Why Your Non-Compete Clause Might Be Void for Being Against Public Policy

As a business owner, you’ve invested significant time and resources into training an employee. You’ve shared proprietary knowledge and introduced them to valuable client contacts. The thought of that employee walking out the door and immediately working for a direct competitor is alarming. To protect your interests, you had them sign a contract with a non-compete clause. You believe you’re covered. However, this sense of security might be dangerously misplaced, particularly when dealing with non-executive staff in Canada.

The standard advice often revolves around ensuring the clause is “reasonable” in its geographic scope, time limit, and the activities it restricts. While these factors are important, they are merely the surface layer of a much deeper legal principle. Canadian courts are displaying increasing judicial skepticism towards these restrictive covenants, viewing them not as standard contractual terms but as potential restraints on an individual’s fundamental right to earn a livelihood. This is especially true when a significant power imbalance exists, which is almost always the case with a junior employee.

The core issue isn’t just about fairness; it’s about public policy. The law recognizes that a mobile workforce fosters competition and innovation, which benefits the public. A contract that unduly stifles this mobility, even if signed willingly, can be declared void. This article moves beyond the typical checklist of “reasonableness.” Instead, it provides a strategic overview of the public policy arguments that can render your non-compete clause unenforceable. We will explore the judicial mindset, the critical distinction between protection and punishment, and the trends indicating that the legal ground beneath these clauses is rapidly shifting.

This analysis will dissect the key legal pressure points that Canadian courts examine when deciding whether to uphold or strike down a restrictive covenant. By understanding this framework, you can better assess the true enforceability of your agreements and avoid costly, and likely unsuccessful, litigation.

Can You Enforce a Contract If the Underlying Activity Was Technically Illegal?

The most straightforward public policy challenge arises when a contract clause is, in itself, contrary to statute. The legal landscape for non-compete agreements in Canada was significantly altered for many businesses when, since October 25, 2021, Ontario prohibited most non-compete clauses under the Working for Workers Act. This move sent a clear signal: the government views such restrictions on most employees as against public policy. If you operate in Ontario and have asked an employee to sign a non-compete after this date (unless they are a C-suite executive involved in a sale of business), your clause is not just unreasonable—it is statutorily void.

Attempting to enforce it would be an attempt to enforce an illegal term. However, the legislation’s scope has important limitations. A crucial point of clarification came from the *Parekh v. Schecter* case, where a court confirmed that the Act does not retroactively void non-compete clauses signed before the cut-off date. According to the analysis of this case, agreements entered into before October 25, 2021, may still be enforceable, but only on an exceptional basis where the employer can meet the stringent common law tests for reasonableness. This means older contracts aren’t automatically safe; they are simply judged by the pre-existing, and already high, legal standards.

For a business owner, this creates a two-tiered risk. For post-2021 agreements in Ontario, enforcement is essentially off the table for the vast majority of your workforce. For pre-2021 agreements, you are thrown back into the challenging arena of common law, where you must prove the restriction is a reasonable and necessary measure to protect a legitimate business interest, a difficult bar to clear, especially for a junior employee.

The Line Between Protecting Trade Secrets and Unfairly Restricting Trade?

Even where a non-compete is not explicitly banned by statute, courts will strike it down if it crosses the line from legitimate protection to an unfair restraint of trade. This is the central balancing act of non-compete litigation. A business has a right to protect its proprietary interests, such as trade secrets, confidential client lists, and specialized training. However, it does not have the right to prevent an employee from using their general skills, knowledge, and experience to earn a living.

As the scales in the image suggest, a court performs a proportionality test. Is the restriction narrowly tailored to protect a specific, identifiable asset, or is it a blunt instrument designed to stifle competition? For a junior employee, this test is almost always fatal for the employer. Such an employee rarely has access to the kind of high-level strategic information that would justify a complete ban on working for a competitor. Their value lies in their industry skills and experience, which the law considers their own property.

This is precisely why, as the Supreme Court of Canada has repeatedly affirmed, courts look more favourably on less restrictive clauses. The court’s perspective, as noted in the landmark case of *E. v. J.G. Collins Insurance Agencies Ltd.*, is that non-solicitation clauses are often preferred over non-competes because they achieve a better balance. A non-solicitation clause prevents a former employee from actively poaching your clients or staff, directly protecting your established business relationships without barring them from the industry altogether. The following table illustrates what courts typically consider legitimate interests versus overreach.

If your goal is to prevent a junior salesperson from using their general sales skills at another company, a non-compete is strategic overreach. If your goal is to stop them from taking the specific client list they built using your resources, a non-solicitation clause is the appropriate tool.

When Is a Contract So Unfair That a Judge Will Refuse to Enforce It?

