Restraint of Trade — Ontario Employment Law
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About Restraint of Trade
The common law doctrine of "restraint of trade" is a foundational principle in Ontario employment law. At its core, the doctrine is based on the public policy that individuals should be entirely free to utilize their skills, practice their chosen profession, and earn a livelihood. Consequently, any contractual provision that restricts a worker's freedom to pursue their trade is considered a "restraint of trade" and is presumptively void (unenforceable) from the outset.
While most workers immediately think of standard non-competition or non-solicitation clauses when they hear about post-employment restrictions, the legal doctrine is significantly broader. Ontario courts have applied the restraint of trade doctrine to scrutinize and strike down a variety of restrictive mechanisms. For example, stock option agreements that force an employee to forfeit their vested shares if they work in the same industry are heavily scrutinized. Courts have also examined retirement agreements where payments are clawed back if the employer subjectively dislikes a former worker's "attitude or conduct," or fixed-term contracts that require healthcare professionals, such as midwives or doctors, to surrender valuable hospital privileges once their term ends. Even heavy financial penalties, such as massive "training repayments" designed to paralyze a worker from leaving for a competitor, can trigger this doctrine.
For an employer to successfully enforce a clause that restrains trade, they must overcome a high legal hurdle. The employer bears the burden of proving that the restriction is both reasonable and absolutely necessary to protect a legitimate proprietary interest, such as true trade secrets or an exclusive client base. Because of the inherent power imbalance between employers and workers, courts apply a much stricter level of scrutiny to employment agreements than they do to commercial transactions, like the sale of a business. To survive this scrutiny, a restraint must be exceptionally clear and narrowly tailored in its duration, geographic scope, and prohibited activities.
Crucially, Ontario courts generally refuse to rewrite or "blue-pencil" overly broad restraints. Under the legal doctrine of severability, if an employer drafts a restraint of trade that goes even slightly too far, the entire restriction is typically struck down, leaving the employee completely free of the obligation. Because deciphering the dividing line between a legally valid contractual condition and an unlawful restraint requires analyzing complex judicial precedents, individuals facing aggressive financial penalties or contractual barriers to their future employment should have their specific agreements assessed by a qualified legal professional.
Frequently Asked Questions
What exactly does 'restraint of trade' mean in an employment contract?
A restraint of trade is any contractual clause that restricts your right to exercise your profession, engage in business, or earn a living after your employment ends. At common law, these clauses are automatically presumed to be void and unenforceable unless the employer can prove they are reasonable.
Are financial penalties for quitting considered a restraint of trade?
Yes, they can be. If a contract attempts to claw back bonuses, cancel vested stock options, or demand repayment of massive "training fees" specifically because you found work elsewhere, Ontario courts may rule these provisions as unlawful restraints of trade hidden as financial penalties.
Why do courts treat employment restraints differently than business sales?
Courts apply a much tighter legal standard to employment contracts because of the recognized power imbalance between employers and employees. While a buyer of a business has equal bargaining power to negotiate non-competition terms, an individual employee rarely does, meaning courts are much faster to declare employment restraints unreasonable.
If a restraint of trade clause is drafted too broadly, will a judge just narrow it down?
No. In Ontario employment law, courts generally reject "notional severance" or rewriting clauses. If a restraint of trade clause is found to be unreasonably broad in time, geography, or scope, the judge will typically strike the entire provision out of the contract completely.
When should I get a lawyer to review a clause restricting my future work?
You should seek an employment lawyer's review either before signing an agreement with heavy restrictive conditions, or before changing jobs if you are worried your current employer might try to claw back your equity, severance, or legally pursue you for moving to a competitor.
Common Scenarios
- A departing executive discovers a clause in her stock option agreement stating she will forfeit tens of thousands of dollars in vested equity unless she agrees not to work for any technology company in North America for three years.
- A specialized healthcare worker finishes a fixed-term contract with a clinic, only to find the employment agreement dictates they must permanently withdraw their local hospital privileges, severely limiting their ability to practice in their home region.
