Ontario has prohibited employee non-competes since 25 October 2021. Employment Standards Act, 2000 section 67.2(3) lifts the ban in one situation: the covenant is given as part of a sale of a business, and the seller immediately becomes an employee of the purchaser. A covenant from anyone else on the payroll is void.
Key takeaways
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Part XV.1 of the Employment Standards Act, 2000 is two sections long. Marginal note Prohibition, subsection 67.2(1): “No employer shall enter into an employment contract or other agreement with an employee that is, or that includes, a non-compete agreement.”
Subsection (2): “For greater certainty, subsection 5 (1) applies and if an employer contravenes subsection (1), the non-compete agreement is void.” Section 5(1) is the anti-waiver rule — no party “shall contract out of or waive an employment standard” — so a signature changes nothing. The remedy is that the clause is not there. Treadstone Law covers enforceability from the employee’s side.
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Section 67.1 defines it broadly: “an agreement, or any part of an agreement, between an employer and an employee that prohibits the employee from engaging in any business…that is in competition with the employer’s business after the employment relationship between the employee and the employer ends”. One clause in a long contract is caught alone.
Nothing qualifies it by length or distance; the Ministry agrees: “An agreement, or part of an agreement, may be considered a non-compete agreement whether or not it is time-limited or geographically restricted.”
Nor do labels decide it. On the Ministry’s non-compete page, “the substance of the agreement is what matters, not the words that are used”. Treadstone Law separates non-solicitation from non-competition.
SECTION 03 OF 10
Part XV.1 has its own definitions, so a buyer cannot time its way round the ban. In section 67.1, “employee” “includes an applicant for employment” and “employer” “includes a prospective employer”; section 1(1) “includes a person who was an employee”.
It bites before anyone starts and after everyone leaves: “Entering into non-compete agreements is prohibited before the employment relationship begins, during the employment relationship and after it ends.” A manager handed a new contract two weeks before closing is an applicant for employment of a prospective employer. Treadstone Law asks whether a new owner can impose a non-compete, and why buyers ask retained staff anyway.
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Subsection 67.2(3), marginal note Exception — sale, etc., of business: “If there is a sale of a business or a part of a business and, as a part of the sale, the purchaser and seller enter into an agreement that prohibits the seller from engaging in any business, work, occupation, profession, project or other activity that is in competition with the purchaser’s business after the sale and, immediately following the sale, the seller becomes an employee of the purchaser, subsection (1) does not apply with respect to that agreement.”
Three conditions, all required: a sale of a business or part of one; a covenant given by seller to purchaser as a part of the sale; the seller becoming its employee immediately after.
The third looks odd until you see its purpose: a seller who takes the money and leaves was never caught, being nobody’s employee. Subsection (3) is for the founder who stays on — the structure behind post-closing covenants — who would otherwise sign an employee non-compete on closing day.
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Ontario’s guide to the ESA states the exception as three bullets, opening with: “there is a sale or lease of a business or a part of a business that is operated as a sole proprietorship or a partnership”. Read the consolidated Act and the qualifier is absent. Subsection (3) says “a sale of a business or a part of a business” and stops; subsection (5) adds only that “‘sale’ includes a lease”. Part XV.1 nowhere mentions any form of ownership.
That is a Ministry of Labour administrative position, not the provision. A business carried on through a corporation is not outside subsection (3) because a guide says so. The guide itself points elsewhere: “Employees may have a greater right under their employment contract or the common law.”
The gloss cuts both ways. Read the section first; the guide is evidence of how the Ministry will approach a claim, not of what the claim is decided by.
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The distinction is what the covenant is paid for. Without a seller’s covenant, in Dickson J.’s reasons as reproduced in MEDIchair LP v. DME Medequip Inc., “A person seeking to sell his business might find himself with an unsaleable commodity if denied the right to assure the purchaser that he, the vendor, would not later enter into competition.”
An employee’s covenant protects nothing that was bought. Hence M & P Drug Mart Inc. v. Norton: “A non-competition covenant in an employment agreement that restricts the post-termination activities of an employee is subject to more rigorous scrutiny than a non-competition covenant in a sales agreement that restricts the post-sale activities of the vendor”. MEDIchair puts it as “applying a presumption of validity to such clauses where they have been negotiated as part of the sale of a business”.
