While the U.S. and Ontario have recently banned the use of non-competition covenants (Non-Competes) in most employment contracts, Alberta still relies on common law to enforce them. Courts in Alberta are cautious, requiring employers to prove their necessity and reasonableness, and often favouring less restrictive options like non-solicitation clauses.
On April 23, 2024, the United States Federal Trade Commission passed regulations effectively prohibiting the use of non-competition covenants ("Non-Competes") in employment contracts. Some may recall that in late 2021, Ontario passed legislation amending its Employment Standards Act, SO 2000 c 41, to prohibit the use of Non-Competes for all employees except executives. These changes present an opportunity to revisit Alberta's laws respecting Non-Competes, and whether this trend of limiting their use is coming our way.
Alberta still operates under the common law when it comes to Non-Competes. In other words, Albertans look to the courts to determine whether a Non-Compete is enforceable or not. The leading case about enforcing Non-Competes is the Supreme Court of Canada decision in Shafron v KRG Insurance Brokers (Western) Inc.
Non-Competes are used in various circumstances, most notably commercial and employment contexts. The context in which a Non-Compete is used is important and is often the first thing a court will look at when determining whether one is enforceable.
In commercial contexts, parties are presumed to have equal bargaining power and to have exchanged money or assets in consideration for a Non-Compete. Courts tend to favour principles of freedom of contract over concerns regarding restraints on free trade.
Non-Competes in employment contexts are treated quite differently. When an employer seeks to impose a Non-Compete on an employee, the court presumes that the Non-Compete is unenforceable. Courts start from this position because of a perceived imbalance in bargaining power between an employee and their employer, as well as a perception that employees are not given extra consideration to agree to a Non-Compete. Put another way, courts tend to view Non-Competes in employment contracts as unreasonable restraints on free trade and are therefore reluctant to enforce them. Accordingly, courts impose a burden on the employer to prove that enforcing a Non-Compete is a reasonable means of protecting its legitimate business interests.
Courts tend to ask themselves two questions when determining whether to enforce a Non-Compete:
- Is a restriction on competition necessary at all, or would less restrictive measures such as a non-solicitation covenant work?
- If a Non-Compete is required, is the scope of that clause no broader than is necessary to protect the employer's asserted interests?
Courts will normally consider the following factors when deciding whether the scope of a Non-Compete is reasonable and therefore enforceable:
- The interests an employer is trying to protect by imposing a Non-Compete.
- Whether there are less restrictive means of protecting an employer's interests.
- The geographical scope of the Non-Compete.
- The temporal scope of the Non-Compete.
- The scope of activities that are prohibited by the Non-Compete.
Courts in Alberta have refused to enforce Non-Competes for a variety of different reasons. Recalling that a Non-Compete must be no broader than reasonably necessary to protect an employer's business interests, the most common reason that courts refuse to enforce a Non-Compete usually relates to the scope of the clause.
Examples
Since courts are reluctant to enforce Non-Competes that extend beyond the geographical scope in which a business operates, an employer operating a business exclusively in Calgary would not likely be able to enforce a Non-Compete that prevents an employee from working in the same industry elsewhere in Alberta. Likewise, since courts are reluctant to enforce Non-Competes that last too long, an employer would not likely be able to enforce a Non-Compete that lasts forever, or even one that lasts for two or more years. Courts are reluctant to enforce Non-Competes that cover a wide range of business activities, so an employer specializing in manufacturing casing, tubing, and other products for use in the resource extraction industry, for example, would not likely be able to enforce a Non-Compete on an employee that generally extends to working in metal and/or machinery manufacturing.
Takeaways for Employers
Businesses must take an exceptionally tailored approach to drafting Non-Competes. They need to be drafted like Goldilocks likes her porridge: just right. The broader the Non-Compete, the less likely a court will enforce it. Courts will always look to the least restrictive means of limiting free trade while also affording sufficient protection for businesses. In most cases, a non-solicitation clause may do the trick. These clauses are less restrictive, as they only extend to preventing a previous employee from poaching the employer's clients and/or business. Courts commonly refuse to enforce Non-Competes where a non-solicitation clause and/or a confidentiality clause would sufficiently protect the employer's interests.
Whether a business can enforce a Non-Compete on any of its employees or contractors depends on many factors, and the legal process to enforce one can be complicated.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.