Beyond the test of reasonableness, a contract can be voided if it is deemed “unconscionable.” This legal doctrine addresses situations where there is such a profound inequality of bargaining power that the resulting agreement is grossly unfair to the weaker party. For a business owner attempting to enforce a non-compete against a junior employee, this is a perilous legal minefield. The very nature of the employment relationship, especially at the hiring stage, is one of inherent imbalance. An applicant needs a job; the employer holds the cards.

The Supreme Court of Canada provided a clear framework for this in a prominent decision. In the *Uber Technologies Inc. v. Heller* case, the Court established that the test for unconscionability involves proving two elements: an inequality of bargaining power and a resulting “improvident bargain” — a deal that unduly advantages the more powerful party. As Monkhouse Law highlights in its analysis of the Uber v. Heller case, this test is now a key tool for challenging unfair contracts. A non-compete that prevents a junior employee from working in their chosen field for a year could easily be seen as an improvident bargain, as the harm to the employee’s career far outweighs the legitimate protective benefit to the employer.

An employer cannot simply argue that “they signed the contract.” The court will look behind the signature to the reality of the situation. Was there any meaningful negotiation over the clause, or was it presented on a take-it-or-leave-it basis? Does the employee have the sophistication and resources to understand the full legal implications of what they are signing? For a junior employee, the answer to these questions almost always favors a finding of unconscionability. The prevalence of this issue is significant; it is believed that millions of Canadian workers likely have employment contracts with non-compete clauses that would not stand up to this judicial scrutiny, yet they may feel bound by them out of fear or lack of knowledge.

Liquidated Damages vs Penalties: Why You Can’t Just Punish a Breach Financially?

Some employers, aware of the difficulty in enforcing a non-compete, attempt a workaround: they include a “liquidated damages” clause. This clause specifies a large, fixed sum of money that the employee must pay if they breach the non-compete. The thinking is that the financial threat will be a sufficient deterrent. However, this is another form of strategic overreach that courts view with extreme skepticism. The law draws a sharp distinction between legitimate liquidated damages and an illegal “penalty clause.”

A valid liquidated damages clause must be a genuine, good-faith pre-estimate of the actual losses the business would suffer from a breach. For example, if you could prove that losing a specific client would cost you $20,000 in predictable revenue, a clause set at that amount might be upheld. In contrast, a penalty clause is not designed to compensate for a loss; it is designed to punish the employee and terrorize them into compliance. A clause demanding $100,000 from a junior employee for working for a competitor would almost certainly be seen as a penalty, as that figure bears no realistic relationship to the actual damages caused.

As one ruling demonstrated, even if the financial penalty isn’t the primary focus, the underlying agreement must still be sound. In the case of *M & P Drug Mart Inc.*, a judge found a non-compete unenforceable simply because it was ambiguous and overly broad, regardless of the financial clauses attached. Courts will not allow you to use financial threats to enforce a restriction that is already void on public policy grounds. It’s crucial to audit any such clauses in your contracts to ensure they are compensatory, not punitive.

How to Save the Rest of Your Contract When One Clause Is Declared Void?

A common mistake business owners make is drafting overly broad and ambitious non-compete clauses, assuming that if a court finds a part of it unreasonable, it will simply “fix” it for them. This belief often relies on a misunderstanding of two legal tools: the “severability clause” in the contract and the judicial power of “blue-pencil severance.” A severability clause states that if one part of the contract is found to be illegal, the rest of the contract remains in force. While helpful, it doesn’t give a court free rein to rewrite your bad clause.

The power of “blue-pencil severance” is a very limited judicial tool. It allows a judge to strike out an unreasonable part of a clause, but only if the remaining words still make grammatical and logical sense on their own. The court cannot add words or rewrite the clause to make it reasonable. For instance, if a clause prohibits competition for “five years,” a court cannot change it to “two years.” It could, however, strike out an offending geographic location if the clause was written as “in Toronto and Ottawa,” leaving just “in Toronto.” The problem is, courts are extremely hesitant to do this with non-competes. As legal experts note, Canadian courts are extremely reluctant to use blue-pencil severance for non-compete clauses, arguing it encourages employers to draft overly broad restrictions, hoping the court will do their work for them.

Ambiguity is the enemy of enforceability. A classic example is the Supreme Court of Canada case *Shafron v. KRG Insurance Brokers*. The non-compete was for the “Metropolitan City of Vancouver,” a term that had no legal definition. The court refused to guess what the parties meant and declared the entire clause void. It would not substitute “City of Vancouver” or another term to save the clause. The lesson is stark: you must get it right from the beginning. Draft with precision and reasonableness, because you cannot rely on a judge to salvage a poorly written or overreaching clause.

