Part 1: The Death of the Non-Compete and the Commercial Lifeline
The enforceability of non-competition agreements in Ontario has bifurcated into two distinct legal realities. For the vast majority of employment relationships, the restrictive covenant is statutorily void, a casualty of legislative reforms aimed at promoting labour mobility. However, for business owners engaged in commercial transactions, the Ontario Court of Appeal has firmly established that these protections remain robust, provided they are drafted with commercial precision.
In late 2021, the Ontario legislature significantly altered the employment landscape with the Working for Workers Act, which amended the Employment Standards Act (ESA) to prohibit employers from entering into non-compete agreements with employees. This legislative change was widely publicized and led to a prevailing misconception among business stakeholders that non-competition clauses are universally unenforceable. This generalization presents a significant legal risk. While the prohibition effectively rendered the non-compete a less effective tool for employee retention, the legislation expressly preserved its utility in specific, high-stakes commercial contexts.
For sophisticated stakeholders, understanding the nuance between an “employment” covenant and a “commercial” covenant is now a matter of critical risk management. Reliance on outdated templates or a failure to distinguish between these two categories can result in the loss of proprietary assets, client relationships, and the value of purchased goodwill.
This two-part series provides a comprehensive legal analysis of the current restrictive covenant regime in Ontario. It moves beyond the fundamental statutory prohibitions to examine the sophisticated exceptions that remain available to employers and purchasers. This first installment analyzes the landmark Dr. C. Sims Dentistry Professional Corporation v. Cooke decision, the “Sale of a Business” exception, and the persistent enforceability issues surrounding pre-2021 “legacy” contracts.
The Statutory Prohibition and Its Scope
To understand the current exceptions, one must first appreciate the breadth of the prohibition. Section 67.2 of the ESA prohibits employers from entering into an employment contract or other agreement with an employee that includes a non-compete agreement. The statute defines a non-compete agreement as 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.
The legislation creates a presumptive invalidity. If a business inserts a non-competition clause into a standard employment contract for a junior or mid-level employee in 2025, that clause is void from the outset. It carries no legal force. More significantly, the presence of such a void clause can taint the employer’s broader contractual strategy, signalling that the employer’s agreements are non-compliant with current standards. This statutory ban reflects a shift in public policy, prioritizing labour mobility over employer control, forcing businesses to rely on alternative mechanisms, such as non-solicitation and confidentiality agreements, which are explored in Part 2 of this series.
The Commercial Exception: The Sims Standard
The defining legal authority in this area is the Ontario Court of Appeal’s ruling in Sims. This decision serves as the critical affirmation that the courts will continue to enforce restrictive covenants when they support legitimate commercial transactions.
In Sims, the Court was asked to determine the enforceability of a non-competition covenant entered into in the context of the sale of a dental practice. The seller, Dr. Cooke, sold his practice to the purchaser, Dr. Sims, and agreed to a restrictive covenant that prohibited him from practicing dentistry within a 15-kilometre radius for a period of five years. Following the sale, Dr. Cooke attempted to work at a practice located less than four kilometres away. When challenged, he argued that the covenant was unenforceable, attempting to leverage the judicial skepticism that typically applies to employment restraints.
The Ontario Court of Appeal rejected this argument and enforced the non-compete. The decision reinforces the principle that restrictive covenants in a commercial context are treated with far greater deference than those in an employment context. The Court emphasized that the parties were sophisticated commercial actors with equal bargaining power, both represented by legal counsel. In such scenarios, the courts are reluctant to interfere with the bargain struck by the parties. The purchaser had paid a significant sum for the “goodwill” of the practice—essentially the loyalty of the patient base. If the seller were permitted to immediately open a competing practice nearby, the value of that goodwill would be negated, and the purchaser would be deprived of the benefit of their bargain.
Determining the Context: Commercial vs. Employment
The Sims decision underscores the crucial importance of accurately characterizing the nature of the agreement. The Supreme Court of Canada, in the seminal case of Payette v. Guay Inc., established that the rules of construction for restrictive covenants depend entirely on whether the covenant is linked to a sale of a business or a contract of employment.
In a sale of a business, the courts apply a “commercial” lens. They presume the covenant is lawful and will enforce broader restrictions on geography and duration to protect the buyer’s commercial interests. A five-year restriction, as upheld in Sims, is often considered reasonable in a sale context because it reflects the time required for the purchaser to solidify their relationship with the acquired clients.
