Non-Competition Clauses: Recommendations For Employers

Non-competition clauses (non-competes) are contractual provisions that prevent employees from engaging in competitive activities after leaving an employer. While many employers include non-competition clauses in their employment agreements by default, courts are increasingly finding such restrictions to be unenforceable. While non-competes can serve to protect sensitive business interests, we advise limiting their use exclusively to executive positions.

Understanding the legal landscape regarding non-competes is crucial for compliance. Some jurisdictions have banned their use in employment agreements, and courts in jurisdictions where they are permitted closely scrutinize non-compete agreements. By reserving these clauses for executive roles, you reduce the risk of legal disputes and increase the likelihood of enforceability. BC, Ontario and the United States are illustrative examples of the evolution of the treatment of non-compete clauses.

Ontario: Since October 25, 2021, Ontario has prohibited new non-compete agreements in most cases under the Employment Standards Act. Exceptions exist for certain executive roles, as well as in the context of the sale of a business, but overall, the Ontario approach is one of the most restrictive. Importantly, the inclusion of a non-competition agreement in an otherwise valid employment agreement can result in the entire employment agreement being declared unenforceable, opening the employer up to significant liability.

British Columbia: Currently, BC has no specific legislation governing non-compete clauses. Their enforceability is determined by common law, with courts assessing whether they are reasonable and necessary to protect legitimate business interests. Non-compete clause should be narrow in both jurisdiction and industry. Given ongoing legal trends, BC may consider changes in the future. As such, to ensure employment agreements remain enforceable, employers in BC should consider avoiding non-competition clauses other than in the context of executive roles and obtaining legal advice with respect to wording and scope of the clauses prior to implementation.

United States: On April 24, 2024, the Federal Trade Commission (FTC) enacted a nationwide ban on non-compete clauses in many regulated industries, effective August 2024. This ban aimed to enhance worker mobility and curb the exploitation of vulnerable employees, with exceptions for certain high-level positions and business sales, similar to Ontario. However, this ban was reversed on August 20, 2024, when the U.S. District Court for the Northern District of Texas prohibited the ban. While the FTC has signaled it may appeal this decision, it has also affirmed it will continue to scrutinize non-competition clauses on a case-by-case basis. As with in BC, this uncertainty means avoiding non-competes is the safest path for employers.

Alternative Protective Measures

This area of law is quickly changing and difficult to predict. To insulate your business against the risks of non-compete clauses, consider implementing these alternatives:

Non-Solicitation Clauses: These can prevent former employees from soliciting clients or recruiting colleagues, providing protection without excessively restricting career mobility. So long as the non-solicit has a reasonable duration and the scope is relevant to your business interests, these clauses are more likely to be upheld in legal challenges.

Confidentiality and Proprietary Information Agreements (CPIAs): CPIAs can protect your confidential information and intellectual property without the potential backlash of non-competes. They are effective for safeguarding sensitive data and trade secrets and ensuring that all work contributed to the company by the employee remains the sole property of the company.

Conclusion

In summary, we recommend that non-competition clauses be used sparingly and only for executive roles where legally permitted. Executives typically possess unique knowledge about your strategies and relationships, which, if shared with competitors, could pose significant risks to your organization. However, it’s important that these non-competes are narrow both in area and type of business and that you obtain legal advice before implementing them.

By avoiding the risks associated with non-competition clauses, you can protect your business interests while fostering a positive work environment that encourages employee growth and mobility. This strategy not only aligns with evolving legal standards but also positions your organization as an attractive employer in a competitive landscape. If your organization’s current form of employment agreement includes a non-complete clause or if you have any questions about how to best protect your business, please reach out to info@lwlaw.com and a member of our team will be happy to assist.

Please note that LaBarge Weinstein LLP does not practice law in the United States of America and cannot provide US legal advice. The information above with respect to US matters is for informational purposes only and readers should consult with a lawyer qualified to practice law in the United States on such matters.