Restraint of Trade Following Changes to the Competition Act

Changes to the Competition Act

As a result of amendments made to the Competition Act, RSC 1985, c C-34 (the “Act”) that came into force on June 23, 2023, agreements between employers that seek to manipulate wages and restrict job mobility of employees may now be criminally prosecuted pursuant to s. 45(1.1) of the Act, which reads as follows:

(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.    to fix, maintain, decrease or control salaries, wages or terms and conditions of employment; or

b.    to not solicit or hire each other’s employees.

Such wage-fixing or no-poach agreements are restraints of trade that were unenforceable before the amendments were introduced. Now, there are possible prison and monetary penalties for such anti-competitive conduct. Employers must be mindful of their compliance with the Act, including these amendments.

Employers often have goodwill, client relationships and other proprietary information that they need to protect in order maintain their viability or their market position. In this article, we propose to review some of the lawful and more useful means by which Saskatchewan employers, particularly businesses, may be able to protect themselves through restraint of trade agreements.

Restrictive covenants in transactions

It is often a key component of transactions involving the sale of a business that former employees or other parties to the business being transferred or sold will not compete or solicit clients or employees for a period of time following the transaction. Such restraint of trade agreements aim to ensure that a transaction will not be undermined by former principals interfering with the purchased business. These restrictive covenant agreements are generally lawful and enforceable unless it can be established that their scope is unreasonable, having regard to the circumstances.

For example, the Alberta Court of Appeal recently upheld five-year restrictive covenants entered into as part of a business transaction in Ruel v Rebonne, 2023 ABCA 156. In that case, one of the former principals of a company that was sold to a new owner agreed to non-competition and non-solicitation terms that were in effect for five years. Approximately three years following the sale, the former principal started a competitor business that targeted the clients of his former business. The new owner successfully sued the former principal for damages resulting from the breach of the restrictive covenants. This decision demonstrates that courts will enforce reasonable restrictive covenants in sale of business scenarios.

Turning back to the changes to the Act, it is also noteworthy that, to the extent that restrictive covenants in transaction could fall into the categories of prohibited wage-fixing or no-poach agreement conduct, the Act provides for a statutory defence if such agreements are ancillary to, and reasonably necessary for giving effect to, another agreement provided the other agreement considered alone does not contravene section 45(1.1).

Restrictive covenants in employment contracts

Employers can also proactively safeguard their interests by incorporating reasonable restrictive covenants into their contracts of employment with their employees. However, it is essential for employers to draft these restrictive covenants carefully in order to increase their chances of enforceability and reduce associated liabilities.

Such restraint of trade agreements are presumptively unenforceable. This arises from well-entrenched public policy and a presumption of the courts that there is an imbalance of power between employees and employers that may not exist in a commercial agreement. In order for a restrictive covenant with an employee to be enforceable, it must be found to protect a legitimate proprietary interest of the employer, it must be reasonable in terms of its scope, including length of time, geographical area and nature of the activities covered and its terms must be clear, certain and not vague.

Differences between non-competition clauses and non-solicitation clauses

A distinction is drawn between non-competition and non-solicitation clauses. The difference lies in their respective purposes and enforceability.

A non-competition clause aims to prevent an employee from engaging in direct competition with their former employer, either by working for a competitor or by establishing a competing business. Non-competition clauses are generally held to be unenforceable as they impede a former employee's ability to earn a living and interfere with the public's right to competition.

A non-solicitation clause, on the other hand, focuses on prohibiting an employee from actively soliciting the clients or employees of their former employer. Non-solicitation clauses are more likely to be enforceable, although employers must demonstrate their reasonableness for them to be upheld. This means that, while a former employee can work for a competitor under a non-solicitation clause, they cannot solicit clients or employees from their previous employer (depending on the terms at issue).

Given the above, what should an employer do to help mitigate against the risk of losing their clients to a former employee with intimate knowledge of their operations? While each situation is unique, there are some considerations that may guide employers wishing to having a greater chance of relying on restrictive covenants:

1. Skip the non-competition clause

The general trend is that such clauses are unlikely to be enforced. If a non-competition provision is necessary, the trend is towards limiting these clauses to their minimally necessary scope.

2. Minimize the scope of the restrictive covenant to what is necessary

As a general rule, the longer a restrictive covenant purports to apply, the less likely that it will be upheld by the court. For example, if a non-solicitation clause is found to be in effect longer than is necessary to protect the other party, there is a greater chance that it will be held to be unenforceable. Similarly, a geographical area that the covenant applies to should be specific and no broader than what is necessary. Moreover, it there is any confusion where, for how long and in regards to what conduct the restrictive covenant applies, it is likely that the clause will not be upheld.

3. Define all essential terms in the restrictive covenant

It is important for an employee (and reviewing courts) to know what conduct the restrictive covenant applies to, and what actions they can or cannot take once their employment with the employer ends. Terms such as “confidential information”, “partners”, “competitors” or “clients” are examples of terms that should be clear and certain. Restrictive covenants that are otherwise appropriate can fail because of vagueness or ambiguity.

In Knight Archer Insurance Ltd. v Dressler, 2019 SKCA 34, for example, the Saskatchewan Court of Appeal upheld the lower court’s decision that a non-solicitation clause was unenforceable because there were ambiguous and undefined terms such as the ones above.

Conclusion

In summary:

• Wage-fixing or no-poach agreements are generally illegal and may attract prosecution pursuant to Canada competition laws.
• Restrictive covenants that are entered into as part of business transactions and are reasonable in scope will generally be enforceable and are examples of lawful restraint of trade activities that businesses can take to protect their assets and proprietary interests.
• Properly-drafted restrictive covenants in employment agreements strike a balance between protecting businesses interests while still facilitating free trade and respecting an employee’s right to make a living.

The McDougall Gauley Labour and Employment Group is experienced in navigating contracts of employment and advising employers on ways to navigate business and employment relationships. To learn more about restrictive covenants or related inquiries, please contact a member of our Labour & Employment team.