Its facts make the point. The buyer acquired a Huntsville pharmacy in 2014; the pharmacy manager was not the vendor, yet was asked to sign a new employment agreement with a non-competition covenant, held unenforceable. An employee at a change of ownership is not a seller — the split drawn in why sale non-competes survive where employment ones do not.
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The second carve-out is one line. Subsection 67.2(4): “Subsection (1) does not apply with respect to an employee who is an executive.” Subsection (5) defines that as “any 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”.
A list of offices, not a measure of importance: a vice-president of sales, a general manager and a well-paid founder-employee without a chief title sit outside it. I found no Ontario appellate decision construing “any other chief executive position”, so treat a non-chief title as outside it. An owner who joins as chief operating officer is covered twice — but an office can be changed after closing.
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The exceptions remove a prohibition; they confer no validity. Section 8(1) preserves the background law — “no civil remedy of an employee against his or her employer is affected by this Act” — so restraint of trade governs every covenant surviving Part XV.1.
M & P Drug Mart states it: “a provision in a contract that restrains a vendor of a business from competing with the purchaser, or an employee upon leaving employment from competing with the employer, is prima facie unenforceable”, saved only where reasonable between the parties and in the public interest. The measures: “the extent of the activity sought to be prohibited, the geographic coverage of the restriction, and its duration”, and clarity is a threshold: “In order to withstand scrutiny, a covenant must be clear as to activity, time, and geography.”
A sale covenant is won or lost there, in drafting: how long it runs, how wide its territory is, and whether it is given personally or by the selling corporation.
SECTION 09 OF 10
The commencement is dated three ways, all right. The Working for Workers Act, 2021 is stamped “Assented to December 2, 2021”, which is why the Court of Appeal described the Act “which prohibits employers from obtaining a non-competition agreement from an employee, subject to certain narrow exceptions” as in force from December 2021.
Schedule 2 backdates it. “Section 4 is deemed to have come into force on October 25, 2021.” Section 4 enacted Part XV.1; the explanatory note records “New Part XV.1 of the Act prohibits employers from entering into employment contracts or other agreements with an employee that are, or that include, a non-compete agreement.” The amendment table dates both sections to 25 October 2021.
The Ministry’s position: “The ESA does not prohibit non-compete agreements that were entered into before October 25, 2021”. For a business bought in 2019 the question is reasonableness, not section 67.2.
SECTION 10 OF 10
First, whether a share sale is a “sale of a business” for subsection (3). Section 9(3) defines the word for Part IV — “‘sells’ includes leases, transfers or disposes of in any other manner” — but subsection 67.2(5) is confined to its own section and adds only a lease. I could not source an authoritative answer on how subsection (3) treats a share purchase. See Treadstone Law on a partial share sale covenant.
Second, non-solicits and confidentiality are untouched: “The ESA does not prohibit non-solicit agreements or non-disclosure agreements.” Third, enforcement: section 74(1) bars penalising an employee who “exercises or attempts to exercise a right under this Act”, and section 5.1(1) bars treating “a person who is an employee of the employer as if the person were not an employee under this Act”. Relabelling a retained manager a consultant changes nothing.
Fourth, geography. Ontario only: section 3(2) — “This Act does not apply with respect to an employee and his or her employer if their employment relationship is within the legislative jurisdiction of the Parliament of Canada” — and every other province has its own statute, none described here. See Treadstone Law on non-competes on a business sale, plus allocating price to a non-compete, termination clauses a buyer inherits and staff on a business sale.
Yes. Section 67.2(3) lifts Ontario’s non-compete ban where there is a sale of a business and, as part of it, the seller becomes an employee of the purchaser immediately after closing — the exception exists precisely for the founder who stays on, who would otherwise be signing a void employee non-compete on closing day.
No. The exception only removes the statutory prohibition; it confers no validity. The common-law restraint-of-trade test still applies, and a court looks at the extent of the activity prohibited, its geographic coverage and its duration, saving the clause only where it is reasonable between the parties and in the public interest.
No — an employee non-compete signed around a change of ownership is void unless that person is themselves the seller or qualifies for the separate executive exception. In one case a pharmacy manager who was not the vendor was asked to sign a new non-competition covenant on a change of ownership, and it was held unenforceable.
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