non-compete clauses Ontario business contracts

A non-compete clause is a contractual provision that prohibits a person (typically an employee, executive, or business seller) from engaging in competitive activity after their relationship with the business ends. In Ontario, the enforceability of non-compete clauses in business contracts depends heavily on context: since October 2021, most employee non-competes are banned, while non-competes in business sales remain enforceable when drafted reasonably.

For Ontario entrepreneurs and business owners, understanding exactly where the line falls (and what alternatives exist) is important before signing any agreement that restricts future activities.

What Is a Non-Compete Clause in a Business Contract?

A non-compete clause (also called a non-competition agreement or restrictive covenant) is a provision that prevents a person from working in, owning, or otherwise participating in a competing business for a defined period of time and within a defined geographic area after their relationship with the contracting party ends.

These clauses appear in two main types of Ontario business contracts:

Employment agreements, where an employer attempts to prevent a departing employee from immediately joining or starting a competing business.

Business sale and M&A agreements, where a purchaser of a business requires the seller not to compete against them after the sale closes, protecting the goodwill they have purchased.

Non-compete clauses have long been controversial in Ontario law. Courts have always scrutinised them carefully because they restrict a person's ability to earn a living and compete freely in the marketplace. That tension between protecting legitimate business interests and preserving economic freedom reached a legislative tipping point in 2021.

The 2021 Legislative Change: Working for Workers Act and Non-Compete Clauses

On October 25, 2021, Ontario's Working for Workers Act, 2021 (Bill 27) came into force, amending the Employment Standards Act, 2000 (ESA) to add Part XVI.1, Non-Compete Agreements (sections 67.1 and 67.2).

The core rule under section 67.2 is straightforward: no employer shall enter into an employment contract or other agreement with an employee that is, or that includes, a non-compete agreement.

The ESA defines a "non-compete agreement" under section 67.1 as any agreement or portion of an agreement that prohibits the employee from engaging in any business, work, occupation, profession, project, or other activity that is in competition with the employer's business after the employment relationship ends. If an employer violates this prohibition, the non-compete agreement is void.

The ban applies to agreements entered into on or after October 25, 2021. Agreements signed before that date are not automatically retroactively voided, though they were rarely enforceable even at common law (more on that below).

Employees, applicants, and former employees can file a claim with the Ministry of Labour if they were asked to sign a prohibited non-compete after October 25, 2021, or if they were penalised for refusing to do so.

The Two Exceptions: Who Can Still Be Subject to a Non-Compete?

The ESA ban is not absolute. Ontario law preserves two categories where non-compete clauses remain permissible:

Executive Employees

The prohibition does not apply to "executives", a defined class of senior officers. Under the ESA, an executive is any 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
Chief corporate development officer
Or any other chief executive position

If you hold a genuine C-suite role, an employer may still include a non-compete clause in your agreement. However, the common law reasonableness test still applies, the ESA ban being lifted does not make an executive non-compete automatically enforceable. It still must be reasonable in scope, duration, and geography.

Business Sales (Vendor Becomes Employee)

When a business operated as a sole proprietorship or partnership is sold and the seller subsequently becomes an employee of the purchaser, a non-compete clause in the sale agreement remains permissible under the ESA. This exception exists because protecting the goodwill being transferred is a legitimate commercial interest (a buyer cannot be expected to pay for the seller's business relationships only to have the seller immediately set up a competing operation next door.

Non-Compete Clauses in Ontario Business Sale and M&A Transactions

Outside of the employment context, non-compete clauses in commercial and M&A agreements are governed by common law, not the ESA. Courts apply a fundamentally different (and significantly more deferential) standard.

The Presumption of Validity

When a non-compete clause is negotiated as part of a business sale between sophisticated parties with roughly equal bargaining power, Ontario courts apply a presumption of validity. They will only interfere in exceptional circumstances. The commercial rationale is sound: the non-compete exists to protect the goodwill the purchaser is paying for. Without such protection, the seller could immediately undermine the value of what was sold.

