Does Ontario’s non-compete ban apply if the seller stays on as a consultant?

Ontario’s Employment Standards Act, 2000 bans non-compete agreements between an employer and an employee, subject to exceptions, including one for executives in s.67.2(4). Section 67.2(3) excepts a seller’s covenant given as part of a sale if, immediately following the sale, the seller becomes an employee of the purchaser. A seller who stays on as a consultant is not described in that exception in those words, so the question shifts: is the seller an “employee” under the Act at all? The Act defines “employee”, the ministry’s guide lists factors, and the answer depends on the facts of the arrangement. This page covers Ontario only.

What the ban and the exception turn on

For the non-compete provisions, “employee” means an employee as defined in section 1(1) and includes an applicant for employment. Section 1(1) says “employee” includes a person, including an officer of a corporation, who performs work for an employer for wages and a person who supplies services to an employer for wages. How the ban applies when a business is sold sets out the exception’s three conditions. This page asks only who counts as an employee.

What the ministry guide says about contractors

The Ontario government’s guide says the Act does not apply to independent contractors, and that an independent contractor is someone who is in business for themselves. It lists points that may indicate a contractor, where at least some apply: the business can end the contract but cannot discipline the individual, and the individual has a chance of profit and a risk of loss, decides how, when or where the work is done, and decides whether to subcontract some of the work. It lists opposite points for an employee, such as the business deciding what the work is, the pay, and where and when it happens.

The label does not decide it

The guide says an individual may be considered an employee even if both sides agree, orally or in writing, that the individual is an independent contractor; the relationship matters, not the label. It adds that an individual may be considered an employee even if they charge HST, submit invoices or use their own vehicle for work. Section 5.1 says an employer shall not treat an employee as if the person were not an employee under the Act, and the guide says an employment standards officer can issue a notice of contravention for misclassification.

What to ask a lawyer

• Who controls the seller’s hours, duties and place of work after closing?
• Is the seller paid for the work, and can the seller send someone else to do it?
• Does the covenant rely on the sale exception, or on the seller not being an employee?
• Do the consulting terms and the covenant read consistently with each other?

The Ministry of Labour, Immigration, Training and Skills Development’s Employment Standards Information Centre gives general information on who is an employee but cannot give advice, according to the guide. For a sale, the covenant and the consulting terms are best reviewed together. See also the entry on the non-compete prohibition.