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Restrictive covenants are a widespread tool in commercial and employment agreements; however, legislative and judicial scrutiny guiding their use is on the rise, making it more important than ever for organizations to understand the ins and outs of these provisions. We examine emerging legal and industry trends surrounding restrictive covenants, including current approaches to enforceability, statutory prohibitions across jurisdictions, sector trends, issues in hybrid agreements, and considerations for drafting.
Protecting a company’s interests through restrictive covenants is a common and widespread tool used by businesses in Canada and the US; however, these covenants—including non-competition and non-solicitation clauses—continue to face legislative and judicial scrutiny, particularly on their enforceability and inclusion in different types of employment and commercial agreements. In light of this evolving landscape, it is critical that organizations understand and remain vigilant of key legal developments relating to these types of provisions.
In this article, we explore restrictive covenants in depth, highlighting emerging legal and industry trends, including the interpretation of restrictive covenants in hybrid commercial/employment agreements, and discuss key practical considerations for drafting clauses in both the employment and commercial contexts.
Current legal landscape
To understand the legal landscape of restrictive covenants, it is important to first consider the basic anatomy and use cases for these agreements. Restrictive covenants typically include confidentiality or non-disclosure clauses, non-solicitation clauses, and non-competition clauses. They can be utilized in a variety of contractual contexts—in an employment agreement to govern and/or restrict an employee’s conduct and obligations during and post-employment; in strictly commercial agreements, such as purchase agreements; and within hybrid employment/commercial agreements, such as a shareholder agreement entered into by an employee, agreements entered into by employees in the context of the sale of a business, executive incentive plans, and franchise agreements.
Restrictive covenants, especially non-competition and non-solicitation clauses, are restraints of trade. They are presumptively illegal and unenforceable unless they can be argued as reasonable in the circumstances. Whether a covenant is reasonable in the circumstances depends on whether there is a reasonable balance between the parties’ and the public interest of avoiding restraints of trade, assessed at the time the covenant was entered into. A restrictive covenant must be clear and unambiguous to be enforceable. There are also other factors that courts will consider when determining enforceability, including the reasonableness of the scope, the duration and geographic reach of the restriction, and in the employment context, the nature of the employee’s role.
Importantly, courts have confirmed that restrictive covenants found within employment contracts are subject to heightened scrutiny compared to restrictive covenants negotiated in a commercial context, which are more often found to be enforceable. This is partly due to public policy concerns with restraining employees and the inherent power imbalance presumed within the employer-employee relationship. In contrast, parties negotiating in the commercial context have greater freedom of contract, particularly where the parties are negotiating on equal terms, are advised by competent professionals, and where the contract does not create an inherent power imbalance.
The analysis of covenants, in the context of these clauses being prima facie restraints on trade, can also depend on the type of covenant at issue. Courts have generally held that a non-solicitation clause is sufficient to protect an employer’s proprietary interest, and a non-compete clause is warranted only in exceptional circumstances. The nature and scope of the activities or business being restricted is also critical to the reasonableness analysis, which we further discuss below (see section “Key considerations when drafting”).
Confidentiality clauses
Confidentiality clauses also play a central role in protecting business interests. These clauses are designed to prevent employees or contractors from disclosing sensitive information, such as trade secrets, client data, proprietary technology, and pricing strategies. Unlike non-compete and non-solicitation clauses, confidentiality provisions are generally more enforceable, as they do not restrict a person’s ability to work or compete but focus on safeguarding specific types of information.
In practice, confidentiality clauses are often drafted broadly to cover a wide range of information and may apply both during and after the term of employment or engagement. In some cases, these clauses are embedded within employment agreements, while in others they appear in standalone non-disclosure agreements (NDAs) or as part of broader commercial contracts.
Courts generally uphold confidentiality clauses, provided they are clear, reasonable, and not overly broad. Overly vague or indefinite language can still pose enforceability risks. For example, a clause that attempts to restrict disclosure of “any information” without defining what qualifies as confidential may be challenged. As a best practice, organizations should define the scope of confidential information, specify the duration of the obligation, and ensure that the clause is tailored to the nature of the business and the role of the individual when drafting confidentiality clauses.
