Can a Seller Make Employees Sign Non-Competes in an Ontario Business Sale?

If you are buying a business, you probably want to stop the seller, and sometimes the staff you take on, from setting up nearby and taking customers with them. A non-compete seems like the obvious tool. In Ontario, though, it is not always available.

The Employment Standards Act (ESA) restricts non-competes with employees, but it has exceptions that matter in a business sale. Which one applies depends on who is signing, what kind of business is being sold, and the role the person will have afterward.

Ontario's general ban on employee non-competes

Since October 25, 2021, the ESA prohibits employers from entering non-compete agreements with employees. The ban covers agreements made before, during or after employment.

Agreements made before that date are not prohibited by the ESA. Whether an older agreement can actually be enforced is a separate question that a lawyer can help you assess.

For a buyer, this means you generally cannot ask the seller's staff to sign a new non-compete as a condition of coming across to your business, unless one of the exceptions fits.

The sale-of-business exception

The ESA ban does not apply where a business, or part of one, run as a sole proprietorship or partnership is sold or leased, the seller becomes the buyer's employee immediately after, and the parties sign a non-compete as part of the sale.

All of those pieces matter. Think of it as a checklist:

• The business (or part of it) is run as a sole proprietorship or partnership.
• The business is actually sold or leased.
• The seller becomes the buyer's employee immediately after the sale.
• The non-compete is signed as part of the sale.

The Ministry's manual reads this exception as working only where the seller is an individual or individuals, so it does not cover the sale of a corporation.

When the seller is a corporation

Many businesses are owned through a corporation. In that case, a non-compete between the corporate seller and the buyer is treated as a commercial covenant rather than an employment non-compete.

That is different from non-competes with the seller's employees. Those remain barred unless an exception applies.

Whether a commercial covenant is reasonable and enforceable in a given deal is a question of contract and court law, not of the ESA. A lawyer can review the wording, the length of the restriction and the area it covers before you rely on it.

Executives and other tools that stay available

Non-competes with an executive are not prohibited. For this purpose, an executive is someone who holds the office of:

• chief executive officer, president or chief administrative officer
• chief operating officer, chief financial officer or chief information officer
• chief legal officer, chief human resources officer or chief corporate development officer
• any other chief executive position

The ban also does not reach non-solicit and non-disclosure agreements. If your real concern is customer lists, confidential information or staff being poached, these may fit better than a non-compete for ordinary employees.

An employee who signed a prohibited non-compete, or who faced reprisal for refusing one, can file an ESA claim with the Ministry of Labour. Disputes about enforceability can still go to court.

What to do next

Before you sign a purchase agreement, work out who is actually giving the restriction and in what capacity. The answer decides whether the ESA ban is even in play.

• Confirm whether the seller is an individual, a partnership or a corporation.
• Confirm whether the seller will become your employee right after closing.
• List any key staff who might qualify as executives under the ESA definition.
• Decide whether a non-solicit or non-disclosure agreement would meet your needs.
• Check whether any existing agreements were signed before October 25, 2021.
• Have a lawyer review the restrictive covenants before closing.

Frequently asked questions