Why this Clause in Your Employment Contract is Unenforceable
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You’ve likely heard or signed an employment contract containing a non-competition clause. Some employment contracts include these provisions for the purpose of protecting their business. Employers may find it beneficial to use these clauses when a former employee has put a lot of time into the business, and it would be in their best interests to prevent them from taking clients with them, taking other employees with them, or even opening up shop next door.

Non-compete clauses, thus, come in a variety of forms. Although many of us are familiar with these provisions in employment agreements, they have recently been prohibited in Ontario by the Working for Workers Act, 2021, which came into force in October 2021.

Non-Competition Clauses are No Longer Permitted in Ontario

The Working for Workers Act, 2021 amended Ontario’s Employment Standards Act, 2000 to prohibit employers from providing potential employees with an employment contract containing a non-compete agreement. Non-compete agreements are defined as:

“an agreement, or any part of an agreement, between an employer and an employee that prohibits the employee from engaging in any business, work, occupation, profession, project or other activity that is in competition with the employer’s business after the employment relationship between the employee and the employer ends.”

The amendments came into force as of October 25, 2021. Courts have since ruled that the new amendments prohibiting non-compete clauses do not apply to employment contracts entered into before this date.

What If I Signed My Employment Agreement Before the Law Changed?

In a recent case before the Ontario Court of Appeal, M&P Drug Mart Inc v Norton, the owner of a pharmacy brought an application alleging that their former pharmacist, Norton, had breached the non-competition covenant in the employment agreement. Norton had worked for M&P’s pharmacy, Hometown IDA, since 1980. M&P acquired Hometown IDA in 2014. The new owners wanted to keep Norton on as pharmacy manager, so they negotiated with him to sign a new employment contract.

The contract Norton signed acknowledged the non-competition clause as necessary for the protection of M&P’s business interests. Irrespective of the common law at the time, the non-competition covenant read:

“The Employee agrees that during the Employee’s employment with the Company and during the one year period following the termination of the Employee’s employment with the Company, for any reason whatsoever, the Employee shall not carry on, or be engaged in, concerned with, or interested in, directly or indirectly, any undertaking involving any business the same as, similar to or competitive with the business within a fifteen (15) kilometre radius of the business located at 10 Main Street East, Huntsville, Ontario P1H 2C9.”

In September 2020, Norton resigned from Hometown IDA. He began work as a pharmacist at Campus Trail Pharmacy, which was located less than three kilometres away from his former employer. When M&P reminded Norton of the clause in the contract he signed, he claimed it was unenforceable. The application judge dismissed M&P’s application because the employment clause in question was too ambiguous and overly broad. M&P appealed that decision.

Non-Competition Clauses Must Be Reasonable If They Are Going to be Enforced

Before the Working for Workers Act, 2021 came into force, non-competition clauses were generally unenforceable unless they were reasonable and in the best interest of the public. When looking at the reasonableness of these clauses, courts had to consider two things:

  1. whether the employer had a proprietary interest that is entitled to protection; and
  2. whether the clause was overly broad with respect to prohibited activities, length of time, or geographical limits.

Where the second consideration was not clear, the clause was considered ambiguous and unenforceable.

Courts Won’t Ignore Unreasonable Possibilities Stemming from Terms of Employment Contract

The Court of Appeal agreed with the decision of the application judge. When an employer wishes to enforce a non-competition clause, also called a “restrictive covenant,” in a contract, it is up to the employer to prove that it is reasonable. The application judge found the clause in question to be ambiguous because M&P failed to demonstrate that the restrictions on Norton after his departure from Hometown IDA were reasonable.

The clause was found to be overly broad because, when the language of the agreement is interpreted closely it appeared to go beyond what was reasonable. For instance, the contract did not expressly prohibit Norton from working as a pharmacist at a pharmacy or in a store that has a pharmacy. Instead, it prohibited him from “carry[ing] on, or be[ing] engaged in, concerned with, or interested in, directly or indirectly, any undertaking involving any business the same as, similar to or competitive with the [Hometown IDA].” The wording of the contract suggests that Norton would be unable to work at a story containing a pharmacy in a non-pharmacist role. It also reads to preclude Norton from being a passive investor in businesses like M&P’s.

M&P was critical of the court’s interpretation of the clause but could not demonstrate that the clause could not be interpreted in this way. In response, the court noted that background facts cannot be used to change the meaning of the words used in the contract or to make a new agreement. In other words: “The language of the covenant is the primary indicator of contractual meaning.”

The Employment Lawyers at Baker & Company Can Help You Draft or Review Your Employment Contracts

Baker & Company regularly works with employers in drafting and reviewing employee workplace policies and manuals. It is vital that these documents be kept up to date to ensure that they comply with all relevant legislation and that an employer’s obligations have been satisfied while also mitigating an employer’s liability and risk. To speak with a lawyer about a workplace policy or an employment law issue contact us online or by phone at 416-777-0100.

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