Judicial Trends: Why Are Courts Becoming More Pro-Employee in Restrictive Covenant Cases?

The increasing judicial skepticism towards non-competes is not a recent or isolated phenomenon. It is part of a broader, long-term trend in Canadian employment law that prioritizes the employee’s right to work and economic mobility. This pro-employee stance is rooted in fundamental principles of public policy and human rights that have been developing for decades. An employer who ignores this trend does so at their peril, as they are swimming against a very strong legal tide.

Quebec’s legal framework provides a powerful example of this long-standing principle. The Civil Code of Quebec has explicit provisions governing non-compete clauses that are far more detailed and protective of employees than the common law in other provinces. For instance, Article 2089 of Quebec’s Civil Code explicitly states that the burden is on the employer to prove the clause is necessary and reasonable, and it sets out specific requirements for the clause to be valid. This rights-based approach has influenced judicial thinking across the country, reinforcing the idea that restrictive covenants are an exception, not the rule.

The legislative ban on most non-competes in Ontario is the most dramatic manifestation of this trend, but it is unlikely to be the last. Legal observers widely predict that other provinces may follow suit. A recent analysis from Miller Titerle Law suggests that British Columbia may likely follow suit and prohibit non-competes in the near future, bringing its laws in line with the direction set by Ontario. For a national employer, this patchwork of evolving laws creates significant risk. A clause that might be marginally enforceable in one province could be illegal in another. The clear direction of the law across Canada is towards greater freedom for employees and higher scrutiny for employers trying to restrict them.

The Toxic Workplace: When Does Poor Equity Enforcement Count as Firing an Employee?

An employer’s ability to enforce a contract is not a one-way street. To seek enforcement of a clause, the employer must have upheld their own end of the bargain. If an employer’s own actions constitute a serious breach of the employment contract, they may lose the right to enforce any restrictive covenants within it. This is a critical concept often overlooked by business owners focused solely on the employee’s obligations.

The most significant example of this is “constructive dismissal.” This occurs when the employer makes a fundamental, unilateral change to the employment relationship without the employee’s consent, effectively forcing them to resign. This can include a demotion, a significant pay cut, or the creation of a toxic or intolerable work environment. If an employee can prove they were constructively dismissed, a court will treat it as if they were wrongfully terminated. In this scenario, the employer’s breach of contract comes first.

The legal consequences are severe. As the employment lawyers at Monkhouse Law clearly state, “If your employer wrongfully dismisses you, they generally cannot rely on a non-compete clause.” The reasoning is simple and a matter of fundamental fairness: a court will not permit an employer to benefit from their own illegal act. You cannot breach the contract by creating an unbearable workplace and then use that same contract as a weapon to prevent the employee from finding work elsewhere. Aggressively or unfairly trying to enforce a non-compete against an employee could itself contribute to a toxic environment, potentially giving the employee grounds for a constructive dismissal claim and thereby invalidating the very clause you seek to enforce.

Can You Legally Fire an Employee for Their Social Media Posts in Canada?

In the modern workplace, an employee’s departure is often immediately followed by activity on professional social media platforms like LinkedIn. An updated profile announcing a new role at a competitor can feel like a direct challenge to a business owner who feels protected by a non-compete or non-solicitation clause. However, the legal implications of such an announcement are nuanced and tie back to the core principles of what constitutes legitimate protection versus overreach.

The central question is whether a public-facing social media post constitutes “solicitation.” Generally, a simple job status update is not considered solicitation. It is a passive announcement to a professional network. An employee is entitled to update their career information. The situation changes if the post goes further—for example, if it includes a call to action inviting former clients to move their business, or if the employee begins actively messaging contacts from their previous employer through the platform. This would likely be a breach of a well-drafted non-solicitation clause.

This reinforces the central theme: a non-solicitation clause is the more appropriate and enforceable tool. It directly targets the harmful action (poaching clients) without restricting the individual’s right to work or announce their career progression. As court rulings have often indicated, a reasonable non-solicitation clause that fairly balances the interests of all parties is much more likely to be upheld than a blanket non-compete. Attempting to discipline or sue an employee for a simple LinkedIn update, based on a broad non-compete, is likely to be viewed by a court as punitive and an unreasonable restraint of trade.

Ultimately, relying on a non-compete clause as your primary defense against a departing junior employee is a high-risk strategy in Canada. The legal and public policy tides are flowing strongly against their enforcement. A far more prudent approach is to focus on what is truly protectable—your confidential information and client relationships—and use precisely targeted non-solicitation and non-disclosure agreements. Before initiating legal action, seek a thorough review of your contract from an employment law expert who can provide a realistic assessment of its enforceability.