Ninety-six non-competes sorted by signature date

The situation

The target had been incorporated in 1983 and had used four different employment agreement templates over four decades. Every personnel file contained a signed non-compete of some description — three years and the province in the 1990s template, five years and all of Canada in the 2000s one, two years and a customer radius in the most recent.

The buyer's employment counsel produced a one-page diligence memorandum. It said that non-compete agreements with employees are prohibited in Ontario and void, that the exception for a sale of a business did not apply because none of these 96 people were vendors, and that the buyer should treat the target's restrictive-covenant protection as nil.

Two of the three propositions are correct. The third is a conclusion, and it skipped a step.

The problem

The prohibition in ESA s.67.2(1) does not operate on the existence of a covenant. It operates on an act: “No employer shall enter into an employment contract or other agreement with an employee that is, or that includes, a non-compete agreement”. The verb is enter into, and an act has a date.

So does the Part. Part XV.1 was added to the Act by section 4 of Schedule 2 to the Working for Workers Act, 2021, S.O. 2021, c. 35. The Act was assented to on 2 December 2021, and the commencement provision in Schedule 2 reads: “Section 4 is deemed to have come into force on October 25, 2021”.

The Act therefore reached back thirty-eight days behind its own Royal Assent. That is not a curiosity; it is a live diligence line, because covenants signed in that window were caught by a prohibition that did not exist on the day they were signed.

What the wording does not do is reach further. A covenant entered into before 25 October 2021 was not entered into in contravention of s.67.2(1), because on that date the subsection did not operate. Section 67.2(2) voids a covenant where “an employer contravenes subsection (1)”, so if there was no contravention there is nothing for it to void. Those covenants stand or fall on ordinary common-law reasonableness.

This file states that as a reading of the text and the commencement provision. It does not cite a court decision for it, and it should not be read as one: the Ontario courts' treatment of the question was not fetched for this file and is not summarised here.

The numbers

Sorting 96 personnel files by signature date took an afternoon and produced three groups.

Thirty-four covenants signed before 25 October 2021. Outside s.67.2(1) entirely. Most of these were the 1990s and 2000s templates, and most of those would fail a reasonableness analysis anyway — five years and all of Canada for a warehouse supervisor is not a serious restraint. Eleven were not: they were signed between 2016 and 2021, ran twelve to eighteen months, and were confined to named competitors or a defined customer set.

Four covenants signed between 25 October and 2 December 2021 — after the deemed in-force date, before Royal Assent. Caught.

Fifty-eight covenants signed after 2 December 2021. Caught.

Of the 62 caught, three were held by the target's president, chief financial officer and chief operating officer. Section 67.2(4) provides that “Subsection (1) does not apply with respect to an employee who is an executive”, and s.67.2(5) lists those offices. Those three are outside the prohibition regardless of when they were signed.

So the buyer's actual restrictive-covenant protection was 11 arguable covenants plus 3 executive covenants — 14 of 96, not 0 of 96. The 11 sat with employees who between them held relationships covering $6,800,000 of the target's $31,200,000 of revenue.

The rule that decided it

The unit question is the agreement, not the employee and not the employer. Section 67.2(1) attaches to each act of entering into an agreement. Two employees doing identical work in identical roles can hold covenants with opposite fates because they were hired in different years, and one employee can hold an enforceable covenant and, after a re-papering exercise, a void one.

Which is the direction that mattered here. The buyer's integration playbook called for fresh employment agreements for all retained staff at closing, to standardise terms across the group. Those agreements carried the buyer's own restrictive covenant and, like every commercial template, an entire-agreement clause.

Run against the 11, that plan would have done two things at once. It would have entered into 11 new covenants after 25 October 2021, void under s.67.2(2). And, through the entire-agreement clause, it would have substituted them for the 11 that were outside the prohibition. Not addition — substitution. The buyer would have paid $31,000 in legal and human-resources time to convert its only enforceable protection into no protection, and it would have done so as a tidying exercise nobody would have flagged.

The outcome

The buyer carved the 11 out of the standardisation exercise. Their existing agreements were left untouched, including the parts of them the buyer would rather have changed, and the other terms it wanted were dealt with by side letter rather than by a replacement contract.

It then stopped relying on restrictive covenants as the retention mechanism, which is the more durable answer. Eleven paid retention agreements totalling $214,000, payable at eighteen months, do not depend on s.67.2, on a signature date, or on a court's view of reasonableness. They depend on a date and a bank transfer.

The three executive covenants were left in place and, because s.67.2(4) removes them from the prohibition, were re-papered with the rest without difficulty.

For the sale-side version of the same section, where the exception rather than the date does the work, see two non-competes six weeks apart, and only one held.

What it would have cost otherwise

Two costs, in opposite directions, and the buyer was exposed to both.

Writing off all 96 costs the 14 that were worth something. In a distributor where relationships sit with individuals, 11 covenants covering $6,800,000 of revenue are not a rounding error; they are the difference between a departure being an inconvenience and a departure being a customer transfer.

Re-papering all 96 costs the same 14 and charges $31,000 for the privilege. That is the more dangerous of the two, because the first error is passive and reversible — a memorandum can be revised — and the second is an executed document.

The tell

The tell is a diligence memorandum that answers a question about ninety-six documents with one word. A company that has been trading for forty-three years has personnel files spanning four templates and one statute, and the statute has a date in it.

Takeaways

• • Section 67.2(1) prohibits entering into a covenant. Sort the target's covenants by signature date before concluding anything about them.
• • Part XV.1 is deemed to have come into force on 25 October 2021, thirty-eight days before the Working for Workers Act, 2021 received Royal Assent. Covenants signed inside that window are caught retroactively.
• • Covenants entered into before 25 October 2021 are outside the prohibition on the wording, and fall to be tested on ordinary common-law reasonableness. Most old templates fail that test anyway; some do not.
• • Re-papering destroys what diligence found. A replacement employment agreement with an entire-agreement clause substitutes a void covenant for an enforceable one.
• • Section 67.2(4) removes executives from the prohibition entirely, so C-suite covenants survive the date question altogether.

Sources

• • Employment Standards Act, 2000, S.O. 2000, c. 41 (Ontario) — s.67.2(1) prohibition; s.67.2(2) voidness on contravention; s.67.2(4) and (5) the executive exception; the Part XV.1 amendment table recording 2021, c. 35, Sched. 2, s. 4 in force 25/10/2021.
• • Working for Workers Act, 2021, S.O. 2021, c. 35 — Schedule 2 s.4 adds Part XV.1 to the ESA; Schedule 2 s.34(3) deems s.4 to have come into force on 25 October 2021; the Act itself was assented to on 2 December 2021.
• • No court decision is cited for the proposition that the prohibition does not reach covenants entered into before 25 October 2021. That reading is taken from the wording of s.67.2(1) and (2) and the commencement provision; the case law was not fetched for this file.
• • Treadstone Law — can a new owner require a non-compete you never had — on point for whether a new owner can require a covenant that did not previously exist, which is the same act of entering into an agreement seen from the employee's side.
• • Treadstone Law — reviewing employee contracts for severance exposure — background on reviewing employee contracts for exposure during diligence.