Restrictive covenants since non-competition prohibition

As most employers operating in Ontario are already aware, as of October 25, 2021, the Ontario Employment Standard Act, 2000 (the ESA) prohibits employers from entering into post-employment non-competition covenants with employees, except for “executives” (as defined in the ESA) and in certain circumstances related to the sale of a business (the Ontario Prohibition). Subsequent jurisprudence confirms that the Ontario Prohibition does not have retroactive effect,^[1] and that restrictive covenants that are not prohibited by the ESA remain subject to existing common law principles regarding enforceability.^[2] This means that Ontario contracts containing post-employment non-competition agreements entered into before the Ontario Prohibition should be approached carefully when being updated or amended, so as to ensure the continued potential application of the restrictions therein.

Practical considerations under common law

To increase the likelihood of enforceability of restrictive covenants that are not prohibited by statute – such as non-solicitation covenants and post-employment non-competition clauses in provinces outside of Ontario – the geographic scope, duration, and restricted activities of the covenant must be reasonable, clearly defined, and be no broader than necessary to protect the employer’s legitimate business interests. These factors must be taken into account, along with industry-specific considerations and other contextual matters, such as the position held by the employee. For example, one important feature of customer non-solicitation covenants that appellate courts have repeatedly emphasized as being critical to the reasonableness and enforceability of the restriction is whether the application of the clause is limited to only customers with whom the employee had business interactions with during the course of their employment.^[3]

When drafting restrictive covenants, employers must balance their need to protect their legitimate business interests with the reasonableness of the restrictive covenant. Given that there is absolutely no “blue penciling” or judicial reading-down of restrictive covenants under Canadian law,^[4] the employer only gets one chance at drafting an enforceable clause. Furthermore, any practical “deterrent” effect may be undermined if the restriction is overbroad. Please consult with the Osler Employment and Labour Department for advice and drafting assistance to navigate the complex legal landscape related to these clauses. Osler has also successfully acted in enforcing, and defending against the enforcement of, restrictive covenants in a variety of different circumstances and industries.