Non-Compete Agreement

Ontario law applies very different standards to non-compete agreements depending on the context. Since October 25, 2021, amendments to the Ontario Employment Standards Act, 2000 (ESA) introduced by Bill 27 (Working for Workers Act, 2021) have made non-competition agreements in employment contracts void and unenforceable for most employees — except for certain high-level executives. This is a significant change from the pre-2021 common law regime. However, the ESA restriction does not apply to non-compete agreements that form part of a business sale. When a business owner sells their business and agrees not to compete as part of that transaction, the courts apply the traditional common law reasonableness test rather than the ESA rule.

Under the common law test, which applies in the context of a business sale or a shareholder agreement, a non-compete covenant will be enforced by Ontario courts if it is reasonable in three dimensions: (1) geographic scope — limited to the area where the business actually operated and where the restriction is needed to protect the purchaser's investment; (2) duration — no longer than reasonably necessary to protect the legitimate business interest; typically 2–5 years for a business sale, potentially longer for a unique or specialized business; and (3) activity restriction — the prohibited activities must be reasonably tied to the business sold and not so broad as to prevent the seller from earning a living in their field. Courts give greater latitude to non-competes in business sale contexts than in employment contexts, because the parties are presumed to be bargaining at arm's length with experienced advisors.

A non-solicitation covenant is narrower than a non-competition covenant — it prevents a departing party from actively soliciting the customers, suppliers, or employees of the former employer or business, but does not prevent them from working in the same industry. In employment contexts, where full non-compete covenants are now void under the ESA for most employees, non-solicitation covenants remain enforceable if they are reasonable in scope and duration. Courts often view non-solicitation covenants as less oppressive because they restrict specific conduct (active solicitation) rather than general participation in an industry. However, a non-solicitation covenant that is effectively equivalent to a non-competition covenant may be recharacterized and struck down.

If a court finds that a non-compete agreement is unreasonably broad, it will generally not rewrite the covenant to make it reasonable — Ontario courts prefer to sever the offending portion entirely rather than modify it. The courts have applied the 'blue-pencil' rule in some cases, deleting words that make the covenant too broad if the remaining words make grammatical and commercial sense. However, 'notional severance' — where the court would have to rewrite the covenant to make it reasonable — is generally not available in Ontario. The safer approach is to draft narrow, defensible covenants in the first place rather than drafting broadly and hoping the courts will moderate the excess.