Torys on Budget 2025: proposed reforms for federally regulated employers

The 2025 Federal Budget (the Budget) proposes several new legislative actions relevant to employers. In this bulletin, we focus on three of the key proposed changes: 1) restrictions on non-compete agreements for federally regulated employers; 2) wage theft countermeasures; and 3) proposals aimed at protecting workers against deliberate misclassification as independent contractors. We also set out the key takeaways for employers about these proposed reforms.

What you need to know

• Non-compete restrictions for federally regulated employers. The Budget proposes amending the Canada Labour Code (CLC) to restrict the use of non-compete clauses in employment contracts. The proposed change reflects growing scrutiny of restrictive covenants and aims to promote labour mobility and competition.
• Significant increase in penalties for wage theft. Wage theft (defined as failing to pay compensation rightfully owed) is already prohibited, but the Budget proposes substantially higher penalties for violations.
• Measures to address employee misclassification. The Budget introduces initiatives to “crack down” on deliberate misclassification of employees as independent contractors. While some of the government’s proposals relating to misclassification appear to be targeted to the trucking industry, one proposal with broader application is the expansion of CRA–ESDC data-sharing arrangements to strengthen enforcement of employee misclassification under the CLC.

Restricting non-compete agreements for federally regulated employers

The Budget proposes a legislative amendment to the Canada Labour Code to restrict the use of non-compete agreements in employment contracts for federally regulated businesses. It does not provide details of the proposed legislative changes, but indicates the government will launch consultations in early 2026.

The federal government’s stated rationale for the proposed restrictions is to address concerns about labour mobility and competition. According to the Budget, the measure aims to “protect workers’ rights, promote labour mobility, strengthen competition, and empower workers to move to a higher-paying job or start their own business”.

The federal government’s proposal reflects the growing scrutiny of non-compete agreements in the employment context. Under Canadian common law, post-employment non-compete clauses have long been presumptively unenforceable as restraints on trade unless they are reasonable in the circumstances. In recent years, however, legislative prohibitions have emerged. In 2021, Ontario banned the use of post-employment non-compete agreements except in the context of a sale of business or for certain defined executive positions, such as C-suite roles (read our prior insights on the Ontario non-compete ban).

In the U.S., the trend has been more expansive: several states have passed legislation to prohibit the use of non-competes. In 2024, the Federal Trade Commission sought to impose a rule to ban new and existing non-compete clauses across the country, though the rule was ultimately declared unlawful by a U.S. federal court (read our summary for more about the U.S. Federal Court’s decision in Ryan, LLC v. Federal Trade Commission).

While the federal government’s proposal would only apply to employers who are federally regulated under the CLC, the amendments could spur further provincial legislative changes over time. We also note that the Budget does not indicate any intention to restrict the use of post-employment non-solicitation clauses or other restrictive covenants.

Wage theft and employee misclassification countermeasures

The federal government proposes to “crack down” on federally regulated employers who do not pay workers the wages they have earned. To achieve this, the Budget proposes regulatory changes to substantially increase penalties for federally regulated employers that commit “wage theft”. Wage theft—defined as failing to pay compensation rightfully owed to an employee—is described as one of the most common labour standards violations in federally regulated sectors. Although wage theft is already illegal and subject to penalties, the proposed changes aim to “substantially increase” existing penalty amounts, which currently range from $2,000 to $25,000 for large corporations, depending on the CLC violation.

The Budget also proposes regulatory changes targeted at combatting deliberate employee misclassification. While some proposed measures appear to be aimed at protecting workers in the trucking industry specifically¹, one measure expected to have a broader impact on other federally regulated sectors is the expansion of the data-sharing arrangements between Employment and Social Development Canada (ESDC) and the CRA. First introduced in Budget 2024, the proposed amendments will permit the CRA to share taxpayer information (under the Income Tax Act) and confidential information (under the Excise Tax Act) with ESDC for the purposes of the administration and enforcement of the CLC as it relates to worker classification.

Together, these initiatives reflect a broader legal trend toward stricter enforcement of employee rights and rising employment class actions related to payroll compliance. Recent class actions have focused on unpaid overtime, worker misclassification and underpayment of statutory entitlements under minimum standards legislation.

Takeaways for employers

In light of the proposed measures in Budget 2025, federally regulated employers should consider the following:

• Evaluate restrictive covenants. Review existing non-compete agreements to ensure they are reasonable and enforceable, recognizing that such clauses are often difficult to uphold even if pre-existing agreements remain valid. Additionally, assess non-solicitation and other restrictive covenants (which are currently unaffected by the proposed changes) to confirm they are robust and aligned with organizational needs. Further, employers may consider forfeiture clauses for any deferred compensation paid to employees upon their exit from the organization, which would be triggered in the event of post-employment competition. Any such clauses would need to be carefully drafted to ensure they are reasonable and to avoid the prohibition against penalty clauses.
• Engage in consultations. The federal government will launch consultations on proposed CLC changes in early 2026. Consider participating, especially if restrictions on non-competes could create industry-specific challenges for your organization.
• Review worker classifications. Ensure that individuals engaged as independent contractors are properly classified under the Income Tax Act.
• Review payroll and wage practices. With the federal government signalling tougher enforcement and higher penalties for wage theft, conduct a comprehensive review of payroll systems, wage policies and record-keeping to confirm compliance.