Can a Departing Partner Be Bound by a Non-Compete in Ontario?

When one co-owner buys out another, the buyer usually wants the departing owner not to start a competing business. Whether the person stays on as an employee or leaves completely can affect whether Ontario's employment standards rules limit that promise.

This article explains how the Employment Standards Act, 2000 (ESA) ban on non-competes works in a buyout, and the exceptions that may apply. Enforceability questions can be technical, so a lawyer should review the actual documents.

The general ESA ban on non-competes

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.

The ban is limited to non-competes. Non-solicit agreements and non-disclosure agreements fall outside it. A buyout document may therefore still contain those clauses even where a non-compete is barred.

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.

That means all of the conditions matter. The exception is tied to the sale itself, so a non-compete added later or unrelated to the sale does not fit it neatly.

• A sole proprietorship or partnership is being sold or leased.
• The seller becomes the buyer's employee immediately afterward.
• The non-compete is signed as part of the sale.

Individual sellers versus corporations

The Ministry's manual reads the sale 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 treated as a commercial covenant, but non-competes with the seller's employees remain barred unless an exception applies. If you own shares through a company, how the deal is structured can change which rules apply, so raise this early.

The executive exception

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 or chief corporate development officer, or any other chief executive position.

A co-owner who holds one of these offices and stays on may fall within this exception. Holding a title informally or having ownership alone is not the same thing, so check the actual office held.

What to do next

If you are bound by a non-compete, or asked to sign one, a few steps can clarify where you stand. An employee who signed a prohibited non-compete, or faced reprisal for refusing one, can file an ESA claim with the Ministry of Labour, and disputes about enforceability can still go to court.

• Confirm the date the agreement was made.
• Identify whether the seller is an individual or a corporation.
• Check whether the seller becomes an employee right after closing.
• Check whether the person holds an executive office.
• Separate non-compete clauses from non-solicit and non-disclosure clauses.
• Have a lawyer review the draft before you sign.

Frequently asked questions