Picture a Brampton freight broker who has spent six years building relationships with shippers along the Highway 410 corridor. Her top dispatcher hands in his notice and mentions he is joining a competitor in Mississauga. She pulls out his contract, finds a clause saying he cannot work for a competitor within 100 kilometres for two years, and feels relieved. In most cases that relief would be misplaced. If the contract was signed on or after October 25, 2021, and the dispatcher is an ordinary employee, the clause is probably void.
That scenario is hypothetical, but the misunderstanding behind it is common. Many employers still rely on templates downloaded years ago or copied from a former employer. Ontario’s Employment Standards Act, 2000 (the ESA) now prohibits non-compete agreements with most employees, and the title of this article should not suggest otherwise. For employers, the useful questions are narrower: who falls within an exception, what happens to older agreements, and what else can lawfully protect the business?
This article is general information, not legal advice. Restrictive covenants turn heavily on exact wording and on the employee’s actual role, so have a lawyer look at your documents before you rely on them or threaten to enforce them.
What Ontario Actually Prohibits
Section 67.2 of the ESA says an employer shall not enter into an employment contract or other agreement with an employee that is, or includes, a non-compete agreement. If an employer does so anyway, the non-compete is void.
The definition is broad. A non-compete is an agreement that prohibits the employee from engaging in any business, work, occupation, profession, project or other activity that competes with the employer’s business after the employment relationship ends. Reasonable-sounding limits do not rescue it. A six-month restriction covering only Peel Region is still a prohibited non-compete if the person is covered by the ban.
Notice the words “or other agreement”. Moving the restriction out of the employment contract does not necessarily help. A separate covenant, a bonus plan, a stock option document, or a shareholder agreement signed by someone who is also an employee could all raise the issue. An employer that hides a non-compete in a side document may end up with a void clause and an unhappy employee who has noticed the attempt.
The Executive Exception Is Narrower Than the Word Suggests
The ban does not apply to an employee who is an “executive”. The ESA gives that word a specific meaning: a person who holds 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 who holds any other chief executive position.
This list is much shorter than most organization charts. A vice-president of sales, a general manager running your Brampton warehouse, a director of operations, or a senior account manager is not obviously covered, however senior they feel and whatever they earn. There is no salary threshold that converts a well-paid employee into an executive.
Be cautious about handing out inflated titles to fit the exception. Calling a branch manager “Chief Growth Officer” for contract purposes invites the argument that the title is a label with no substance. Whether a title of that kind counts as a “chief executive position” is exactly the sort of point an employee’s lawyer would test.
Falling within the exception also does not make the clause enforceable. It only means the ESA ban does not apply. The older common law test still has to be met, as discussed below.
The Sale-of-Business Exception and Its Conditions
The second exception is built for a specific transaction. It applies where a business or part of a business is sold, the purchaser and seller agree as part of the sale that the seller will not compete with the purchaser’s business afterward, and, immediately following the sale, the seller becomes an employee of the purchaser.
Suppose a Brampton dental lab owner sells to a larger group and stays on as an employee to help with the transition. A covenant in the sale documents preventing her from opening a rival lab can fall within this exception. The buyer is paying for goodwill, and the law has long recognized that a buyer needs protection for what it paid for.
The exception protects the seller’s covenant, and that word needs careful attention. It does not automatically extend to the key staff who come along with the business. If you are buying a company and want the former owner’s senior employees bound, an employee who is not a seller will generally be outside the exception, unless they are also an executive. Buyers should deal with this in their due diligence and not assume the seller’s covenant covers everyone.
A seller who walks away entirely and never becomes the buyer’s employee is in a different position again. The ESA ban is aimed at agreements with employees, so a covenant from a departing owner is normally assessed under common law sale-of-business principles.
What About Agreements Signed Before October 25, 2021?
The ban came into force on October 25, 2021, through the Working for Workers Act, 2021. In Parekh et al v. Schecter et al, 2022 ONSC 302, the Ontario Superior Court held that the prohibition does not reach back to invalidate non-competes entered into before that date.
That sounds like good news for employers with long-serving staff, but three cautions apply:
- The common law still governs. An old clause was never automatically enforceable. It must still survive a reasonableness review, and many did not even before the ban.
- Replacing the contract can change the analysis. If a long-service employee signed a fresh agreement after the ban took effect, for example on a promotion, the employer may no longer be able to point to the old covenant. Read what the updated contract says about prior agreements.
