What you need to know about noncompete clauses

The U.S. Federal Trade Commission, a consumer protection agency, recently prohibited employers from including “noncompete” clauses in employment contracts south of the border, saying the move would promote competition and increase workers’ freedom.

These clauses limit an employee’s ability to work for a competitor for a set period of time after they leave their place of employment. They’re common in all kinds of workplaces in Canada, especially among companies looking to protect intellectual property and trade secrets.

While proponents argue that noncompete agreements encourage employers to invest in training, perhaps because they know employees will likely stick around, critics say they keep unhappy employees stuck in jobs where they’re not the most productive by discouraging them from leaving.

If you’re a Canadian worker, you may have signed a noncompete agreement without realizing it, as many contracts include them as part of the boilerplate. That might not necessarily be a bad thing, however, as noncompete clauses are difficult to enforce under Canadian law, according to labour lawyers interviewed by the Star, and can give workers the opportunity to negotiate higher severance pay.

“Our courts are very reticent to enforce noncompetes,” said Rich Appiah, an employment lawyer at Appiah Law in Toronto. They’ll typically “look to see if there are other, less intrusive ways for an employer to protect itself.”

Ontario was the first and only province to make noncompete clauses illegal in October 2021.

The change didn’t apply to federally regulated workers, including those working in airlines, banks or interprovincial railways. It also excluded independent contractors, who are not subject to employment standards, C-suite employees and workers who signed a contract prior to Oct. 25, 2021.

However even in those cases, noncompete clauses are rarely valid, said Hena Singh, a Toronto-based employment lawyer at Singh Lamarche LLP.

Employers “have to show that the employee is essentially such a fundamental part of the company that they are indeed a threat if they go to a competitor for a certain period of time,” she said.

If you’re an Ontarian working a job where the ban applies and you’re asked to sign a noncompete, you don’t have to sign, but might want to do it anyway, said Appiah.

“(Employees) may want to negotiate an increase to their severance in exchange for their acceptance,” he said. “Sometimes it’s best to leave unenforceable clauses or illegal clauses in the contract to allow for a leverage negotiation in an exit.”

Singh, however, cautions that signing in Ontario is risky because it could mean the entire agreement is void.