Restrictive covenants, such as non-competition and non-solicitation clauses, are commonly used in employment, partnership, and shareholder agreements to protect a business’s proprietary interests. While these clauses serve similar protective purposes, they differ significantly in scope, enforceability, and legal treatment under Ontario law. Business owners, HR professionals, and legal counsel should understand these distinctions to ensure their agreements are enforceable and legally compliant.

What is a Non-Competition Clause?

A non-competition clause restricts a former employee, contractor, or business seller from engaging in activities that compete with the business for a specific time and within a defined geographic area. These clauses are designed to prevent a former associate from operating or working for a rival business, thereby protecting confidential information, client relationships, and market share.

However, Canadian courts generally view non-competition clauses as restraints of trade and scrutinize them carefully. In the employment context, such clauses are enforceable only if they are reasonable in scope, duration, and geography, and if a non-solicitation clause would be insufficient to protect the business’s interests.

Importantly, under Ontario’s Employment Standards Act, 2000, non-competition clauses in employment agreements are now prohibited, with exceptions limited to executive positions and in the context of the sale of a business.

What is a Non-Solicitation Clause?

A non-solicitation clause is narrower in scope than a non-compete. It prevents a departing employee or former associate from soliciting or attempting to solicit the company’s clients, customers, suppliers, or employees for a competing business or personal gain.

These clauses are more likely to be upheld by Canadian courts, particularly when they are clearly worded, time-limited, and tailored to protect legitimate business interests without unduly restraining a person’s right to work.

Key Differences at a Glance

Below is a high-level comparison between the two types of clauses:

• Non-Competition: Prohibits working for or starting a competing business.
• Non-Solicitation: Restricts outreach to clients, employees, or vendors of the former employer.
• Enforceability: Courts are stricter with non-competes; non-solicits are more routinely enforced.
• Legal Status in Ontario: Non-competes generally prohibited for employees (with some exceptions); non-solicits remain valid if reasonable.

Best Practices for Drafting Enforceable Clauses

To enhance enforceability, consider the following:

• Ensure the clause protects a legitimate business interest (e.g., trade secrets, client relationships).
• Limit the clause to a reasonable duration (typically no more than 12–24 months).
• Narrow the geographic scope to where the business actually operates.
• Tailor the restrictions to the individual’s role, access to sensitive information, and level of seniority.
• Avoid ambiguous language—unclear terms will likely render the clause unenforceable.

Relevant Case Law

• Payette v. Guay Inc.: The Supreme Court of Canada upheld a non-competition clause in a business sale context, distinguishing it from an employment scenario and emphasizing the parties’ equal bargaining power.
• Shafron v. KRG Insurance Brokers: The Supreme Court of Canada refused to enforce a non-compete clause due to vague geographic terms, reinforcing the need for clarity in drafting.

Conclusion

While both non-competition and non-solicitation clauses aim to safeguard a business’s proprietary interests, the latter is more commonly enforced in employment agreements due to its narrower scope. Non-competes should be used cautiously and primarily in the context of executive employment or business sales. Employers and business owners should work with legal counsel to carefully draft these clauses in line with applicable statutory and common law standards.

At Blueprint Law, we assist employers and business owners in drafting clear, enforceable restrictive covenants tailored to their unique operational needs. Contact us to review or prepare your employment or commercial agreements.

Disclaimer

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