Feb 17, 2022
Statutory Ban On Non-Competition Clauses Does Not Apply To Agreements Entered Into Prior to October 25, 2021
As we previously discussed, the Ontario Government recently passed the Working for Workers Act, 2021. This legislation amended the Employment Standards Act, 2000 to prohibit non-competition agreements with employees, except for executives or in the context of a sale of a business.
In a recent injunction dealing with the enforceability of a non-competition covenant, the Court confirmed that the Working for Workers Act, 2021, does not void non-competition clauses in employment agreements entered into prior to October 25, 2021. This is consistent with how the Ministry of Labour has interpreted the law.
In Parekh et al v. Schecter et al, the Plaintiffs brought an interlocutory injunction motion seeking orders that would prohibit one of the Defendants from competing at a dentistry practice located within a 5km radius of the Plaintiffs’ clinic. The Defendants included a father (“Defendant Father”) and son (“Defendant Son”), with the Defendant Son being the sole shareholder of the dentistry practice. The Defendant Father had previously sold his shares to the Defendant Son and continued to practice as an associate dentist. In 2020, the Plaintiffs purchased the dentistry practice from the Defendant Son. A term of the sale required all associate dentists, including the Defendant Father, to sign an employment agreement which contained a non-competition clause. This non-competition clause prohibited the Defendant Father from practising dentistry within a 5km radius of the Plaintiffs’ clinic for a period of two years. In October 2021, the Defendant Father resigned and started practising dentistry at a clinic that was within a 5km radius from the Plaintiffs’ clinic.
Besides concluding that the statutory ban does not apply to the Defendant Father’s employment agreement as it was entered into prior to October 25, 2021, the Court held that the non-competition clause was enforceable under the common law. In doing so, the Court held that the Defendant Father’s goodwill in the practice was part of the sale transaction (even though he was not a shareholder at the time of the sale transaction) and the non-competition clause in his employment agreement was a corresponding extension of the share purchase agreement. The Court also found the non-competition clause to be reasonable and unambiguous.
Employers should obtain legal advice when imposing non-compete agreements – both to ensure the statutory prohibition is not triggered and, if it is, to ensure the restrictions are reasonable and not contrary to public policy.
Should you have any questions, please contact any member of our Employment & Labour Group