Non-Competition Agreements – Legal or Illegal?

Posted on 19 September 2024 Back to News

Many people have heard of a non-competition agreement. However, did you know that non-competition agreements are not always legitimate?

Non-competition agreements are generally described 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.

This means an employer can restrict an employee (both current and previous) from partaking in any similar business within a certain distance and/or period of time after the termination of the employment relationship.

Recently, Ontario passed the Working for Workers Act which prohibits or otherwise invalidates non-competition agreements in certain circumstances. Generally speaking, non-competition agreements in the employment context are now prohibited.

There are exceptions to the prohibition of non-competition agreements. One common exception is in the course of the sale of a business. If the seller of a business intends to be an employee of that business after the sale, which is common, the new owner of the business may restrict the seller, now employee, by way of a non-competition agreement. To determine whether this exception is triggered, a court will assess the following:

  • First, “there is a sale or lease of a business or a part of a business that is operated as a sole proprietorship or a partnership”.
  • Second, immediately following the sale, the seller becomes an employee of the purchaser.”
  • Lastly, “as part of the sale, the purchaser and seller enter into an agreement that prohibits the seller from engaging in any business, work, occupation, profession, project or other activity that is in competition with the purchaser’s business after the sale.”

If these three qualifications are met, the non-competition agreement may be valid.

Additionally, there is an exception which permits an employer to enter a non-competition agreement with executives. An executive includes those who hold an office such as chief executive officer, president, chief legal officer, or chief human resources officer.

If a non-competition agreement is permitted, it may still be invalid on the basis that its terms and conditions are overly broad, vague, or overreaching. A non-competition agreement may be invalidated by, among other things, unreasonable time and/or geographic limits.

It is best practice for an employer or an employee who is considering a non-competition agreement to consult with a litigation lawyer specializing to ensure that the non-competition agreement is permitted, fair and reasonably restrictive.

This article is intended for general information purposes only and is not intended to provide legal advice. Readers with concerns about how this affects situations or transactions should obtain the independent review and advice of legal counsel.

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