Alternatives to traditional non-competes

Following policy announcements in the federal Budget 2025, the viability of non-compete restrictive covenants (RCs) in employment agreements is once again in the spotlight. This is an opportunity to revisit the use of RCs, and possible alternatives.

There are various forms of RCs that can apply post-employment. In this update, we focus on the use of non-compete covenants that restrict former employees from competing against their former employers. As alternatives to non-competes, we discuss below certain less onerous covenants such as a non-solicitation of customers/suppliers/employees covenant or a covenant against using confidential information for which there is more latitude for use and enforcement.

A second statutory prohibition

The federal government is moving ahead with its stated plan to introduce a ban on non-competes in employment contracts subject to the Canada Labour Code (that is, in private sector employment in federally regulated sectors like aviation, telecommunications, banking, interprovincial transport, maritime shipping, etc.). The government has indicated public consultations with stakeholders will take place in early 2026.

If a federal non-compete prohibition comes into effect it will be the second such law in Canada. Ontario introduced a statutory prohibition on employee non-competes effective October 25, 2021. The Ontario prohibition has narrow exemptions applicable to certain senior executives or to sale-of-business scenarios but otherwise bars non-competes in provincially regulated employment relationships. It remains to be seen whether a federal prohibition would have similar exemptions.

Perhaps the federal move to a non-compete prohibition signals a trend toward such legislation in Canada, and perhaps not. For the moment there is no indication other provincial jurisdictions will follow suit. Either way, such legislation needs to be considered in context. Even without a ban, non-competes are unenforceable except in very narrow circumstances and for a very select group of employees. 

The limited use case for traditional non-competes

At common law and under Quebec’s Civil Code, an employee RC agreement can only be enforced if:

• It protects a legitimate proprietary interest of the business, such as trade connections or confidential information. 
• Its terms are minimally restrictive, meaning they impair a departed employee’s ability to work only to the minimum extent necessary to protect the former employer’s legitimate proprietary interest. A non-compete must be reasonably limited in duration, in geographic scope, and in the activities it restricts. 

If a non-compete does not protect a legitimate proprietary interest, if it is overbroad in its restrictions, or ambiguous in its meaning, a court will likely not enforce it if an employer seeks to prevent post-employment competition.

Practically speaking, this means non-competes are a non-starter for most employees. Most employees do not have the ability to leverage the connections and confidential information of their former employers to engage in competitive activities. Even if they do, improper use of those connections or information can typically be guarded against through lesser restrictions such as non-solicit agreements or non-competition agreements. 

It is rare that departed employees can materially affect their former employers’ proprietary interests simply by occupying a role with a competitor business, and it is only in such cases that a non-compete will be enforced (assuming it is properly drafted). As a result, the use cases for traditional non-competes involve a narrow range of job roles.

Those use cases may be further narrowed by statutory prohibition, such as the one in effect in Ontario and the one now proposed federally. Such legislation may contain exemptions for certain employee types – for example, defined senior executives in Ontario – but its overall effect will be to reduce the utility of traditional non-competes.

Alternatives to traditional non-competes

Given the narrow use cases for non-competes under common law or the Civil Code, and the potential for statutory prohibitions on such use in future, businesses should consider effective alternatives:

• If the goal is to protect confidential information from misuse and disclosure, a detailed confidentiality agreement may be an adequate contractual protection. These agreements build on existing legal duties of confidentiality for departed employees and are typically enforceable for all employment roles provided they are drafted appropriately. Enforcement will require proving misuse of confidential information, which can be challenging, but a clear contractual prohibition on such misuse is an important first step. This evidentiary challenge may be mitigated somewhat by the contract requiring the employee to cooperate with the employer and establish that confidential information was not used or disclosed.
• If the goal is to protect existing client, supplier or employee relationships from disruption, a non-solicit agreement may be an adequate contractual protection. Non-solicits bar a departed employee from actively contacting defined parties to divert them away from a former employer but otherwise do not restrict competitive activity. While non-solicits must be carefully drafted (including to ensure compliance with the Competition Act prohibition on certain non-solicit agreements) they are typically enforceable for a broad range of employment roles. Again, enforcement will require proving the departed employee engaged in prohibited solicitation, but a clear contractual prohibition is an essential first step. The evidentiary challenge may be mitigated somewhat by the contract requiring the employee to cooperate with the employer and establish that no prohibited solicitation occurred.
• To disincentivize competition without barring it outright, an agreement that permits competition at a cost is worth exploring. Such agreements anticipate that a departed employee might engage in competitive activity and, in that event, either cut off an ongoing payment or benefit or require the employee to repay a defined amount to the former employer. These agreements are more likely to be enforced by Canadian courts than traditional non-competes, though their drafting requirements vary across provinces. 
• To lower the risk of competition for a short time, a lengthy resignation notice period or a period of “garden leave” may be agreed to with the employee. Both of these arrangements involve an ongoing employment relationship where the employee continues to receive compensation, and is barred from working for a competitor, but is otherwise relieved of regular duties. 

These alternative contractual arrangements should be considered, as they may be a better and more effective match for sensitive business interests and diverse employment relationships than the challenging tool of traditional non-competes. As more attention is directed to minimizing the use of non-competes, such alternatives are worth exploring with counsel.