How do you protect your business if Alberta regulates non-competition agreements?
Written by Jeff Fixsen, Partner Duncan Craig LLP | Business Solutions
Non-competition agreements are changing.
In April 2024, the United States Federal Trade Commission (“FTC”), an independent agency responsible for civil antitrust laws and consumer protection, announced a 3-2 ruling that will ban all future non-competition agreements (“NCAs”) and render most existing ones unenforceable. While an injunction already affects that ruling, the U.S. is not the only country regulating NCAs. Even before the FTC’s move, Ontario regulated NCAs in 2021. Under Ontario’s Employment Standards Act, employers are prohibited from entering into any new NCA agreements with an employee, with some exceptions, such as NCAs with CEOs and other C-suite executives.
NCAs have been finding their way into more and more employment agreements. They have become so common in boilerplate employment contracts that even asking ChatGPT for a sample of a regular employment contract returns one with a NCA clause.
According to the results of a 2023 poll by The Angus Reid Institute, 27% of Canadians say they have been subject to a NCA clause. In the U.S., where the FTC ruling took place, nurses, fast-food workers, security staff, and bartenders have been bound by NCAs. In 2016, US fast-food chain Jimmy John’s only backed away from its NCA policy targeting sandwich-makers after the New York attorney general started investigating their policies.
Governments of other common law jurisdictions, such as the UK and Australia, have strongly indicated that they will regulate NCAs. NCAs have limited applicability in two of Canada’s other main business partners; in Mexico, they are mainly unenforceable due to their unconstitutionality, and in China, they are extensively regulated, only applicable to higher-level employees but not lower-level ones.
What are NCAs?
NCAs are clauses in employment contracts that require employees to pledge not to work with a competitor for some time after their resignation or termination. They are not new and have existed in common law in the UK since 1414 and have been enforced to various degrees since at least 1711. The limitations imposed by NCAs often limit the specific competitors with whom or the particular field in which the employee is not allowed to work. NCAs usually impose geographical limitations as well.
In common law, NCAs belong to a particular group of contracts called restrictive covenants, meant to help a business maintain its competitive edge. Some other restrictive covenants are:
●????? Non-solicitation clauses (a promise not to poach clients from a previous employer)
●????? Non-disclosure agreements or NDAs (a promise to not disclose certain information gained through last employment to anyone else)
●????? No-poaching agreements (two employers’ agreement to not poach employees from each other).
Such clauses are crucial in many industries where trade secrets, books of business, or unique business practices are vital to success. They promote the flow of knowledge and skills by inspiring confidence in employers to share proprietary knowledge with their employees and teach them the necessary skills for performing vital tasks without fear of losing their clients or having their unique business practices used against them.
Are restrictive covenants regulated in Alberta?
Currently, no-poaching and wage-fixing agreements and the communication of trade secrets are federally regulated. However, the government may only enforce such regulations in unique circumstances, and individual businesses or employees may want to rely on something else.
While there are no statutory regulations for other restrictive covenants in Alberta, including NCAs, this does not mean they are always enforceable. For years, the courts have strived to strike a balance between crucial public interests such as freedom to contract and individual liberty of action in trading, striving to enforce only those NCAs they find “reasonable.”
Are NCAs enforceable in Alberta?
As a general rule, Canadian courts (including Alberta) find NCAs unenforceable. However, they will still enforce those that are reasonable between the parties and with reference to the public interest. As such, the party seeking to enforce them (usually the employer) has the onus to prove that the NCA in question is reasonable. Once that is established, it will fall on the other party to demonstrate that the NCA is against public policy.
What constitutes a reasonable NCA is greatly context-dependent. For instance, if the NCA is signed in the context of the sale of a business, the courts are more inclined to find it enforceable. The reasoning is that the sale of a business often involves a payment to the vendor for goodwill, assuring the purchaser that the vendor will not later enter into competition. On the other hand, in a strict employment scenario, the courts will apply a more rigorous test and are more inclined to find NCAs unreasonable. For instance, in strict employment scenarios, the courts will not find a NCA reasonable if the same goals could be achieved by less restrictive means, such as a non-solicitation agreement. Furthermore, the NCA terms must be clear, with no ambiguity, to prove reasonableness. Otherwise, the courts will consider the NCA void before even considering whether it could be reasonable.
Why are NCAs changing?
Generally, there have been public policy reasons behind calls for regulating NCAs. Many find them to be anti-competitive and a hindrance to better economic progress. Some see them as employer-sided and against the interests of employees. However, what has been a catalyst for regulation is how widespread NCAs have become. They seem to find their way into contracts where they are not reasonably protecting any genuine interest of the employer while significantly limiting what lower-level employees can do if they have to resign or are laid off.
While many such NCAs are unenforceable, this does not mean that they are ineffective. Employers are often in a stronger economic position and have a better understanding of the intricacies involved in employment contracts. As a result, they could achieve their goals by threatening litigation, even if their NCA would be found unenforceable by the courts. The courts, too, have been concerned with these social issues regarding the NCAs for many decades and have reflected their concerns in their decisions.
