Canada: Bill 27 Prohibition On Non-Competition Clauses In Ontario Employment Contracts Amended To Include Exception For Executives

Summary

On November 30, 2021, Bill 27, Working for Workers Act, 2021, received its third reading. Among other changes, the Bill amends the Employment Standards Act, 2000 ("ESA") to add a prohibition against "entering into" an employment contract or other agreement with an employee that is or includes a non-compete clause. Any non-compete agreement that violates this new provision will be rendered void. As we noted in our October 27, 2021 Update, Ontario Introduces Legislation Prohibiting Non-Competition Clauses in Employment Contracts and Requiring Right-to-Disconnect Policies for Employees, this provision will be deemed to have come into force on October 25, 2021, regardless of when the Bill receives royal assent. Companies with employees that are subject to the ESA should consider the potential impact of Bill 27 in any transactions and negotiations that are currently underway.

New Exception for Executives

Importantly, Bill 27 was amended and now provides an exception for employees who are executives to the prohibition on any employer entering into an employment contract or other agreement with an employee that is, or that includes, a non-compete agreement. "Executive" is defined 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; ("cadre supérieur")"

Recap of Key Observations

In our October 27, 2021 Update, we noted our key observations on Bill 27's provisions concerning non-compete clauses. Below is a recap of some of those observations.

Sale of a Business Exception

Bill 27 also provides an exception for non-compete agreements tied to the sale of a business or part of a business, although little guidance has been given on its scope. Unless amended, the Bill 27 prohibition on entering into a non-competition agreement will not apply to an employer entering into a non-competition agreement with the "seller" of a business that is being purchased, even though the "seller" becomes an employee of the "purchaser" immediately following the transaction.

Bill 27 does not define "seller" or "purchaser". Accordingly, it is unclear whether this important exemption will apply (1) where the "seller" is in fact a corporation or a family trust or other entity and the principals of the seller become the employees; or (2) where the "seller" becomes or remains an employee of the target business that is sold rather than becoming an employee of the purchaser. Careful consideration should be given to the structuring of any transaction to address these uncertainties until these issues are clarified through amendments, regulations or case law.

Existing Non-Competes

It is unclear if Bill 27 will affect the enforceability of non-competes entered into before October 25, 2021, although that does not appear to be intended based on the press release and the government's backgrounder and explanatory notes. Bill 27 appears to prohibit the "entering into" of a non-competition agreement as of October 25, 2021, as opposed to voiding all existing non-competition agreements.

Other Restrictive Covenants

Bill 27 does not restrict the entering into of other restrictive covenants to protect the reasonable business interests of an employer such as non-solicitation, non-interference or non-disparagement covenants, or confidentiality and protection of intellectual property rights.

Regulations to Follow

Bill 27 provides the government with the ability to implement regulations to further define the scope and parameters of the prohibition on non-competition agreements. The Ontario government typically does not release draft regulations before a bill receives royal assent. Accordingly, there may be a period of time between the prohibition on non-competition agreements coming into force as of October 25, 2021 (which will occur immediately upon Bill 27 receiving royal assent) and the date that regulations are introduced and passed.

Looking Forward

For information on how Bill 27 affects your business or transactions, please contact any member of our Employment and Labour Group.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.