The Supreme Court of Canada established this framework in Payette v. Guay inc., 2013 SCC 45, holding that in the commercial context "a restrictive covenant is lawful unless it can be established by the employee/vendor that its scope is unreasonable." The Ontario Court of Appeal has consistently applied this standard. The contrast with the employment context is deliberate: courts give "more scrutiny to the reasonableness of a restrictive covenant in the employment context, while applying a presumption of validity to such clauses where they have been negotiated as part of the sale of a business."

The 2024 Ontario Court of Appeal Decision: Dr. C. Sims Dentistry v. Cooke

The most recent and significant guidance comes from Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388.

In that case, a buyer purchased a dentistry practice from the seller as part of an Agreement of Purchase and Sale for $1.1 million. The seller agreed to a non-competition covenant prohibiting him from practicing dentistry for five years within a 15-kilometre radius of his former practice.

The Ontario Court of Appeal upheld the non-compete. The court confirmed that where parties are "sophisticated commercial parties who had access to legal counsel," non-competition covenants negotiated as part of a business sale are binding and enforceable except in extraordinary circumstances. The purpose of the restriction (preventing the seller from devaluing the goodwill that was sold) justified its enforcement.

The court was equally clear that even in commercial contexts, the clause must still be reasonable. The reasonableness constraint cannot be set aside entirely.

Commercial Non-Competes Outside Business Sales

The ESA governs employer-employee relationships specifically. Genuine business-to-business commercial contracts (such as shareholder agreements, franchise agreements, or certain independent contractor arrangements) are assessed entirely at common law. Courts apply the reasonableness test, but without the heightened suspicion reserved for employment non-competes.

What Makes a Non-Compete Clause in Ontario Enforceable or Void?

Whether you are dealing with an executive non-compete or a business sale covenant, courts assess enforceability across three dimensions:

1. Geographic Scope

The geographic restriction must be limited to the area where the party actually competed or held client relationships. A clause banning a dental practice seller from practicing anywhere in Ontario would almost certainly fail. A 15-kilometre restriction around a sold practice (as in Sims v. Cooke) is far more defensible because it maps to the actual client catchment of the business sold.

A company operating in a dense urban market like Toronto faces more scrutiny for wide geographic restrictions than one operating in a rural area with limited competition, because the harm from a precise local competitor is easier to demonstrate.

2. Duration

The time limit must be proportionate to the legitimate interest being protected. For business sales, two to five years is common and generally defensible, though longer periods have been upheld where the nature of the goodwill (client relationships, industry reputation) takes longer to dissipate.

For executive employment non-competes, shorter durations tend to fare better. Anything exceeding two years in the employment context will face hard questions.

3. Scope of Restricted Activities

The clause must clearly define what "competition" means. If a clause is ambiguous about what activities are prohibited, courts will refuse to enforce it, not rewrite it. Courts do not "blue-pencil" (surgically revise) a fundamentally unreasonable or vague clause; they void it entirely.

A clause that says "the seller shall not engage in any business" is far too broad. A clause that says "the seller shall not provide [specific services] to clients in [specific territory] for [X years]" is far more enforceable.

Non-Compete Clauses and Confidentiality Agreements: How They Interact

The Working for Workers Act ban applies specifically to non-compete agreements. It does not affect:

Confidentiality agreements (NDAs), fully enforceable for all employees
Non-solicitation agreements, fully enforceable for all employees
IP assignment provisions, unaffected

This distinction is critical. Post-2021, Ontario businesses protecting themselves from departing employees must rely more heavily on well-drafted confidentiality and non-solicitation provisions, since the non-compete option has been largely removed.

The Post-2021 Business Protection Toolkit

For most Ontario employers, protecting legitimate business interests now means layering several provisions:

Confidentiality / NDA: Protects proprietary information, trade secrets, client data, pricing, strategies, and business methods. Enforceable for all employees. Must be precisely drafted, overly broad clauses that protect information that is generally known or publicly available will be limited by courts.