Restrictive covenant statutory prohibitions across jurisdictions
Ontario
Consistent with the public policy objectives identified in the common law, Ontario enacted a statutory prohibition on non-compete agreements in the employment context effective October 25, 2021. Under section 67.2 of the Ontario Employment Standards Act (ESA), no employer shall enter into an employment contract or other agreement with an employee that is, or that includes, a non-compete agreement. A non-compete agreement is defined as an agreement, or any part of an agreement, between an employer (including a prospective employer) and an employee (including an applicant for employment) that prohibits the employee from engaging in any business, work, occupation, profession, project, or other activity that is in competition with the employer’s business after the employment relationship between the employee and the employer ends.
There are two specific exceptions to Ontario’s non-compete prohibition:
- Sale of business exception. A non-compete is not prohibited where a business, or part of a business, that is operated as a sole proprietorship or partnership is sold or leased, and immediately following the sale, the seller becomes an employee of the purchaser. In these circumstances, a non-compete entered into as part of the sale that prohibits the seller from engaging in any work, occupation, profession, project, or other activity that is in competition with the purchaser’s business after the sale is not prohibited.
- Executive exception. A non-compete agreement may be entered into with employees who hold certain defined executive positions, including employees who hold prescribed C-suite positions (CEO, CAO, CFO, COO, etc.) or the office of the president. This exception only applies to employees who are “executives” as defined in section 67.2(5) of the ESA, not “executives” writ large.
Ontario’s non-compete prohibition does not apply to agreements entered into before October 25, 2021; rather, these agreements remain subject to the common law analysis of enforceability.
Québec
While there is no general statutory non-compete ban on non-competition clauses in employment contracts, such restrictive covenants are not allowed in certain specific contexts and are not enforceable in others.
The holders of a personnel placement agency licence issued in accordance with the Regulation respecting personnel placement agencies and recruitment agencies for temporary foreign workers may not take measures or agree on provisions preventing or restricting the employee’s hiring by the client, beyond a period of six months following the beginning of the assignment of an employee to a client. The definition of “personnel placement agencies” under the Regulation is very broad, encapsulating any person, partnership, or entity that has at least one activity consisting of offering personnel leasing services to meet the labour needs of a client.
Under article 2095 of the Civil Code of Québec (CCQ), non-competition clauses are not enforceable by the employer if the employee was terminated without a serious reason (cause) or was constructively dismissed. However, after the termination of employment, the employee may agree to waive the protections afforded by article 2095 of the CCQ, including in the context of a settlement agreement.
Federal
On May 6, 2026, the federal government introduced Bill C‑31, which proposes to amend the Canada Labour Code (CLC) to significantly restrict the use of non‑competition clauses and certain other employment‑related restrictions in federally regulated workplaces
The bill would prohibit employers from entering into or imposing such clauses, rendering them void, or in Québec, null, and contemplates additional prohibited restrictions to be defined by regulation. As in Ontario, limited exceptions would apply, including in the context of a sale of business and for certain senior executive roles. The proposed amendments also include anti‑reprisal protections and place the burden on employers to demonstrate that a clause is not caught by the prohibition. A transitional provision would delay, by one year following the coming into force of the prohibition, the application of the nullity rule to existing agreements.
Bill C‑31 is currently at first reading, and we will provide further updates as it advances through the legislative process.
US considerations
In the United States, there is currently no statutory non-compete law at the federal level. During the Biden administration, the US Federal Trade Commission (FTC) issued a rule that would have banned virtually all non Additionally, at the state level, we are continuing to see a patchwork of divergent non-compete laws. A number of states impose specific notice requirements, wage criteria, and other procedural requirements, along with penalty provisions for violating them, or an outright ban. States’ non-compete laws continue to evolve and vary, and it remains increasingly important for employers with a US workforce to ensure that restrictive covenants comply with the applicable state law requirements.competes against workers; however, the rule was immediately challenged in courts and ultimately abandoned under the Trump administration.
Although there is no nationwide statutory ban on non-competes, the FTC has made it a priority to investigate and prosecute anti-competitive labour-market practices, and has been pursuing enforcement actions against companies to limit the overly broad use of non-competes against non-managerial employees.
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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.
