How does the non-compete ban apply when a business is sold?

Ontario’s ban on employee non-competes is written for employment, but a business sale can bring a seller inside it. The Employment Standards Act, 2000 prohibits an employer from entering into a non-compete agreement with an employee, and a non-compete made in breach is void. A seller’s covenant is excepted if it meets the conditions of section 67.2(3), or if the seller is an employee who is an executive under section 67.2(4), so how the seller’s exit is structured matters.

What the ban covers

The Act defines a non-compete agreement as an agreement, or part of one, between an employer and an employee that prohibits the employee from competing with the employer’s business after the employment relationship ends. For these provisions, “employee” includes an applicant for employment and “employer” includes a prospective employer, so a seller negotiating to stay on can be within the words before closing. Subject to exceptions, the Act’s standards apply where the employee’s work is to be performed in Ontario, or in and outside Ontario where the work outside is a continuation of work in Ontario; one exception is an employment relationship within the legislative jurisdiction of Parliament.

The sale exception

Section 67.2(3) lifts the ban for one agreement. There must be a sale of a business or part of a business; the purchaser and seller must enter, as a part of the sale, an agreement that prohibits the seller from competing with the purchaser’s business after the sale; and, immediately following the sale, the seller must become an employee of the purchaser. The Act says “sale” includes a lease. A seller who leaves at closing and is never hired does not meet the third element, and whether the ban reaches that seller at all turns on the definitions above, so ask counsel before assuming either way.

Who the exception leaves out

The exception covers the seller’s covenant, not the business’s staff. An employer that wants non-competes from other employees meets the ban in full unless the employee is an executive, which the Act defines as the chief officers it lists, a president, or anyone in another chief executive position. In a share sale, where the seller stays on with the company they sold rather than with the purchaser itself, whether that makes them “an employee of the purchaser” is a drafting point for counsel.

The Competition Act applies separately

Passing the employment test does not settle everything. The Competition Act separately makes certain agreements between competitors an offence, with a defence in section 45(4) for an agreement that is ancillary to a broader or separate agreement and meets that subsection’s other conditions, and the Competition Bureau publishes information on illegal competitor agreements. Whether a sale non-compete is illegal under that Act has its own answer. Other provinces’ employment laws are outside this page, so check the law where the seller works.