OTTAWA — By barring “non-compete” clauses in employment contracts, the Ontario government hopes to free up the market for tech talent, California-style.

Provisions forbidding workers to move to other employers in the same sector for a set time after leaving a job are common features in tech-sector contracts, said Ontario’s Labour Minister Monte McNaughton in an interview with The Logic.

The province doesn’t know just how common they are, he said, but one U.S. survey estimated that at least 27.8 per cent of private-sector workers there are subject to them.

A proposed provincial law would simply ban non-compete clauses from employment agreements except in cases where a company owner is bought out and goes to work for the buyer as an employee. If the law is passed, any other non-compete clause in a current contract will be void.

When McNaughton introduced the bill in October, Toronto employment lawyer Chris Achkar told The Logic that Ontario judges typically won’t enforce non-compete clauses lasting longer than a year.

“In reality, many non-competes don’t hold up in court anyway. So it really is, in many cases, used as an intimidation tactic by employers,” McNaughton said.

In some places in the U.S., employers are even putting non-compete clauses into the contracts of restaurant workers, including fast-food employees; President Joe Biden’s administration has ordered regulators to use federal rules to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility” in sectors they oversee.

“It used to be a problem that we saw in U.S. jurisdictions, but it’s creeping in here,” McNaughton said. Wages have increased in jurisdictions that have banned non-compete clauses, as workers use their new freedom to negotiate higher pay, he said.

Bosh, said Ted Sichelman, a law professor at the University of San Diego specializing in intellectual property and entrepreneurship. “Non-competes actually raise wages,” he said in an interview.

In the U.S., there’s a school of thought that California’s hostility to non-compete agreements (built into its law for nearly 150 years) is a big reason why it vaulted past Massachusetts as a tech centre despite the Boston area’s money and world-class institutions like Harvard and MIT. 

Contrarily, maybe it’s more to do with Silicon Valley’s early focus on personal computers rather than the less wieldy minicomputers that turned out not to be the real successors to room-filling mainframes, and a Californian cultural willingness to job-hop while New England reserve has tended to keep people with one employer.

In a nearly-100-page paper making the case for allowing non-compete agreements last year, Sichelman (and fellow law professor Jonathan M. Barnett of the University of Southern California) argued that widespread non-compete agreements let employers invest more in their workers because they don’t need to worry about others “expropriating” that investment.

Employees who sign them can ask for more compensation, the pair argued, and in California there are workarounds, like restrictive stock-option deals, that keep workers tied to employers in other ways.

In the tech industry, trade secrets and other critical competitive information are often in employees’ heads, not on blueprints spirited out in rolled-up tubes or even on disks or in file directories that can be tracked. If somebody takes them from one employer to the next, “no paper trail is left,” Sichelman said. Non-compete agreements are a solution to the difficulty of tracing specific thefts of intellectual property.

He suggests restrictions on predatory non-compete agreements—setting a pay threshold, for instance, or limiting them to certain industries—but said courts are well equipped to deal with particular circumstances.

Yes, California is a success in silicon, but Boston is a dominant life-sciences player despite its state’s non-compete agreements. Also, non-compete clauses are severely limited in other U.S. jurisdictions that have not become tech titans, such as Oklahoma and North Dakota.

“There’s very little evidence, when you dig underneath, that non-competes played any role in the success of Silicon Valley,” Sichelman said.

The clauses are still a restraint on trade, counters Matt Malone, barriers to keep skilled people from the employers they’d naturally move to.

A former Silicon Valley employment lawyer now pursuing a doctorate at the University of Ottawa, he said employers should fight for talent in the usual way, not by barring people from taking other jobs.

“By its name, it’s a ‘non-compete.’ So it reduces competition,” he said. Even where broad non-compete agreements don’t hold up in court, the threat of litigation—especially when you’ll be up against a well-resourced legal department—creates friction in the job market.

The biggest technology companies have market-capitalizations that exceed the GDPs of nation-states, Malone said. “I think it’s a bit of a myth to talk about bargaining power, when you have an employer that is larger than the GDP of Canada, or larger than the GDP of Ontario, negotiating that employment agreement with an employee.”

Non-compete clauses are blunt instruments that don’t get at the real concern, which is the theft of legitimate corporate secrets, he said.

“At the end of the day, our laws should be seeing the ball, not the person,” Malone said. “Is there room to improve our law in that area? Yes. But should our law be constraining the actions of individuals and preventing them from working and making a livelihood for themselves? All under the name of protecting confidential information and trade secrets, when that’s not actually what’s going on? I don’t think so.”