Conversely, in a pure employment relationship, the courts apply a “public policy” lens. They view the covenant as a restraint of trade and a limitation on individual liberty. In this context, a five-year restriction would be summarily struck down as unconscionable. The burden of proof shifts heavily to the employer to demonstrate that the restriction is the absolute minimum necessary to protect a proprietary interest.
The danger for business owners arises when the lines between personal and professional responsibilities become blurred. For example, if a business is sold and the former owner remains employed by the purchaser for a decade, a non-compete signed five years into that employment tenure may be viewed through the stricter employment lens, rather than the commercial lens. The temporal proximity to the transaction is a key factor. To benefit from the commercial exception, the restrictive covenant should be clearly integrated into the transaction documents and contemporaneous with the sale.
The “Sale of a Business” Statutory Exception
The ESA explicitly codified this common law distinction. Section 67.2(3) provides a statutory exception to the ban on non-competes if two specific conditions are met. First, there must be a sale or lease of a business or part of a business. Second, immediately following the sale, the seller must become an employee of the purchaser.
This statutory exception is designed to facilitate mergers and acquisitions (M&A) activity, succession planning, and “acqui-hires.” It recognizes that in many transactions, the seller’s continued involvement is necessary to transition relationships and knowledge. However, businesses must be cautious not to artificially manufacture this exception. Granting a nominal amount of equity to a junior employee solely to characterize them as a “seller” upon their departure is a strategy likely to fail under judicial scrutiny. The courts examine the substance of the transaction to determine whether it constitutes a genuine commercial sale or a disguised employment arrangement.
The Legacy Problem: Pre-2021 Contracts
A distinct but equally critical issue facing Ontario businesses is the status of “legacy” contracts signed before October 25, 2021. Many employers assume that because the legislation is not retroactive, their older contracts remain fully enforceable. The Ontario Superior Court’s decision in Parekh et al v. Schecter et al confirmed that the statutory ban does not retroactively void agreements entered into before the effective date.
However, “not void by statute” does not mean “enforceable at law.” While a pre-2021 non-compete survives the ESA prohibition, it must still pass the rigorous common law test for reasonableness.
For a legacy non-compete agreement to be enforced today, the employer must prove that it is reasonable in terms of geography, time, and scope of activity. A clause that restricts an employee from working “anywhere in Ontario” when the business operates only in Ottawa will likely be deemed invalid. Similarly, a clause that prevents an employee from working in “any capacity” for a competitor (even in a non-competing role such as a janitor) will be struck down for overbreadth. This “Janitor Clause” issue is examined in greater detail in Part 2.
Consequently, reliance on legacy contracts creates a false sense of security. An employer may believe they are protected by a 2018 contract, only to find during litigation that the clause is unenforceable under common law standards. This underscores the necessity of auditing older agreements and, where appropriate, transitioning employees to new, compliant contracts that rely on enforceable non-solicitation provisions rather than questionable non-competes.
Understanding the New Regime of Non-Competes in Ontario
The legal environment for restrictive covenants in Ontario has matured into a complex dual regime. The general prohibition protects the workforce as a whole, while the commercial exception preserves the integrity of business transactions. The Sims decision serves as the governing standard, reminding stakeholders that when money changes hands for a business, the courts will protect the purchaser’s investment with the full force of the law.
However, for the vast majority of staff who are not selling a business, the non-compete is no longer a viable option. This reality forces employers to adopt alternative protective measures. The focus must shift from blocking competition to preventing the specific theft of clients and confidential information.
Bader Law Provides Multifaceted Advice in Business & Employment Law Matters in Oakville
Part 2 of this series will examine the sophisticated alternatives available to employers. It will analyze the “Executive” exception for C-Suite leaders, the critical drafting requirements for enforceable Non-Solicitation Agreements, and the “fiduciary duties” that effectively bind senior management even in the absence of a written contract.
If your business is navigating the changing landscape of restrictive covenants in Ontario, informed legal guidance is essential. The business and employment lawyers at Bader Law assist employers, buyers, and commercial stakeholders in drafting, updating, and enforcing agreements that withstand modern scrutiny. Our team proudly serves clients in Oakville, Mississauga, and the surrounding areas. Contact us online or call 289-652-9092 to review your existing contracts or to develop tailored strategies that protect your goodwill, client relationships, and competitive position.