What Is a Non-Compete Clause When You Sell a Business in Ontario?

When you sell a business, the buyer often wants your promise not to open a competing one nearby. That promise is a non-compete clause. If you are the seller, it can limit what you do next, so it deserves a careful read.

Ontario treats non-competes in employment very differently from those in a business sale. This article explains the difference, the exceptions, and the questions to raise before you sign.

Two kinds of non-compete

A sale-of-business non-compete is a promise by the seller to the buyer, made as part of the deal, to protect the value of what the buyer paid for, such as customers and goodwill. An employment non-compete is a promise by an employee to an employer.

Since October 25, 2021, the ESA prohibits employers from entering non-compete agreements with employees, whether before, during or after employment. Agreements made before that date are not prohibited by the ESA, and non-solicit and non-disclosure agreements fall outside the ban.

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.

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. A corporate seller's non-compete with the buyer is a commercial covenant, whereas non-competes with the seller's employees remain barred unless an exception applies.

Executives and other exceptions

Non-competes with an executive are not prohibited. An executive means someone holding the office of CEO, president, chief administrative officer, COO, CFO, CIO, chief legal officer, chief human resources officer, chief corporate development officer or any other chief executive position.

A job title alone is not enough to rely on, so check whether the person actually holds one of the listed offices.

How enforceable is it?

Whether a sale-of-business non-compete can be enforced is a question for the courts, and disputes about enforceability can still go to court. How this applies to your own clause depends on your situation. It is worth having a lawyer read the clause against your own facts.

Employees who signed a prohibited non-compete, or faced reprisal for refusing one, can file an ESA claim with the Ministry of Labour.

Other points that come up in a sale

The non-compete is rarely the only term that matters. Staff and tax questions often sit beside it in the same agreement, and they can affect what you owe or receive.

• Staff service: if the purchaser employs one of the seller's employees, the employment is deemed not terminated, and the seller's service counts toward any later calculation of length of employment. An exception applies if the employee is rehired by the purchaser more than 13 weeks after the earlier of the last day with the seller or the day of the sale.
• Hiring is not automatic: a purchaser is not required to hire the seller's employees, and an employee does not have to accept employment with the purchaser. Employees not hired by the purchaser within 13 weeks are the seller's responsibility for ESA notice or pay in lieu, and severance pay where applicable.
• Signing away seniority: continuity cannot be avoided by having the employee sign an acknowledgment that seniority is not carried forward.
• GST/HST election: the s. 167(1) election is available only if the buyer acquires all or substantially all (generally 90% or more) of the property reasonably necessary to carry on the business or part of it. Where the supplier is a registrant, the buyer must also be a registrant, and the parties make the election jointly on Form GST44.
• Effect of the election: with a valid election, no GST/HST is payable on the property and services supplied under the sale agreement. Tax still applies to taxable services the supplier renders to the buyer, taxable leases or licences, and taxable sales of real property where the buyer is not a registrant.

How these points apply to your deal depends on the facts, so it is worth confirming them with a lawyer or accountant.

What to do next

Treat the non-compete as a term you can negotiate, not a formality. Think about what you plan to do after closing before you agree to it.

• Confirm whether you are selling as an individual, a partnership or a corporation.
• Check how long the restriction lasts and what area and activities it covers.
• Ask whether you will work for the buyer after closing.
• Make sure the clause matches the business you actually sold.
• Ask how staff and any GST/HST election are handled in the agreement.
• Have a lawyer review the clause before signing.

Frequently asked questions