Ontario Banned Non-Competes: What Still Protects the Business

Ontario prohibited non-compete agreements in employment on 25 October 2021, and I still get sent employment agreements with one in them.

Part XV.1 of the Employment Standards Act, 2000 says no employer shall enter into an employment contract or other agreement with an employee that is, or includes, a non-compete agreement. If an employer does, the non-compete agreement is void. The Act defines a non-compete agreement as one that prohibits the employee from engaging in any business, work, occupation, profession, project or other activity in competition with the employer’s business after the employment relationship ends, and it defines “employee” for this purpose to include an applicant for employment.

There are two exceptions written into the section. Neither is wide.

Executives. The prohibition does not apply to an employee who is an executive, which the Act defines as a person holding the office of chief executive officer, president, chief administrative officer, chief operating officer, chief financial officer, chief information officer, chief legal officer, chief human resources officer or chief corporate development officer, or any other chief executive position. That is a list of titles, not a description of seniority. Your best salesperson is not an executive because you call them one.

Sale of a business. Where a business or part of a business is sold and, as part of the sale, the purchaser and seller agree that the seller will not compete, and immediately after the sale the seller becomes an employee of the purchaser, the prohibition does not apply to that agreement.

Whether a particular covenant falls inside either exception, and what happens to an agreement signed before the prohibition took effect, are legal questions. Ask an employment lawyer. What follows is the part I can help with: what you were actually trying to protect, and what still does it.

What you were really protecting

Owners almost never want to stop a former employee from working. They want to stop three specific things: the customer following them out the door, the rest of the team following the customer, and the company’s information walking into a competitor’s building.

Those are three different problems and only one of them was ever a non-compete’s job.

Non-solicitation clauses are a different animal from non-competes, and the Part XV.1 definition is aimed at competing rather than soliciting. How broadly a given non-solicit will be read, and whether it is enforceable as drafted, is squarely a question for counsel. Courts look at these carefully.

The tools that do the work

Confidentiality, applied properly. CIPO’s material on trade secrets makes the point that a trade secret is protected because it is kept secret. That is an operational discipline, not a clause. If your entire sales team can export the customer list to a spreadsheet, you do not have a confidentiality problem, you have a systems problem. I go through the limits of the paperwork side in what an NDA actually protects.

Notice periods. A required notice period from the employee, honoured and paid, buys you time to introduce the successor to the account before the departing person is free to approach it. It is one of the few genuinely effective levers left, and it costs payroll rather than legal fees.

Owning the relationship in the first place. This is the unglamorous answer and it is the right one. Contracts in the company’s name. CRM data on company systems. More than one person on every significant account. A customer who deals with a business rather than a person does not leave with that person.

The contractor question

The ESA applies to employees. That does not make “hire them as a contractor and put a non-compete in” a strategy, because whether someone is an employee is determined by the substance of the arrangement, not the label on the agreement, and the Act prohibits treating an employee as though they were not one.

There is also a tax exposure sitting underneath the same decision. The employee versus contractor test and the personal services business rules both punish getting this wrong, and they punish it on the payer’s side as well as the worker’s. A restrictive covenant is not worth reclassifying a workforce for.

What does belong in a genuine contractor agreement is a different set of terms, and I have set those out in the contractor agreement.

Where to spend the effort

Someone with client relationships is leaving?
├─ Contract has a non-compete
│    → assume it is void unless they are an executive
│      or it came from a sale of the business
├─ Contract has non-solicit + confidentiality
│    → ask counsel what it actually reaches
└─ Contract has neither
     → the departure is a business problem, not a legal one
        · reassign accounts before the last day
        · client contact from you, not from them
        · revoke system access on schedule

The exit mechanics matter more than the paperwork. Getting the final pay, records and record of employment right protects you far more reliably than a covenant you cannot enforce, and I have covered that in hiring your first employee and in severance and retiring allowances.

One tax note before you buy your way out

Paying someone for a restrictive covenant is not a neutral transaction. Amounts received for a covenant have their own treatment under the Income Tax Act and are not automatically capital in the recipient’s hands. If a covenant is being priced as part of a departure or a sale, get the tax characterisation looked at before the number goes into the agreement, not after.

Federal guidance on employment standards for federally regulated employers sits at labour standards, and the provincial overview is your guide to the Employment Standards Act.

If a key person is leaving and there is money attached to the exit, whether it is severance, a covenant payment or a buyout, get in touch and we can work out what it costs each side after tax before anyone signs.