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Are Non-Compete Agreements Allowed in Ontario?

A non-compete agreement is defined in the Employment Standards Act, 2000 (“ESA”) as:

67.1 …[A]n agreement, or any part of an agreement, between an employer and an employee that prohibits the employee from engaging in any business, work, occupation, profession, project, or other activity that is in competition with the employer’s business after the employment relationship between the employee and the employer ends.

As of October 25, 2021, the ESA prohibits employers and employees from entering into non-compete agreements. Under this prohibition, non-compete agreements cannot be created through a clause in the employment contract or through any other agreement that is made between an employer and employee.

The prohibition against non-compete agreements in the ESA has some exceptions. Following the general prohibition, the ESA outlines two specific circumstances where employers and employees are permitted to enter into a non-compete agreement.

Non-compete agreements may be entered into when:

  • A sale of a business takes place, and the seller becomes an employee of the business immediately following the sale
  • The agreement concerns an individual who is an executive of an organization

Non-Compete Agreements in the Sale of a Business

Under the ESA, parties may be allowed to enter into a non-compete agreement if there is a sale or a lease of a business. When there is a sale of a business, a non-compete agreement is permitted if the parties make an agreement that the seller of the business becomes an employee of the business (which would then belong to the purchaser) immediately after the sale takes place.

In this case, the parties may enter into an agreement prohibiting the seller of the business from competing with the purchaser’s business after the sale takes place. The prohibited behaviour captured by the non-compete agreement can include engaging in any business, work, occupation, profession, project, or other activity that competes with the business.

Non-Compete Agreements for Executives

The ESA states that the prohibition against non-compete agreements does not apply if the employee in question holds the office of an executive. Individuals who are considered executives are permitted to enter into non-compete agreements.

An executive includes, but is not limited to, the positions of:

  • President
  • Chief Executive Officer
  • Chief Administrative Officer
  • Chief Operating Officer
  • Chief Financial Officer
  • Chief Information Officer
  • Chief Legal Officer
  • Chief Human Resources Officer
  • Chief Corporate Development Officer

Non-Compete Agreements Entered Into Prior to ESA Prohibition

As the ESA prohibits entering into a non-compete agreement, the text of the ESA does not automatically prohibit the enforcement of non-compete agreements that were entered into prior to October 25, 2021.

The principle that non-compete agreements entered into prior to October 25, 2021 are enforceable was addressed by the Ontario Superior Court of Justice in the 2022 case of Parekh et al v Schecter et al, where the Court stated:

[47] Faced with this express legislative intent to make the ESA amendments applicable as of October 25, 2021, and not earlier, it cannot be said the provisions with respect to the non-compete clause applies to contracts of employment with non-compete clauses entered into before October 25, 2021.

As a non-compete agreement entered into prior to October 25, 2021 is not a violation of the ESA, common law principles can be used to determine whether it is an enforceable agreement.

Considerations in Non-Compete Agreements

For individuals who are permitted to enter into non-compete agreements—certain sellers of a business or executives that fall into the exceptions to the ESA prohibition on non-compete agreements—there are several factors that inform whether the content of the non-compete agreement is enforceable under the common law.

These factors include:

  • Whether the agreement protects a legitimate interest of the employer
  • The length of time that the agreement will last
  • The geographic area that will be covered by the agreement
  • The nature of the activities that will be limited by the agreement
  • Whether the language used is clear and unambiguous