- Ontario's Employment Standards Act, 2000 prohibits employers from entering into non-competes with employees, with exceptions for a sale of a business and for executives.
- One exception covers a sale or lease of a business where the seller becomes the buyer's employee and a non-compete is agreed as part of the sale.
- The ban took effect on October 25, 2021 and does not prohibit non-competes entered into before that date.
- Whether a particular non-compete will hold up depends on its wording and the facts, so it needs legal review.
If you are buying a business, one of your biggest worries may be the seller opening a similar shop down the street and taking the customers you paid for. A non-compete clause in the sale agreement is the usual tool to address that worry.
Ontario changed its employment law in recent years to restrict non-competes, which has left many buyers unsure whether a sale-of-business clause still works. This article explains the rules you can count on, the exception for sales, and the practical steps to take.
Why buyers ask for a non-compete
When you buy a business, part of the price pays for goodwill: the customer relationships and reputation that make the business worth buying. If the seller can immediately set up in competition, that value may walk out the door. A non-compete clause is a promise by the seller not to compete for a certain time, in a certain area, in a certain kind of business.
A non-compete usually sits alongside related promises, such as not soliciting the customers or not hiring away the staff. Each promise is separate, and how far each one reaches is part of what a lawyer reviews.
What Ontario's employment law says
Under the Employment Standards Act, 2000 (ESA), employers are prohibited from entering into employment contracts or other agreements that contain a non-compete. The ban is effective October 25, 2021. It does not prohibit non-competes entered into before that date, though common law rights may still apply.
The ESA also does not prohibit employers from entering into non-compete agreements with executives, such as a CEO, president, CFO or COO.
| Situation | What the ESA says |
|---|---|
| Non-compete in an ordinary employment contract | Prohibited for employers |
| Non-compete signed before October 25, 2021 | Not prohibited by the ban; common law rights may still apply |
| Non-compete with an executive such as a CEO or CFO | Not prohibited by the ESA |
| Non-compete in a sale or lease of a business | Subject to a sale-of-business exception |
The sale-of-business exception
The ESA ban has a sale-of-business exception. It applies where there is a sale or lease of a business or part of a business, the seller becomes the buyer's employee, and a non-compete is agreed as part of the sale. In practice, this matters when the seller stays on after closing to help with the transition, which is common.
If the seller walks away at closing and does not become your employee, how the ban applies to your agreement depends on how the deal is structured. Do not assume the answer either way. A lawyer should read the exact wording of the statute against your facts before you rely on the clause.
Another point to keep in mind is that the ESA is only one layer. Whether a clause is enforceable is a separate question from whether it is allowed, and the answer depends on the wording and the facts, so it is worth confirming with a lawyer.
What makes a non-compete more likely to hold up
There is no single formula, and the answer depends on the facts. Still, buyers can improve their position by drafting thoughtfully rather than asking for everything.
- Describe the restricted business clearly, matching what was sold
- Choose a time period that fits how long it would take you to establish the customer relationships
- Define the geographic area by where the business really operates
- Record in the agreement that part of the price is for goodwill and that the clause protects it
- Make sure the seller signs personally, not only through a company
- Include related promises on customer and staff solicitation, drafted separately
How far a clause can safely reach depends on your deal, so it is worth confirming with a lawyer.
What to do next
Raise the non-compete early in negotiations, not in the final days before closing. Sellers are more willing to agree when it is part of the overall price discussion, and your lawyer has time to tailor the wording.
- Decide what business, area and time period you need to protect
- Find out whether the seller will stay on as an employee after closing
- Ask your lawyer how the ESA exception applies to your structure
- Have the seller sign personally, along with any selling company
- Link part of the price to goodwill in the sale agreement
- Keep the signed agreement with your closing documents
Frequently asked questions
Can the seller of a business be bound by a non-compete in Ontario?
It depends on the deal. The ESA ban has a sale-of-business exception where the seller becomes the buyer's employee and a non-compete is agreed as part of the sale. Whether a particular clause is enforceable depends on its wording and the facts, so it should be reviewed by a lawyer.
Does the Ontario non-compete ban apply to agreements signed before it came in?
The ban is effective October 25, 2021, and it does not prohibit non-competes entered into before that date. Common law rights may still apply to those older agreements.
Can a company have a non-compete with its CEO?
The ESA does not prohibit employers from entering into non-compete agreements with executives, such as a CEO, president, CFO or COO. Whether the clause is enforceable is a separate question.
What if the seller just reopens nearby anyway?
If you have a signed non-compete, a lawyer can review your options, which may include a demand letter or a court application. Without one, you may have little to rely on. That is why it is worth settling the clause before closing.
Sources
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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