Two sellers, one covenant, two outcomes. Ontario voids a non-compete in an employment agreement, and only one of the statute's two exceptions rescued either of them.
At a glance
Two shareholders sold a precision machining business for $5.1 million. The founder held 70% and the office of president, and agreed to stay on for a twelve-month transition. The second seller held 30%, had come up through the shop and carried the title operations manager; she was retiring at closing. The buyer wanted both bound and, on its counsel's precedent, put the covenants in employment agreements — including for the seller who was not going to be employed, whose agreement was dated the closing date and expressed to terminate the same day.
The familiar question about a non-compete is whether it is too broad. In Ontario that question is second. Since October 2021 a non-compete in an employment agreement is prohibited outright and void, and a reasonableness analysis never gets started. There are exactly two exceptions, one of which turns on a fact about what happens after closing and the other on which office the person held. The founder cleared one of them. The operations manager cleared neither, and the buyer's attempt to bind her by dressing the covenant as employment is precisely what brought it inside the prohibition.
Fourteen months after closing she took a role with a competitor thirty kilometres away. Three customers moved with her.
The three customers represented $840,000 of annual revenue and roughly $210,000 of annual contribution. The buyer applied for an interlocutory injunction on the non-compete, was met with s.67.2(2), and the application was dismissed with costs of $64,000 against it.
What the buyer did recover came from a document nobody had thought was the important one: a two-year non-solicitation covenant given by both vendors as vendors in the purchase agreement itself. That covenant is not between an employer and an employee and never entered Part XV.1 at all. Damages of $118,000 were agreed on it.
Part XV.1 of the Employment Standards Act, 2000 is short. Section 67.1 defines a non-compete agreement as “an agreement, or any part of an agreement, between an employer and an employee that prohibits the employee from engaging in any business, work, occupation, profession, project or other activity that is in competition with the employer’s business after the employment relationship between the employee and the employer ends”. The same section extends employee to include an applicant for employment. Section 67.2(1) then provides that “No employer shall enter into an employment contract or other agreement with an employee that is, or that includes, a non-compete agreement”, and s.67.2(2) that on contravention “the non-compete agreement is void”.
Exception one is conditional on a future fact. Section 67.2(3) disapplies the prohibition where, on a sale of a business or part of a business, purchaser and seller agree such a covenant “and, immediately following the sale, the seller becomes an employee of the purchaser”. The operations manager did not. She signed an employment agreement and retired the same day, which is the opposite of becoming an employee immediately following the sale. The exception failed on its own terms and there was nothing left to argue about scope.
Exception two is the one most analyses of this section forget, and it is the reason the two covenants diverged. Section 67.2(4) provides that the prohibition does not apply to an employee who is an executive, and s.67.2(5) defines executive as a person who holds “the office of chief executive officer, president, chief administrative officer, chief operating officer, chief financial officer, chief information officer, chief legal officer, chief human resources officer or chief corporate development officer, or holds any other chief executive position”. It is a list of offices, not a test of seniority or pay. The founder held the office of president, so s.67.2(1) never applied to him and his covenant stood on its own reasonableness. Operations manager is not on the list and is not a chief executive position, so the same words in the same form of agreement were void.
Most selling founders hold one of those offices, which is why this defect is under-reported: the prohibition usually misses the person everyone is worried about and catches the second seller, the key employee taking rollover equity and the family member with a plant title — the people whose covenants are copied from the founder's.
The fix is the document, not the drafting. A covenant given by a vendor as vendor, in the purchase agreement, is not an agreement between an employer and an employee and does not engage Part XV.1. It is then assessed at common law on the sale-of-business standard, which is materially more permissive than the employment standard. One warning on secondary sources: the government's own guidance glosses s.67.2(3) as covering a business operated as a sole proprietorship or a partnership. Those words are not in the Act — the consolidated text of s.67.2(3) was read for this file and contains no restriction by business form. Treat the guide as an administrative position and the Act as the rule. See the non-competition covenant glossary entry.
Quebec regulates the same conduct in a different way entirely. There is no statutory prohibition, no sale-of-business carve-out and no executive exception. Article 2089 of the Civil Code of Québec permits the stipulation in writing and in express terms, but requires that it “shall be limited as to time, place and type of employment, to what is necessary for the protection of the legitimate interests of the employer”, and places “The burden of proof that the stipulation is valid” on the employer. Article 2095 adds a forfeiture the Ontario section has no analogue for: “An employer may not avail himself of a stipulation of non-competition if he has resiliated the contract without a serious reason or if he has himself given the employee such a reason for resiliating the contract.”
The buyer paid both sides' costs, recovered $118,000 under the purchase agreement's non-solicitation covenant, and rebuilt its precedent so that vendor covenants sit in the purchase agreement, with employment agreements carrying confidentiality and non-solicitation only. The founder's covenant was never tested; he had no interest in competing.
Moving four paragraphs from one document to another would have preserved a covenant worth $210,000 a year of contribution and avoided $64,000 of costs. Nothing commercial would have changed, and the retiring seller would have signed it — she had already given the same restriction without complaint. The cost was a filing decision made by a precedent.
The tell is an employment agreement for someone who is not going to be employed. A contract of employment dated the closing date for a retiring vendor means somebody used employment as a wrapper for a covenant, and in Ontario the wrapper is what voids it. The second tell is a job title: check every covenanting individual against the s.67.2(5) list before assuming the executive exception saves them.
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