Extending the ban on non-compete agreements to more businesses will 'promote labour mobility' and 'strengthen competition,' the Liberals said in the budget this week.Fred Lum/The Globe and Mail
Ottawa wants to restrict the use of non-compete agreements for employees of federally regulated businesses, taking action after Ontario updated its own labour laws and banned contracts that prevent people from joining rival companies.
In Canada, employment law is split between the provinces and Ottawa, which means Ontario’s crackdown in 2021 only prohibited employee non-competition agreements for certain businesses. Crucially, it did not have an impact on staff at federally regulated banks, telcos and airlines, even if they are based in Ontario.
Because a gap remains, some of Canada’s largest companies still have leeway to threaten employees with a court fight if they try to leave, said Hena Singh, a partner at Singh Lamarche LLP in Toronto. Non-compete agreements, she added, “are still used as a sword”
Even if a judge is likely to throw out the agreement, the legal fight makes changing jobs all the more challenging. “How much is the employee going to have to go through in terms of cost, in terms of time, in terms of emotional wear down, to go through that process?” Ms. Singh said.
The federal Liberals announced plans Tuesday to amend the Canada Labour Code and “restrict” the use of non-compete agreements in employment contracts for federally regulated businesses. The initiative was part of Prime Minister Mark Carney’s first budget, and consultations on the legal changes will start in early 2026.
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Non-compete agreements have long existed for senior executives, because these employees are privy to confidential information and corporate strategies that a rival may benefit from knowing, but the contracts exploded in popularity and companies expanded their use.
Low-level employees started feeling the impacts, and the length of time that someone was prevented from joining a rival company also grew, sometimes to as long as one year.
When Ontario implemented its own ban, the provincial government said doing so would help workers advance their careers and earn more money, while also giving the province a competitive advantage in attracting global talent.
In the federal budget this week, the Liberals said extending this prohibition to more employees “will protect workers’ rights, promote labour mobility, strengthen competition and empower workers to move to a higher-paying job or start their own business.”
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The irony of Ottawa’s new efforts is that Canadian judges are already likely to strike down non-compete agreements, said Michael Wright, an employment lawyer at Wright Henry LLP. “Courts have generally taken the position that these were unenforceable,” he said.
But it still hasn’t been enough. “Everyone seemed to know that, but it still created complications,” he said.
Legislation, then, could serve as the ultimate deterrent.
However, it won’t affect employees at every rank because senior executives are still often subject to non-compete agreements, given their access to sensitive information. Executives also face other hurdles that complicate switching jobs, such as having to give up their supplemental retirement plans and leaving behind deferred compensation in the form of company shares.
But past a certain level of seniority, employees tend to appreciate that restrictions will be placed on their movement. On Bay Street, “gardening leaves,” as they are known, are commonplace, said Leah McGillivray Palko, a partner and financial services practice leader at executive search firm GlassRatner.
All things considered, for senior leaders, “the short-term pain from a non-compete is manageable,” she said.