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On the other hand, there are concerns regarding the courts acting as policy-makers while not being politicians and not being responsible to the public in the way public representatives are.
Regulation will resolve these issues to an extent. It will better reflect the public's will and prevent unnecessary NCAs, which would be unenforceable by the courts regardless.
How can you create NCAs that are enforceable under the current system in Alberta?
Generally, a NCA has to have certain qualities to increase the odds that the courts will find it enforceable. First, the terms must be clear and unambiguous. The courts will look at three factors to see whether the clear terms are reasonable:
Because the courts are reluctant to rectify errors in NCAs to make them enforceable, it is crucial to consult an expert lawyer. For instance, in a case which found its way all the way to the Supreme Court of Canada, the usage of the geographic descriptor of “Metropolitan City of Vancouver'' was found to be too ambiguous and, as such, impossible to prove reasonable and effectively void and unenforceable. The Court was unwilling to rectify that term to mean just the city of Vancouver (or other alternatives). As one of Canada’s Supreme Court justices famously pointed out, “[r]ectification is not equity’s version of a mulligan.”
Furthermore, because non-solicitation and non-disclosure agreements are less restrictive for employees while still achieving many of the same goals, most courts are more willing to enforce them. If they are adequate, it is best to use them and refrain from using NCAs unnecessarily.
What will a change look like if Alberta adopts the trends concerning NCAs?
If the trend to regulate NCAs finds its way to Alberta, whether through Alberta legislation or federal regulation, it will likely not be an outright ban like the one proposed by the FTC. It will most likely be similar to the more reasonable approaches adopted by Ontario or other developed countries to respond to policy concerns while protecting employers’ interests.
In such a scenario, non-solicitation agreements and NDAs remain as effective as they are today. As a result, it may be wise to rely on as few NCAs as possible.
What strategies can help employers if NCAs are regulated in Alberta?
No matter the nature of the changes, a reallocation of risk may be in order. The employer must adjust the benefits it provides and recalculate how much it relies on NCAs to protect its interests. For instance, an employer may want to calculate the monetary loss equivalent to the detriment it faces if each ex-employee were to join the competition and adjust the pay and benefits it provides to recoup that loss in advance.
It will be prudent to adopt other risk allocation strategies when reasonable. For instance, an employer may want to deal directly with the most critical clients and refrain from sharing the most vital trade secrets with their employees. Reviewing and strengthening protections around trade secrets, customer lists, and other proprietary information is always a good practice. Another risk-mitigating practice is making the work process modular. Modularity could limit individual employees' access to trade secrets and control the damages arising from an ex-employee joining the competition. Depending on the qualities of the business, patent and trademark registration, non-solicitation agreements, and non-disclosure agreements can help supplement a business’s efforts in protecting its interests.
Adapting measures to incentivize loyalty is another viable strategy. It is an excellent strategy for an employer to make it more attractive for certain key employees to keep working at their business. If appropriate, a limited share in ownership may motivate the employees to work in the business's best interest. An employer could offer severance provisions that the employee will forfeit if they resign. Depending on the industry, retention bonuses or deferred compensation arrangements could also be helpful. Reasonable garden leaves (where an employer pays a portion of an ex-employee's salary during the NCA period) or prolonged notice periods could also be beneficial.
Given the dynamic nature of legal matters and the high possibility of changes to come, it is crucial to be in regular contact with a lawyer to ensure that all essential terms of employment contracts follow the latest standards.
References:
Written by Jeff Fixsen, Partner Duncan Craig LLP | Business Solutions
Jeff Fixsen has advised corporations and individuals in all aspects of their business for over two decades. His practice includes the areas of corporate and commercial law, real estate, mergers and acquisitions, corporate restructuring and financing, and trademarks. Jeff's ability to foster practical approaches to problem solving helps clients achieve success efficiently and effectively. Jeff's clientele is diverse and reflective of the greater Edmonton and area and Northern Alberta business community. He provides the proper business structures for owner-managed, family-owned, multi-generational and start-up businesses for long-term success.
In Jeff's Own Words: "My colleagues tell me that I am a great communicator with a relaxed style and good humour. I think that works well with the practice of law which often involves high emotions, high stakes and tight timelines. As such, I am tough on problems but not on people. My clients see me as their protector, which indeed I am. Most of my clients come to me by the referrals from other clients or other professionals in the tax, accounting or real estate world. Most often the introductory email or phone call is 'Jeff will take care of you.' I see that as a great opportunity and responsibility to do just that. I love taking care of my clients and helping them sort through complex legal issues, realize their business goals and make sure that they have peace of mind during the process."
Contributions to this article provided by Alborz Azizpourshoobi, Law Student at the University of Alberta.
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2 个月Awesome article Jeff!!
Acelero a profesionales ambiciosos | Experto en Liderazgo entrenado en HARVARD ???? ???? ???? | Coach Ejecutivo y de Equipos | Conferencista Internacional | Profesor Liderazgo y Negociación en MBA | ???? MTB ?? Mago
2 个月Understanding changing NCA regulations is essential for business resilience in Alberta. Jeff Fixsen
Partner at SB LLP, Barristers & Solicitors
2 个月Thanks for sharing Gurpreet