As we previously reported in our December 6, 2021 newsletter, the Ontario Working for Workers Act, 2011 (the “Act”), became law on December 2, 2021. The Act includes amendments to the Employment Standards Act, 2000 (“ESA”) that prohibit employers from entering into a non-competition agreement with employees that apply post-employment. The two exceptions to the rule are for (1) executives, as defined in the Act which includes individuals holding “chief executive” titles, and (2) in specifical circumstances of a sale of the business. The rule came into effect October 25, 2021; however, the Act did not specify what happened to post-employment non-competition agreements entered into prior to October 25, 2021.
In the recent decision of Parekh et al v. Schecter et al, 2022 ONSC 302 (“Parekh”), the court held that the ESA’s prohibition against non-competition agreements does not apply to those entered into prior to October 25, 2021.
In Parekh, one of the remedies sought by the Plaintiffs, was for an injunction to prohibit the Defendant from carrying on a dentistry practice within 5 kilometres from its business.
In 2020, the Defendant had entered into an Associate Agreement (the “Agreement”) with the Plaintiffs that included a non-compete provision that restricted the Defendant from practicing dentistry within a 5 km from the Plaintiffs’ business. In October 2021, the Defendant left and joined another dentistry practice that was just over 5 km away from the Plaintiffs.
In coming to a decision on whether to grant the injunction, the court reiterated the legal principles on the enforcement of restrictive covenants in employment contracts. Principles outlined included:
- While restrictive covenants may be enforceable if reasonable, they are considered a restraint of trade and contrary to public policy. They must be considered reasonable within the context of public interest.
- Restrictive covenants in employment contracts will be more heavily scrutinized.
- If ambiguous, restrictive covenants will not be enforceable (such as with respect to time limitations, geographic scope, and restrictions on activity).
- An employer’s right to protect confidential information and trade secrets must be balanced with public interest.
- The clause, the entire agreement, and surrounding circumstances must be considered.
- Factors to be considered are whether the employer’s proprietary interest is entitled to protection, the time limitation and geographic scope, and whether the activity prohibited is overly broad.
The court in Parekh turned its mind to whether the prohibition on non-compete clauses in the Act applied to the Agreement. The court found that, as the Act made clear that the ESA amendments came into effect as of October 25, 2021, and not before, the prohibition on non-compete provisions did not void non-compete clauses entered into prior to that date, such as the one in the Agreement.
The court ultimately found that the non-compete provision in the Agreement was not unreasonable, as it had a restriction of two years and a narrow geographic restriction of 5 km of the Plaintiffs’ practice. Further, the Defendant was involved in negotiating the clause. Therefore, the court found that the Plaintiff was likely to be successful in proving the case as required to grant the injunction.
According to Perekh, post-employment non-compete clauses in employment agreements entered into prior to October 25, 2021, are not prohibited under the ESA. However, we will have to see if future cases follow the same reasoning applied in Parekh. There have been other cases where courts have voided termination provisions set out in employment agreements based on changes to the ESA that came into effect after the employment agreement was entered into which would seem to be distinguishable from Perekh. Further, while they may be allowed under the ESA, post-employment restriction clauses will still undergo heavy scrutiny by the courts based on the principals cited above.