NON-COMPETE AGREEMENTS: ARE THEY STILL ENFORCEABLE UNDER THE WORKING FOR WORKERS ACT?
By: Elliot Saccucci, Alessia Grossi and (Summer Student) Isabelle Nazarian.
After the Working for Workers Act (the “Act”) entered into force on October 25, 2021, employers are no longer permitted to enter into an employment agreement that is, or includes, a non-compete agreement. According to the Act, a non-compete agreement prohibits employees from engaging in any business, work, occupation, profession, project, or other activity that competes with the employer’s business once their employment has ended.
The Act permits two narrow exceptions to this prohibition:
- If the non-compete agreement is made upon the sale of the business, where the seller becomes the employee of the purchaser; and
- The non-compete agreement is entered into with an executive employee.
The Act itself does not specify the implications for non-compete agreements entered into before the Act takes effect.
EFFECT ON AGREEMENTS BEFORE THE ACT
The interpretation of non-compete provisions entered into before October 25, 2021, was addressed by the Ontario Superior Court of Justice in its ruling in Parekh et al v Schecter et al (“Parekh”), 2022 ONSC 302.
According to this decision, the Act only affects non-compete agreements entered into after October 25, 2021. If an agreement is signed before that date, it cannot be considered void retroactively nor retrospectively because of the Act. The enforcement of non-compete agreements signed before the Act remains subject to the common law.
Just last month, the Ontario Court of Appeal reaffirmed this when addressing a non-compete provision in M & P Drug Mart Inc v Sydney (Alan) Norton (“M & P”), 2022 ONCA 398. When considering the non-compete provision, the court applied the common law and determined that the covenant, when read as a whole, could not be enforced due to its ambiguity and overly broad language. The Court did not look to the Act to determine enforceability because the agreement was entered into in 2013.
Framework for Enforceability, Common Law
According to the common law, non-compete provisions are prima facie unenforceable. There is an exception to this general rule that states that the non-compete agreement “will be upheld if it is reasonable in reference to the interests of the parties and the public, judged in light of the circumstances at the time the covenant is made.”
The court will consider:
(i) the extent of the activity that is prohibited;
(ii) the geographic scope of the restriction;
(iii) and the length of time of the non-compete when evaluating whether it is reasonable.
Non-compete agreements between employers and employees are also more stringently scrutinized by the courts than non-compete agreements connected with the sale of a business.
Application Decisionin M & P Drug Mart Inc.
The Plaintiff, M & P Drug Mart Inc. (“M & P”), brought an application for a declaration that the non-competition provision included in its employment agreement with the Defendant, Sydney Norton, was valid and binding.
Norton entered into an employment agreement with M & P after an acquisition that occurred in late 2013. Both parties negotiated the terms of the employment agreement before it was signed.
Within Norton’s contract was a non-competition provision that 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) kilometer radius of the business located at 10 Main Street East, Huntsville, Ontario P1H 2C9.
This contract remained in place until 2020, when Norton resigned from M & P. Following his resignation, Norton started working at another pharmacy that was less than three kilometers away from his former employer.
In his review of the agreement, the Judge hearing the Application deemed the non-competition agreement unenforceable because it was ambiguous and overly broad. The Judge held that the prohibition on being indirectly “concerned” with “any undertaking involving any business” that was “similar” to the pharmacy, was not sufficiently clear. He also noted that, based on the language, this prohibition could be interpreted as prohibiting Norton from working in a non-pharmacist role in a non-pharmacy department of a supermarket if the supermarket also included a pharmacy. Furthermore, it was not clear if the prohibition extended to businesses with any aspect that resembled a pharmacy (i.e., if they sell: cosmetics, greeting cards, food, shaving cream, etc.). With all of these potential restrictions, the provision was found to be overly broad.
The application judge commented that the provision would have been reasonable if it had simply prohibited “working as a pharmacist at a pharmacy.”
Appeal Decision, Ambiguous and Unreasonable Scope
M & P appealed the Application Judge’s decision and submitted that he had erred by focusing on whether the covenant extended to the broader situations than actually confronted him, and in doing so divorced the covenant from its context. The fact is that the respondent was working as a pharmacist, at a nearby pharmacy, in breach of the agreement. According to M & P, similar non-compete agreements had been found unambiguous. M & P also argued that, when considering the current context, the restriction was clear, not unduly broad, and applied directly to the activity of the respondent.
First, the Court of Appeal, like in the Parekh decision, affirmed that this analysis is controlled by common law because the Act came into effect after the creation of this non-competition provision.
The Court of Appeal next looked to the words used in the non-competition provision and concluded that the Application Judge’s determination was correct, noting “[t]he wording does not clearly and only restrict Mr. Norton from acting as a pharmacist; the restriction goes further.” The Court of Appeal further added, that in response to the contextual arguments made by M & P, the factual circumstances, such as pre-contractual negotiations, cannot be used to alter the language in the covenant. The parties are stuck with the words they chose at the time the agreement was drafted.
The Court of Appeal found that when reading the words, the non-compete provision would not only restrict Norton from acting as a pharmacist but would go further to restrict actions beyond working as a pharmacist; therefore, the covenant was not reasonable nor defensible.
IMPLICATIONS FOR EMPLOYERS
The M & P Decision provides employers and employees with a number of important insights, including:
- Non-complete agreements signed before October 25, 2021, do not become void because of the Act;
- Covenants in restraint of trade are still prima facie unenforceable at common law because they interfere with individual liberty and the exercise of trade;
- A non-compete agreement entered into before October 25, 2021, that is unambiguous and is not unduly broad may still be upheld;
- To reduce the likelihood that courts will deem a non-compete (or even a non-solicit) agreement ambiguous or broad, and thus unenforceable, employers should limit the scope of the prohibited activity by mentioning the function the employer holds and the activity their business is involved in;
- Even if an employee acknowledges the non-compete agreement, or had bargaining power (or legal advice) when the agreement was established, the court may nonetheless find the agreement to be void if it is unclear or overly broad; and
- Finally, courts will focus on the language of the covenant itself and the parties’ intentions or other factual circumstances will not save it. The court is unable to rewrite the covenant “to reflect its own view of what the parties’ consensus ad idem might have been,” had it been properly drafted.
As a result of the Act, employers may only contract for non-compete agreements with C-suite executive and individuals selling their business. When drafting agreements with these people, and non-solicitation agreements with employees more broadly, employers should exercise caution and draft the clause as narrowly and precisely as possible. As a rule of thumb, the narrower the restriction (in terms of time, geography, and the activity restricted), the more likely the provision is to be enforced.
If you have questions about the enforceability of your existing non-competition (or non-solicitation) agreements, or would like advice on entering into these types of agreements that are still permitted by the Act, our Employment and Labour team is here to help.
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