Federally regulated employers face a new era for non-compete clauses under Bill C-31

At a glance

• Bill C-31 proposes amendments to the Canada Labour Code that would broadly prohibit non-compete clauses and certain other post-employment restrictions for federally regulated employers.
• The reforms would apply across key industries such as banking, telecommunications, and transportation, requiring a reassessment of restrictive covenant strategies.
• The proposed legislation includes anti-reprisal protections and places the burden on employers to justify the enforceability of any disputed restrictions.
• Limited exceptions would remain for senior executives and sale-of-business transactions, preserving protection of goodwill in commercial deals.
• Overall, Bill C-31 signals a clear shift towards enhancing employee mobility and labour market competition at the federal level.

Bill C-31’s proposed amendments to the Canada Labour Code signal a shift in the regulation of workplace restrictive covenants in Canada. If enacted, the legislation would significantly limit the use of non-compete clauses for federally regulated employers and continue a broader national trend favouring employee mobility and labour market competition.

For employers operating in federally regulated industries, including banking, telecommunications, and transportation, the proposed changes could require a reassessment of employment agreements, executive contracts, and post-employment restriction strategies.
What Bill C-31 proposes
Bill C-31 would amend the Canada Labour Code to broadly prohibit employers from entering into or enforcing non-compete clauses and certain 'other employment-related restrictions' that limit an employee’s ability to work for or operate a competing business after the employment relationship ends. The proposed legislation defines 'non-compete clause' broadly. Notably, the amendments are designed not only to invalidate traditional non-competes but also to potentially capture other forms of contractual restrictions that may unreasonably impair labour mobility by way of future regulation.

The proposed changes also include anti-reprisal protections for employees, prohibiting employers from dismissing, disciplining, demoting, or otherwise disadvantaging employees who refuse to agree to an unlawful non-compete provision.

The legislation places the burden on employers to establish that a disputed restriction is permissible under, including whether it falls within one of the permitted categories of exception.

Key exceptions to the proposed amendments
Although the legislation would dramatically restrict the use of non-compete clauses, it preserves several important exceptions.

• Senior executive employees: Bill C-31 would also exempt certain high-level executives from the prohibition. The proposed exemptions include chief executive officers and several senior executives who report directly to the CEO, chief financial officers, chief technology officers, and certain other prescribed executive positions.
• Sale-of-business transactions: The proposed amendments would continue to permit non-compete clauses where a business, undertaking, or operation is sold or transferred and the seller subsequently becomes an employee of the purchaser. This reflects the long-standing principle that purchasers are entitled to protect the goodwill they acquire in commercial transactions.

How the federal changes compare with Ontario’s non-compete prohibition

Ontario was the first Canadian jurisdiction to prohibit most employment-related non-compete clauses through amendments to the Employment Standards Act 2000 that came into force in 2021. While the approach being taken at the federal level is similar, there are some key differences that employers should note.

First, Bill C-31 appears broader in scope than Ontario’s legislation. In addition to prohibiting traditional non-compete clauses, the federal proposal contemplates restricting additional categories of 'other employment-related restrictions' through future regulations where those restrictions are viewed by the Governor in Council as unreasonably limiting employee mobility.

Second, while Ontario’s legislation contains similar primary exception categories (sale-of-business transactions and executives), the proposed federal amendments include more detailed executive categories and expressly places the burden on employers to justify the enforceability of any disputed restriction (which is a statutory codification of the common law burden).

Third, Bill C-31 includes proposed anti-reprisal protections and transition provisions addressing existing agreements, which would surpass the worker protections found in Ontario’s legislative framework.

What federally regulated employers should do now
Although the amendments are not yet in force, Bill C-31 provides a clear indication of where this segment of federal legislation is heading. Employers should not wait for final implementation before reviewing their employment agreements for restrictive covenants generally and non-compete clauses specifically. Some practical considerations include:

• With non-compete clauses likely to be prohibited for most employees, carefully drafted non-solicitation provisions will become the front line of post-employment protection. Employers should ensure that their non-solicitation clauses clearly define the scope of protected relationships (distinguishing between clients the employee personally serviced versus the broader client base), specify reasonable time limitations, and avoid language so broad that a court could characterise the clause as a de facto non-compete.
• Employers should review whether their long-term incentive plans, restricted share unit agreements, and deferred bonus arrangements include forfeiture-on-competition provisions that may be captured by the broader 'other employment-related restrictions'. Equity forfeiture clauses that function as economic deterrents to competition will conceivably fall within that scope.
• The burden now rests with the employer to show that one of the applicable C-Suite exemptions apply. Accordingly, rather than only relying upon the applicable employment agreement, employers should ensure that organisational charts, job descriptions, and reporting lines clearly evidence that the individual holds one of the prescribed positions and reports directly to the CEO.
• Bill C-31 provides a one-year transition period from the coming-into-force date, after which time existing non-compete clauses will be void. The transition period should be viewed as an opportunity to prioritize renegotiating agreements with employees in roles where knowledge protection is most critical. Any new agreements will, of course, likely require fresh consideration for signing the new agreement.

DLA Piper will be closely monitoring the development of Bill C-31 and will provide updates as they become public.