Non-Competition Clauses in Canadian Employment Law and the Doctrine of Inequality of Bargaining Power

Abstract

In 2021, the Ontario government legislatively prohibited most non-competition clauses, the first Canadian government to take this step. The move was unexpected because the political party in power (the Progressive Conservative Party, or PCP) has not traditionally been a strong supporter of workers' rights. However, the PCP had recently targeted the working class vote, and banning non-compete clauses demonstrated a commitment to workers' rights that would make Ontario more attractive to the creative industries. The PCP also believed that legislatively banning non-competes would attract little backlash from its business constituency since the common law renders almost all non-competes illegal in Canada anyways.

The common law approach to enforceability of non-competition clauses in employment contracts is similar in Canada and the United States. Courts in both countries are suspicious of these clauses because they restrict the right of workers to accept jobs within their field of work and expertise. Therefore, the common law requires employers to justify these restrictive covenants based on a standard of reasonableness. However, a deeper analysis reveals that Canadian courts are far less likely to enforce non-compete clauses than their American counterparts. This divergence can be explained in part by fundamental differences in employment law architecture. For example, the fact that the default rule in Canada requires notice of termination of an employment contract rather than "at will" employment has important implications for the treatment of non-competes.

However, more fundamentally, Canadian courts are guided by a doctrine of inequality of bargaining power. This doctrine, developed primarily by the Supreme Court of Canada over the past half-century, permeates the common law of the employment contract. The doctrine compromises both a descriptive and a normative element. Descriptively, the doctrine recognizes (1) that work has a psychological component and is integral to human dignity, personal identity, and self-worth in Canadian society; and (2) that the employment relationship is frequently characterized by inequality of bargaining power. Normatively, the doctrine of inequality of bargaining power posits that due to the importance of work and the reality of inequality of bargaining power, the common law should develop in a manner that considers the vulnerability of employees. It is through the application of this doctrine in Canada that importance differences in the common law approach of the two countries becomes most evident. For example, relying on the doctrine of inequality of bargaining power, Canadian courts have refused to sever or rectify unreasonable and over-broad non-compete clauses. This marks a substantial difference in the approach of courts in Canada and the U.S., where courts routinely intervene on behalf of employers to read-down unreasonable non-competes to make them enforceable. This essay examines the treatment of non-competition clauses in employment contracts through a comparative lens, explaining how Canadian courts (and now legislators) have demonstrated much less tolerance for contractual restrictions on the right to work.

Keywords: Employment Law, Non-Competition Clauses, Comparative Law, Contract Law, Canada, U.S., Ontario

JEL Classification: K12, K31, K42, L38, J18, J47, J68, J62