Anonymised, illustrative composite. The associate who generated a fifth of the practice's billings was leaving the day the sale closed — and whether the restrictive covenant in the associate's own agreement would actually hold came down to one word: employee.
At a glance
A buyer agreed to acquire a general dental practice for $1,240,000, against seller's discretionary earnings of $620,000 — a 2.0× multiple, below the 2.8–4.0× typical SDE range in deavo's healthcare sector snapshot (published with deavo's disclaimer that its figures “are illustrative ranges based on comparable Canadian transactions, not a valuation, deal or investment opinion”), reflecting the concentration risk described below. One associate dentist, engaged under the practice's standard associate agreement, personally generated $410,000 of the practice's $1,850,000 in annual billings — roughly 22% — tracked through the practice's patient-of-record system.
The associate had already given notice of departure, planning to open an independent practice nearby once the sale closed. The associate agreement contained a two-year, ten-kilometre restrictive covenant, and the buyer's price was built on the assumption that covenant would hold.
Ontario's ban on employee non-compete agreements is broad on its face: the Employment Standards Act guide states that, effective October 25, 2021, a covenant “may be considered a non-compete agreement whether or not it is time-limited or geographically restricted,” and prohibits one before, during and after an employment relationship. There are two exceptions, and neither reaches an associate at a professional corporation. The first is a sale of a business where, as part of the sale, the purchaser and seller agree the seller will not compete and, immediately following the sale, the seller becomes an employee of the purchaser. Note a divergence worth knowing: the statutory text of s.67.2(3) says only “a sale of a business or a part of a business,” while the Ministry's guide reads it as confined to a business “operated as a sole proprietorship or a partnership.” On these facts it does not matter — the departing associate is not the seller and is not becoming the purchaser's employee — but a file that turns on that exception should not rely on the guide's gloss without checking the section. The second exception is a closed list of executive offices in s.67.2(5): chief executive officer, president, chief administrative officer, chief operating officer, chief financial officer, chief information officer, chief legal officer, chief human resources officer, chief corporate development officer, or any other chief executive position.
If the associate had been an employee, the covenant would very likely be void under the ban, with no exception on these facts to rescue it — leaving the full $410,000 book unprotected against departure the moment the sale closed.
The associate was not an employee. The paperwork was consistent — the associate invoiced the practice corporation for services rendered, no CPP or EI source deductions were ever withheld, there was no fixed weekly schedule, and the associate held an active licence to treat patients under a separate practice number — but the label on the paperwork is not the test. The test is the one the Supreme Court set in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc.: there is “no one conclusive test which can be universally applied,” the search is for “the total relationship of the parties,” and the central question is whether the person engaged to perform the services “is performing them as a person in business on his own account.” Here the substance matched the form: the associate carried their own professional risk, controlled their own hours, and treated patients under their own practice number. The ESA ban then does not engage, because s.67.2(1) prohibits an employer from entering into “an employment contract or other agreement with an employee” — and s.67.1 defines a non-compete agreement as one “between an employer and an employee.” A genuine independent contractor is outside both definitions.
That took the associate's restrictive covenant outside the ban's scope entirely, without needing to fit either narrow exception. It still had to satisfy the ordinary common-law reasonableness test that governs any restrictive covenant — a real constraint, but a materially more favourable one than a statutory ban with no applicable exception.
$410,000 of $1,850,000 in annual billings (22%) is attributed to the departing associate's own patient relationships. The buyer's diligence team modelled a 40% attrition risk on that book even with the covenant in place — its own risk-adjusted assumption, not a published attrition rate — and structured an 18-month escrow holdback of $410,000 × 40% = $164,000, released if patient retention on the associate's book stays above 60% at the 18-month mark.
Had the associate instead been documented as an employee — a common informal arrangement in associate dentistry, where scheduling and clinical oversight can blur the line — the covenant would fall inside the ESA ban with neither exception available, leaving it effectively void. The exposure would not have been the $164,000 holdback; it would have been the full $410,000 of associate-attributed billings, unprotected against a departure the buyer already knew was coming, with no realistic contractual recourse.
The tell was in the paperwork, not the covenant's wording: invoices instead of pay stubs, no source deductions, no fixed schedule, and a separate practice number the associate could and did use elsewhere. Correct contractor documentation, assembled long before any sale was contemplated, is what let the restrictive covenant do its job.
A 30-minute call is enough to tell you whether a structuring or diligence gap like this one is sitting in your pipeline.