Non-solicitation: Prevents a departing employee from actively targeting clients or poaching colleagues. Courts treat non-solicitation clauses more favourably than non-competes because they restrict targeted interference rather than broad competitive activity.

IP assignment: Ensures all work product, inventions, and developments created during employment belong to the employer.

Non-compete (where permitted): Only available for executives or in business sale contexts; must pass the common law reasonableness test.

The Substance-Over-Form Warning

One important drafting caution: a confidentiality clause that is so broad it effectively prohibits all competitive work (even if not labelled a "non-compete") may be recharacterised by a court as a non-compete agreement and voided under the ESA. Ontario courts apply a substance-over-form test. The name on the provision does not determine its legal character; the actual restriction does.

Employers should ensure confidentiality provisions are genuinely targeted at protecting specific proprietary information, not disguised attempts to prevent competition broadly.

Pre-2021 Non-Compete Agreements: What Happens Now?

The ESA ban is not retroactive. If you or your employees signed non-compete agreements before October 25, 2021, those agreements are not automatically void.

However, this provides less comfort than it might seem. Even before the legislative ban, Ontario courts applied a presumption of unenforceability to non-compete clauses in the employment context at common law. Courts would require the employer to justify the clause on reasonableness grounds, and routinely refused to enforce clauses they found too broad.

The practical implication: employers should not assume pre-2021 non-competes will hold up. Any such clause should be reviewed by legal counsel before attempting enforcement. If a dispute arises and the clause is challenged, there is a real risk the court will void it regardless of when it was signed.

Practical Guidance for Ontario Businesses

For Business Buyers in M&A Transactions

Always include a carefully drafted non-compete in the purchase agreement. The goodwill you are paying for is only worth what you protect. Work with a corporate lawyer to define geographic limits that match the actual footprint of the acquired business, and time periods proportionate to the nature of the relationships being transferred.

Avoid boilerplate non-compete language. Courts will scrutinise the specific terms of your clause, a provision that looks reasonable on its face but is actually broader than the sold business's geographic reach is vulnerable to challenge.

For Business Sellers in M&A Transactions

Understand exactly what you are agreeing to. A 5-year restriction within 15 kilometres of your sold practice is materially different from a 10-year industry-wide ban. Both may be presented as "standard", they are not equivalent. Negotiate duration and scope carefully, and obtain independent legal advice before signing.

For Employers with Executive Employees

Non-competes for executives remain available but are not risk-free. They must still pass the common law reasonableness test. Pair any executive non-compete with confidentiality, non-solicitation, and IP assignment provisions for broad protection, and review them periodically to ensure they remain proportionate to the executive's actual role.

For All Other Employers

Do not include non-compete clauses in new employment contracts with non-executive employees. Any such clause is void under the ESA, and attempting to enforce it or penalising an employee for refusing to sign constitutes a potential ESA violation.

Instead, focus on:

Precisely drafted confidentiality provisions that identify specific categories of protected information
Non-solicitation clauses that target client and employee poaching without sweeping competitive restriction
IP ownership provisions that clearly assign work product to the employer
Regular contract reviews with employment or corporate counsel to confirm compliance with current law

Frequently Asked Questions

Are non-compete clauses enforceable in Ontario?

Mostly no for standard employees since October 2021. Ontario's Working for Workers Act banned most employee non-compete agreements. Two exceptions remain: non-competes for executives (C-suite officers) and non-competes in business sale agreements where the seller becomes an employee. In commercial or M&A contexts, non-competes remain enforceable when reasonably drafted.

What did the Working for Workers Act do to non-compete clauses?

