Non-Compete Provision Upheld Notwithstanding Working for Workers Act, 2021

a dismissal during the pandemic does indeed engender a longer notice period

In November 2021, the Ontario government passed the Working for Workers Act, 2021, new legislation that, among other things, prohibits non-competition clauses in employment agreements. However, a recent decision of the Ontario Superior Court revealed a reluctance to apply the prohibition to non-compete clauses that already exist.

Parekh et al v. Schecter et al The Facts

The Plaintiffs, in this case, are a dentistry where the Defendants used to work. The Defendants entered into an employment contract in 2020, known as an Associate Agreement, which contained restrictive covenants included a non-competition clause. The clause stated:

Non-Competition. The Associate shall not during the Term of this Agreement and for two (2) years thereafter, either directly or indirectly, whether as a proprietor, partner, shareholder, employee, associate or otherwise, carry on or be engaged in the practice of dentistry anywhere within a five (5) kilometre radius of the Premises.

Consequently, the Defendants could not work at another dentistry within a five (5) kilometre radius of the Plaintiff’s business.

In 2021, one of the Defendants resigned and began working at different dentistry. However, this new dentistry actually fell within the prohibited 5 km radius of the Plaintiff’s business. There, the Defendant had violated the non-competition term of the employment contract and the Plaintiffs sought to have it enforced by means of an injunction.

Should the Non-Competition Clause be Enforced?

The trial judge began by addressing the effect of the Working for Workers Act, 2021. This new piece of legislation added the following provision to the Ontario Employment Standards Act:

67.2 (1) No employer shall enter into an employment contract or other agreement with an employee that is, or that includes a non-compete agreement.

The Employment Standards Act further defines non-compete agreements 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.

In this case, the Defendants argued that the above statutory prohibition of non-competition agreements invalidated the non-competition clause of the Associate Agreement. The Defendant argued the legislation applies retroactively, such that non-competition agreements that existed prior to the legislation being enacted are likewise invalidated by the legislation.

However, the trial judge disagreed, suggesting that the Defendant confused the terms “retroactivity” with “retrospectivity.” Retroactive statutes operate at a time prior to their enactment (operating backwards), whereas retrospective statutes operate for the future only (operating forwards). Thus, their effect is prospective. The Defendant used the term “retroactive”, although the trial judge believed they meant to say “retrospective”.

Regardless of which is the proper characterization, it was the trial judge’s opinion that “the legislation does not apply to void the non-compete clause in the Associate Agreement entered into on January 20, 2020.” According to section 34(3) of the Working for Workers Act, 2021, the new non-compete provisions were deemed to come into force on October 25, 2021. This represented an express legislative intent to make the new Employment Standards Act amendments applicable as of October 25, 2021, and not earlier. Therefore, according to the trial judge, “it cannot be said the provisions with respect to the non-compete clause applies to contracts of employment with non-compete clauses entered into before October 25, 2021.”

The Takeaway

Based on the above, non-compete clauses that existed prior to October 25, 2021, will continue to be enforced in Ontario courts notwithstanding new legislation prohibiting such provisions. They must, however, continue to pass the common law test for injunctions, which is not so easily met.

Non-compete clauses entered into after October 25, 2021, will inevitably be found to be unenforceable. However, some may say this is not good enough. It remains arguable whether the legislation should invalidate non-compete clauses existing prior to October 25, 2021 as well as after.

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