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Canadian employers often use non-compete clauses in employment agreements to protect their business interests. But these clauses have long been closely scrutinized by Canadian courts, and a proposed amendment to the Canada Labour Code will ban them outright for federally regulated employers.
The current legal framework
Canadian courts currently subject non-compete clauses in employment contracts to strict scrutiny. They are generally presumed to be unenforceable because of the inherent power imbalance between employer and employees during contract negotiations. As a result, courts will only enforce such a clause in very narrow circumstances: when they go no further than what is required to protect the employer’s legitimate proprietary rights and do not unduly circumvent the employee from earning a livelihood or making use of their talents.
Ontario has taken a stronger stance than courts in this regard through legislation. Since 2021, its Employment Standards Act, 2000 has prohibited most non-compete clauses in employment contracts with limited exceptions for those tied to the sale or lease of a business, and for individuals holding certain executive positions.
Proposed federal amendments
On May 6, 2026, the federal government introduced Bill C-31, the Budget 2025 Implementation Act, No. 2, which includes proposed amendments to the Canada Labour Code that will prohibit employers from entering non-compete agreements with certain employees.1 Such amendments will apply to employers in the banking, telecommunications, airlines, railways, interprovincial transportation industries, and other federally regulated industries. The bill is currently at second reading in the House of Commons and has not yet been enacted.
Restrictions and key definitions
Bill C-31 proposes to define a “non-compete clause” broadly as any term that prohibits an employee from engaging in any business, work, occupation, trade, profession, project, or other activity in competition with the employer’s federal work, undertaking, or business following the end of the employment relationship.2 It also aims to prohibit a broader category of “other employment-related restrictions,” to be defined by the Governor in Council through regulation that will target employers who attempt to achieve the same effects as non-compete clauses without explicitly using them or otherwise “unreasonably restrict the ability of employees to engage in any business, work, occupation or trade, profession, project or other activity.”3
Exemptions
Like Ontario’s approach, Bill C-31 creates limited exemptions under which non-compete clauses will remain permitted.
- Transactions: Non-compete clauses remain permissible in connection with the sale or transfer of a business where the seller becomes an employee following the transaction.4
- Executives: C-suite executives who report directly to the CEO, including the President, COO, CFO, Chief HR Officer, CIO, CTO and CLO will not be subject to the prohibition.5
Additional provisions
Additional provisions include anti-reprisal protections, place the burden on employers to show a clause falls outside the prohibition, and limit how long existing non-compete clauses may remain valid.
- Anti-reprisal: The bill bars employers from dismissing, demoting, or otherwise disciplining employees who refuse to agree to a prohibited clause.6
- Burden of proof: Employers must show that a challenged restriction is not a prohibited clause or that it falls within an exemption.7
- Existing non-competes: Non-compete clauses already in force when the federal prohibition takes effect may continue only during the one-year transition period. After that first anniversary, any remaining portion becomes void under the new rule.8
Impact on employers
If enacted, these amendments will prohibit non-compete clauses in employment contracts for federally regulated employers. Thus, such employers may increasingly need to rely on carefully drafted confidentiality, non-solicitation, and intellectual property provisions to protect competitive interests. Federally regulated employers should begin reviewing their employment agreements and restrictive covenant clauses now to proactively address these changes.
Footnotes
1. Bill C-31, A second Act to implement certain provisions of the budget tabled in Parliament on November 4, 2025, First Session, Forty-fifth Parliament, 2025, Division 9 (first reading May 6, 2026).
2. Bill C-31, supra, s. 237.1.
3. Bill C-31, supra, s. 237.1.
4. Bill C-31, supra, s. 237.2(3)(a).
5. Bill C-31, supra, s. 237.2(3)(b)–(d).
6. Bill C-31, supra, s. 237.3.
7. Bill C-31, supra, s. 237.4.
8. Bill C-31, supra, s. 273.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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