- Older contracts have other weaknesses. The termination clause in the same contract may also be out of date, and a flaw there can create its own exposure. Reviewing one clause usually means reviewing the entire document.
The Common Law Test Still Applies Where the Ban Does Not
Canadian courts have long been reluctant to restrain someone from earning a living. A covenant in an employment setting starts out presumed unenforceable. The employer must show that it protects a legitimate proprietary interest and is reasonable in time, geography, and the scope of activity restricted. It also must be clear enough to be understood.
Courts have also said that a non-compete is generally not justified where a non-solicitation clause would adequately protect the employer. Overreaching is punished: a court will not usually rewrite an unreasonable covenant to make it fair, and an ambiguous one may fail altogether. A restriction covering “the Greater Toronto Area and surrounding regions”, for example, may simply be too uncertain to enforce.
Covenants given on a sale of a business are viewed more generously, because the parties are usually more evenly matched and the seller has been paid. Even then, they need to be limited to what the buyer actually needs. Drafting that looks tough on paper can lose you all the protection in a courtroom.
Tools That Remain Available
Most Brampton employers do not need a non-compete to protect themselves. The more dependable protection usually comes from a combination of narrower terms and sensible internal practice.
Non-solicitation clauses. These limit a former employee from approaching your clients, and sometimes your staff, for a defined period. They should identify who is covered, ideally clients the employee actually dealt with during a set period before leaving. They need to be drafted carefully. A clause so broad that it effectively blocks the person from working in the industry risks being treated as a non-compete in disguise.
Confidentiality obligations. Customer lists, pricing formulas, carrier rates, supplier terms, and product plans can be protected by a clear confidentiality clause. Employees also owe duties at common law, and some senior employees owe heightened fiduciary duties that can restrict them from taking opportunities or customers after they leave. Those duties exist independent of any clause, but a written term makes expectations far clearer.
Ownership of work product. A term confirming who owns software, designs, and other materials created on the job helps prevent disputes when someone leaves with a laptop full of files.
Practical security. A clause cannot do what access controls can. Limit downloads, keep track of who can see your full client list, and cut off system access promptly at departure. A short exit meeting reminding the employee in writing of their continuing obligations is inexpensive and often effective.
Relationships. Introduce clients to more than one person in the business. If one salesperson is the only contact a customer has ever had, no clause will fully fix that vulnerability.
Contractors, Partners and Shareholders
Employers sometimes ask whether they can avoid the ban by calling a worker an independent contractor. The ESA’s ban speaks about employees, but the label does not decide the question. If the person is really an employee, the ban will apply regardless of what the contract calls them, and you may have created a separate misclassification problem. Genuine contractors are outside the ban, but a restriction on them still has to be reasonable at common law.
Shareholder agreements deserve particular care. A small company in Brampton might have three owners who all work in the business, each promising not to compete if they leave. If one of those people is an employee and holds no qualifying executive office, the question of whether the ESA reaches that covenant needs real analysis. An owner may also be a president or other officer, which could bring them within the exception. These agreements should be checked by someone looking at both the corporate and the employment side.
Audit Your Paperwork Before You Need It
A short internal review now is much cheaper than discovering the problem when a key person resigns. Consider doing the following:
- Find the contract each key employee actually signed, including any later amendments, and note its date.
- Identify every non-compete in contracts, offer letters, bonus plans, and shareholder documents.
- For each one, ask whether the person holds a listed executive office or gave the covenant as a seller.
- Remove void non-competes from your templates so that they stop being copied into offers.
- Add or tighten non-solicitation and confidentiality terms for future hires, remembering that changing an existing employee’s contract generally requires fresh consideration, meaning something of value given in exchange.
- Reset how you handle departures, including system access, return of property, and reminder letters.
If a resignation has already happened, do not send an aggressive letter citing a clause that may be void. Threatening to enforce a prohibited term can damage your credibility and draw a complaint. Get advice on what you can realistically assert, starting with confidentiality, fiduciary duties, and any valid non-solicitation term.
When to Get Help
Restrictive covenants tend to get attention at two moments: when a business is being bought or sold, and when an important employee is walking out the door. Both are poor times to find out your paperwork does not work. A review of your templates through our corporate law group can be combined with a broader look at your commercial contracts. If you are acquiring a Brampton company, covenants belong on the checklist alongside the other terms of a business purchase or sale.
The goal is modest and achievable: terms a court is likely to respect, supported by habits that keep your client relationships and information safe, however a departure unfolds.