- An older worker accepts an early retirement package, but the contract features a forfeiture provision allowing the company to halt the ongoing monthly severance payments if they judge the former employee's 'attitude and conduct' to be unsatisfactory.
- A junior salesperson leaves their job and is suddenly hit with a demand letter for a $20,000 'liquidated damages' penalty, which their former employer claims is owed because the employee took a job in the same industry.
What You Should Know
- Never automatically assume a daunting financial penalty or professional restriction is legally binding just because it is written in a signed employment contract; many are unenforceable.
- Look for exceptionally broad language in your contract; if a clause attempts to restrict your professional activities globally or permanently, the entire restriction is likely void under common law.
- If an employer explicitly threatens to enforce an unreasonable restraint to freeze your career or withhold money you have earned, ensure all communications remain in writing to preserve evidence of their conduct.
- Do not attempt to navigate the enforceability of stock option claw-backs or forfeiture provisions alone; evaluating these specific restraints requires specialized legal analysis of historical case law.
Featured Cases
A. v. S.
2019 ONSC 3989 (CanLII) · 2019-06-27Midwife Contract: Expiration vs Termination & Restraint of Trade
This case concerns the interpretation of a fixed-term midwifery practice agreement, focusing on whether its expiration triggers termination obligations and whether a clause requiring the withdrawal of hospital privileges constitutes an unreasonable restraint of trade. The court applied the contra proferentem rule to resolve ambiguities in favor of the midwife, considering the power imbalance and the non-negotiable nature of the agreement. The court determined that the expiration did not constitute termination under the agreement and that the privilege withdrawal clause was not a restraint of trade.
L. v. The Toronto-Dominion Bank
2013 ONSC 5657 (CanLII) · 2013-09-12Enforceability of Forfeiture-on-Resignation Clauses
This case addresses the enforceability of a forfeiture-on-resignation clause in a long-term compensation plan involving restricted share units (RSUs). The court determined that the clause constituted a valid loyalty incentive rather than an unreasonable restraint of trade, as it tied forfeiture to the cessation of employment rather than post-resignation conduct. The provision was upheld as a valid and enforceable term of the employment agreement.
M. v. ConCreate USL Limited Partnership
2012 ONSC 1840 (CanLII) · 2012-03-21Enforceability of Non-Compete Clauses in Employment
This case addresses the enforceability of restrictive covenants, including non-competition and non-solicitation clauses, within employment agreements. The court analyzed whether such covenants constitute unreasonable restraints of trade and applied the stricter scrutiny standard applicable to employment relationships compared to commercial transactions. Key issues included the reasonableness of scope, territoriality, and duration, as well as the application of the doctrine of severability to ambiguous or overly broad terms.
Poppa Corn Corp. v. C.
2005 CanLII 11804 (ON SC) · 2005-04-13Interim Injunction: Restraint of Trade
An interlocutory proceeding seeking an interim injunction to restrain trade, likely involving a restrictive covenant in an employment or commercial context.
Nortel Networks Corp. v. J.
2002 CanLII 49617 (ON SC) · 2002-01-04Stock Option Claw-Back Clause Upheld in Employment Contract Dispute
A case involving the enforceability of claw-back provisions in a stock option agreement between an employer and employee. The court examined whether the provisions constituted a restraint of trade, a penalty, or lacked consideration, ultimately upholding the clause as valid.
W. v. Stelco Inc.
1998 CanLII 17686 (ON CA) · 1998-06-24W. v. Stelco: Restraint of Trade Appeal
An appeal to the Court of Appeal for Ontario regarding a restraint of trade clause. The court reviewed the lower court's decision on the enforceability of the restrictive covenant.
Semiconductor Insights Inc. v. K.
1995 CanLII 7325 (ON SC) · 1995-10-25Enforceability of Non-Competition Clauses in Employment Agreements
A case concerning the enforceability of a non-competition clause in an employment agreement. The court examined whether the clause was reasonable in scope, duration, and geographic application, and whether it improperly restrained trade or competition, applying principles from Elsley v. J.G. Collins Insurance Agencies Ltd.
