer, chief legal officer, chief human resources officer or chief corporate development officer, or holds any other chief executive position."

Under Ontario corporate laws, every corporation must have a president and secretary, but there is no requirement that a business employ executives using the title "Chief", and we know that many employers do not use those titles even for their top employees. Some employers use titles like "Managing Partner", "Managing Director", "Operations Executive", etc.  While we cannot say for certain absent a tribunal/court decisions or further clarity by way of regulation , it is our view that there is a good argument that this exception ought to be interpreted to include any employee who performs the duties and has the level of responsibility typically associated with the enumerated executives.  We do caution employers to not give this definition an overly broad interpretation; this will very likely be limited to include the very top echelon employees.

Can we require all employees of the company that we're buying to sign non-competes given that they all hold shares in the seller?

The second and final exception under WWA deals with situations where there is a sale of all or part of a business, which includes a lease, and the seller becomes an employee of the purchaser immediately following the sale.  In such a scenario, a non-compete agreement may be entered into between the purchaser as employer, and the seller as employee.  Unfortunately, WWA does not define "seller".  We know that many businesses are not sole proprietorships, but rather are owned by shareholders who may have other layers of corporate status, and many companies offer equity to regular employees as part of their total compensation packages.  The legislation is not clear as to whether the exception applies to these circumstances.

It is our view that there is good argument that "seller" should be interpreted broadly to include any individual with a direct or indirect substantial beneficial interest resulting from the sale of the business.  In other words, if a seller of a business is a corporation whose shares are held by several individuals, those individuals who hold a substantial percentage of the shares, will fall under this exception, if they become employees of the purchaser following the sale. We are of the further view, however, that this will likely not be interpreted to include the multitudes of employees who are granted equity in the business as part of their compensation and continue to be employed post sale.  We also do not yet know whether employers will be prohibited from tying non-compete provisions to ownership of equity.  In other words, will non-comp provisions in Shareholder Agreements, where the non-compete provision is tied to holding shares, as opposed to cessation of employment, be deemed to be void?  This is an open question given that the granting of the equity is very much tied to employment, and often performance in employment.  We will not know the answer to this absent further regulations or decisions from a tribunal/court.

Recommendation

If employers plan to continue to incorporate non-compete provisions for executives or as part of a transaction, we strongly recommend that such provisions be included in an entirely separate agreement, and certainly not incorporated directly into the main employment agreement.  This will reduce the risk that other very important provisions are deemed to be void as well.

If you would like to discuss this article further or have any questions, please contact the authors or a member of our Employment, Labour & Equalities Group.


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