The Working for Workers Act, 2021 (Bill 27) amended Ontario's Employment Standards Act, 2000 to add Part XVI.1. Effective October 25, 2021, employers are prohibited from including non-compete clauses in employment contracts with non-executive employees. Any such clause entered into after that date is void. Executives and business sale exceptions still apply.

What is the difference between a non-compete and a non-solicitation clause?

A non-compete prohibits working in, owning, or participating in a competing business. A non-solicitation prohibits actively targeting specific clients or employees, but does not prevent working in the same industry generally. Only non-competes are banned under the ESA for most employees; non-solicitation clauses remain fully enforceable.

Can an employer enforce a non-compete signed before October 2021?

Pre-October 2021 non-competes are not automatically void. However, they were subject to strict common law scrutiny even before the ban and were rarely enforced in the employment context. Any pre-2021 non-compete should be reviewed by a lawyer before an employer attempts to rely on it.

What happens if my employment contract has an illegal non-compete clause?

The clause is void and unenforceable. You may file a complaint with Ontario's Ministry of Labour. Your employer cannot penalise you for refusing to abide by it or for filing a complaint, doing so constitutes a reprisal under the ESA.

How long can a non-compete last in a business sale in Ontario?

Ontario law sets no fixed maximum duration. Courts assess reasonableness based on the specific circumstances of the sale. Two to five years is common and generally defensible. Longer periods may be upheld where the goodwill transferred (such as long-standing client relationships) justifies extended protection.

Do non-compete clauses apply to independent contractors?

The ESA ban applies specifically to employer-employee relationships. Genuine independent contractors operating under business-to-business agreements are not covered by the ESA. However, courts can recharacterise the relationship as employment, and commercial non-competes still face the common law reasonableness test regardless of the ESA.

Can a confidentiality agreement replace a non-compete?

A confidentiality agreement protects information; a non-compete restricts competitive activity. They are not direct substitutes. Post-2021, employers typically combine confidentiality provisions, non-solicitation clauses, and IP assignment provisions for protection without a non-compete. A confidentiality clause that effectively prohibits all competition may be void as a disguised non-compete.

Are non-competes enforceable in business sale agreements in Ontario?

Yes. The Ontario Court of Appeal confirmed in Dr. C. Sims Dentistry Professional Corporation v. Cooke, 2024 ONCA 388, that non-competition covenants in M&A transactions are generally enforceable between sophisticated commercial parties with access to legal counsel. Courts apply a presumption of validity and will only interfere in exceptional circumstances, though the clause must still be reasonable in scope, duration, and geography.

What makes a non-compete clause in Ontario void?

Common grounds for voidness include: geographic scope exceeding the actual business footprint; duration disproportionate to the interest being protected; ambiguous definition of restricted activities; lack of consideration; and (for post-October 2021 employment agreements with non-executives) the ESA ban itself. Courts will not rewrite an unreasonable clause; they void it.

Sources & Official Resources

Ontario Statutes Cited

Legislation

Working for Workers Act, 2021, Bill 27, Legislative Assembly of Ontario

Canadian Case Law

Contact Hadri Law

Whether you are drafting a business sale agreement and need non-compete protections that will hold up in court, reviewing employment contracts for ESA compliance, or advising executives on the scope of restrictive covenants they have been asked to sign, getting the language right is critical. An unenforceable clause offers no protection at all, and an overly aggressive one may expose an employer to ESA complaints or costly litigation.

Hadri Law is a Toronto corporate and commercial law firm with significant experience in M&A transactions, commercial agreements, and employment contract compliance. Nassira El Hadri and Nicholas Dempsey have collectively worked on more than 90 asset and share sale transactions, including the drafting and negotiation of restrictive covenants in business sale agreements.

Call (437) 974-2374 for a free initial consultation. We serve clients in English, French, Spanish, and Catalan across Toronto, Mississauga, Oakville, Burlington, Hamilton, and the broader GTA.

This article provides general legal information only and does not constitute legal advice. Every situation is different. Contact a lawyer to discuss your specific circumstances.