B. v. Deloitte, Haskins & Sells of Canada
1984 CanLII 2071 (ON SC) · 1984-01-04Non-Compete Clause in Partnership Agreement
This case addresses the enforceability of a non-competition clause in a partnership agreement between accountants. The court found the clause unreasonable as it was overly broad, restricting services to former clients no longer associated with the firm. Additionally, a provision waiving payments upon breach was deemed an unenforceable penalty.
Creditel of Canada Ltd. v. F. et al.
1977 CanLII 1043 (ON SC) · 1977-10-24This is an interlocutory proceeding regarding an application for an interim injunction in a dispute concerning a restraint of trade covenant. The legal issues center on contract law principles governing non-competition or non-solicitation agreements.
E. v. J.G. Collins Ins. Agencies
1976 CanLII 48 (ON CA) · 1976-05-11E. v. J.G. Collins: Restrictive Covenant Enforceability
This is a merits decision from the Court of Appeal for Ontario regarding the enforceability of a restrictive covenant in an agreement that combined the sale of a business with employment. The court addressed whether the covenant should be assessed under employment or vendor-purchaser standards, ultimately upholding the five-year geographical restriction as reasonable and enforceable. This decision was appealed to the Supreme Court of Canada, which varied it (E. v. J.G. Collins Ins. Agencies, [1978] 2 SCR 916). The Supreme Court dismissed the appeal, upholding the validity of the restrictive covenant. However, the judgment below was varied to limit the recoverable damages to the stipulated maximum amount of $1,000 for the period up to the date of trial.
F. v. Burns & Co. Ltd.
1964 CanLII 167 (ON SC) · 1964-03-16Employment Contract: Unreasonable Restraint of Trade Clause Severed
An employment contract dispute involving a restraint of trade clause in a retirement payment agreement. The court held that the provision allowing termination based on the employee's 'attitude and conduct' was an unreasonable restraint of trade and was severable from the rest of the agreement, leaving substantial consideration for the promise to pay.
Detroit Football Co. v. Dublinski Detroit Football Co. v. M.
1955 CanLII 398 (ON SC) · 1955-06-16Restraint of Trade: Football Player Covenants
This is an interlocutory proceeding where the plaintiff sought to enforce negative covenants in contracts of personal service prohibiting defendants from playing football for other teams. The court addressed whether these covenants constituted an unreasonable restraint of trade and whether an injunction was appropriate to prevent breach.
R. C. Young Insurance Ltd. v. B.
1955 CanLII 370 (ON CA) · 1955-06-06Restrictive Covenant Void: Overly Broad Employment Restriction
This appeal concerns the validity of a restrictive covenant in an employment agreement that prohibited an employee from engaging in insurance business within specified areas for three years after leaving employment. The Court of Appeal found the restriction to be overly broad and not justified by the employer's business scope, ruling that the covenant was indivisible and void in its entirety.
I. v. Great West Life Ass'ce Co.
1941 CanLII 549 (ON SC) · 1941-08-20Wrongful Dismissal: Termination Clause Deemed Void in Insurance Agent Contract
A wrongful dismissal case where the plaintiff challenged the enforceability of a termination clause in their employment contract, arguing it was void as a penalty or restraint of trade. The court held that the termination was not wrongful under the terms of the agreement and granted relief against forfeiture of renewal commissions.
P. et al. v. Winters Garment Co.
1928 CanLII 394 (ON SC) · 1928-02-13Legal Status of Unincorporated Labour Unions
This is a merits decision addressing the legal status of unincorporated labour unions in Ontario. The court examined whether the International Ladies Garment Workers' Union was an unlawful association subject to the common law doctrine of restraint of trade, relying on English common law precedents such as Russell v. Amalgamated Society of Carpenters & Joiners due to the absence of specific Ontario legislation.