Recent amendments to the Employment Standards Act, 2000 (Ontario) and the Competition Act (Canada) may be sounding the death knell for certain restricted covenants in Ontario—both non-competition covenants given by employees, and non-solicitation of employees covenants given by anyone.¹

In Why Ontario Employers Should Review Employment Contracts Now, we discussed the elimination on October 25, 2021, of non-competition covenants given by employees in Ontario, except in certain limited circumstances (see pages four to seven). The precise scope of that amendment to the Employment Standards Act remains unclear but in general, the principle is that employees can no longer be required to enter into non-competition covenants as part of their employment arrangements. In our article, we had proposed using non-solicitation of employee covenants as one method to address the gap. That proposed solution may now be more difficult to implement following recent amendments to the Competition Act.

The Budget Implementation Act, 2022 (Canada) recently amended the Competition Act to create a new criminal offence for those who enter into certain non-solicitation (or "no-poaching") agreements. This new criminal offence will come into force on June 23, 2023. While the scope of the new no-poaching offence is currently unclear, the Competition Bureau could take the position that it captures a broad range of employee non-solicitation/hire clauses, including those commonly found in employment agreements.

The actual wording of the new offence is the following:

Conspiracies, agreement or arrangements regarding employment

(1.1)      Every person who is an employer commits an offence who, with another employer who is not affiliated with that person, conspires, agrees or arranges

(a) [intentionally omitted]

(b) to not solicit or hire each other's employees.

The penalties associated with breaching the new offence are potentially significant. Those convicted are subject to an uncapped fine at the discretion of the court and/or to imprisonment for a term of up to 14 years.

There are, however, two defences. The first is referred to as the "ancillary restraints defence" and is derived from the following existing language in the Competition Act:

(4) No person shall be convicted of an offence under subsection (1) or (1.1) in respect of a conspiracy, agreement or arrangement that would otherwise contravene that subsection if

(a) that person establishes, on a balance of probabilities, that

(i) it is ancillary to a broader or separate agreement or arrangement that includes the same parties, and

(ii) it is directly related to, and reasonably necessary for giving effect to, the objective of that broader or separate agreement or arrangement; and

(b) the broader or separate agreement or arrangement, considered alone, does not contravene that subsection.

The second defence is the "regulated conduct defence". It applies where the prohibited conduct is required or authorized under federal or provincial laws.

The Bureau has not yet established any guidelines for the new no-poaching offence but has promised to do so after seeking input from the public in the coming months. However, notwithstanding the seemingly express language of the new offence, which would appear on its face to apply only to two-way agreements, the Bureau stated during a September 8 public information session that it intends to look at both two-way and one-way non-solicitation agreements. Fortunately, the Bureau also confirmed that the statutory and common law defences, including the ancillary restraints defence, would be applicable to the new offence if the appropriate tests can be satisfied.

On a plain reading of the new offence, an employment agreement containing a time-limited employee non-solicitation covenant would seem to be acceptable because (1) it is not an agreement between two employers, and (2) it is only one-way. However, given the Bureau's recent comments, the treatment of employment agreement non-solicitation/hire covenants is currently uncertain.

If the Bureau continues to be of the view that the one-way nature or lack of two employers does not shelter the employment agreement non-solicitation/hire covenant from its oversight, the agreement would still be entitled to the benefit of the applicable defences. For example, as employment agreement non-solicitation/hire covenants are by definition entered into in the context of a broader agreement (the employment agreement) and are customary terms that are directly related to, and often reasonably necessary for giving effect to, the employment agreement, it is possible that they could fit within the ancillary restraints defence (particularly with a reasonable time limit).

Non-solicitation/hire of employee covenants (both two-way and one-way) are found in many other types of agreements, such as M&A agreements, joint venture agreements, distribution agreements, shareholders agreements, supplier agreements, customer agreements, and non-disclosure agreements. These non-solicitation/hire covenants are universally time-limited—typically in the range of one to five years or the term of the agreement plus some additional period of one to two years. Given the Bureau's recent comments, its intended treatment of these non-solicitation/hire covenants is also uncertain. However, as these non-solicitation/hire covenants are part of the package of covenants covered by the main agreement, we would expect that they would often fall within the ancillary restraints defence.

As the new offence is a criminal offence, a court would apply it to the specific factual circumstances that the offence describes, and the accused would be entitled to the benefit of any applicable defence, regardless of whatever guidelines are ultimately issued by the Bureau. However, until the Bureau provides such guidelines, there is considerable uncertainty surrounding its enforcement intentions with respect to the new no-poaching offence.

We will continue to monitor developments.