News & Updates

Updates to Canada’s Competition Act to prohibit “no poach” agreements will impact franchising in Canada

May 29, 2023

Overview

On June 23, 2023 amendments to Canada’s Competition Act (the “Act’) will come into force that prohibit both wage-fixing and “no poach” agreements in commercial agreements across the country. Specifically, updates to section 45 of the Act will make it a criminal offence for unaffiliated employers to enter into agreements to fix salaries, wages or terms and conditions of employment, or to agree to refrain from soliciting or hiring the employees of another business. Violation of these provisions carry severe penalties, including fines and/or imprisonment and may lead to civil liability should an employee make a claim against an employer for an alleged breach of the Act.

“No poach” and non-solicitation provisions are found in many franchise agreements. These provisions typically prohibited franchisees from poaching the employees of the franchisor or other franchisees within the system. While these provisions protect the interests of franchisors and their franchisees who may have invested significant time and resources in recruiting and training skilled employees, they have been applied to restrict the movement of relatively unskilled employees and are now viewed as suppressing an employee’s ability to move from one employer to another and to negotiate their wages.  

These updates to the Act will not apply retrospectively and will only apply to new agreements entered into by employers on or after June 23, 2023. However, the provisions will apply to conduct that reaffirms or implements older agreements, such as renewals or extensions. 

The changes to the legislation in Canada follow similar changes to federal-level competition and anti-trust law in the United States enacted as early as 2016. Following the lead of the US government, the House of Commons Standing Committing on Industry, Science and Technology released a report in November 2022 criticizing Canada’s current approach to wage-fixing and no-poaching agreements, eventually leading to the updates to the Act being passed in early 2022. 

These updates follow similar updates to Ontario’s Employment Standards Act, 2000, which as of October 2021, prohibit non-competition clauses in employment contracts for non-executive employees.

Prohibited Conduct

Section 45 of the Act will be amended to include the following provisions:

45 (1.1) Every person who is an employer commits an offence who, with another employer who is not affiliated with that person, conspires, agrees or arranges

1. to fix, maintain, decrease or control salaries, wages or terms and conditions of employment; or
2. to not solicit or hire each other’s employees.

While section 45(1.1) has been drafted as purposefully broad, the federal government has included defences to the prohibited conduct to mitigate any inherent restraint of trade. Some of the defences under the Act include:

1. The Ancillary Restraints Defence (the “ARD”)
   The ARD will be available when certain business transactions or collaborations require restraints on competition to make them efficient, such as when:
   
   1. the restraint is ancillary to, or flows from, a broader or separate agreement that includes the same parties;
   2. the restraint is directly related to and reasonably necessary for achieving the objective of the broader or separate agreement referred to in (a) above; and
   3. the broader or separate agreement referred to in (a) above, when considered without the restraint, does not violate subsection 45(1.1).

The Competition Bureau (the “Bureau”) may examine the terms of the agreement, the form of the agreement, the functional relationship between the restraint and the principal agreement, and how the restraint makes the principal agreement more effective in accomplishing its purpose.

2. Collective Bargaining Defence
   The updates to the Act under s.45(1.1) will not apply to collective bargaining agreements.

3. Regulated Conduct Defence (the “RCD”)
   The RCD offers a form of immunity from enforcement under the Act for legislatively authorized or mandated conduct. Therefore, a person or business obeying a valid provincial statute may in certain circumstances, be exempted from the new provisions of the Act.

4. Immunity and Leniency
   The Bureau’s Immunity and Leniency Programs are available for the offences described in subsection 45(1.1). To be eligible for these programs, applicants must provide sufficient information as it pertains to the applicable offence(s), including information relating to hiring practices and employee compensation

5. Affiliated Entities
   The new prohibitions under s.45(1.1) of the Act will not apply to affiliated entities, who will remain free to contract into “no poach” and non-solicitation agreements between themselves.

What does this mean for franchising in Canada?

Broadly worded “no poach” and non-solicitation provisions in franchise agreements are likely to violate the amended provisions of the Act. Ordinarily, franchisors and franchisees are not affiliated employers in franchise relationships and will not be able to rely on the affiliation exception under the Act.

It is unlikely that the ARD will apply to agreements between the franchisees since it may be viewed as an unnecessary restraint on their employees’ job opportunities. Whether it applies to the agreement between the franchisor and each franchisee will be case-specific and depend on whether the employers can prove the “no poach” or non-solicitation provision is necessary and flows from the broader franchise agreement. For example, a tightly constrained non-solicitation provision that prohibits a franchisee from hiring the employees of the franchisor who provide services to the franchisee may be permitted under the ARD because the non-solicitation of the franchisor’s employees is reasonable and necessary where the franchisor is sending its employees into the franchisee’s business to support the franchisee.

Franchisors should also be aware that section 36 of the Act allows a person who has suffered a loss or damage as a result of a breach of the Act to sue for and recover from the person who engaged in the conduct an amount equal to the loss or damage proved to have been suffered by them.

Next Steps for Franchisors

Franchisors should undertake a review of their franchise agreements and franchise disclosure documents in order to identify whether those agreements contain any prohibited “no poach” or non-solicitation provisions. While the new amendments will not apply to any agreements entered into prior to June 23, 2023, the provisions will apply to any renewals of those agreements. Therefore, it is critical that any problematic provisions are identified and removed prior to entering into agreements for the grant, extension or renewal of a franchise agreement. 
 

Tags: Competition Act, franchise, Franchising