Ontario Non-Compete and Non-Solicitation Clauses: Enforceability and Limits

1. The 2021 Prohibition on Employment Non-Compete Clauses: ESA s.67.2

The Working for Workers Act, 2021, S.O. 2021, c. 35 added section 67.2 to the Employment Standards Act, 2000 ("ESA"), effective October 25, 2021. The key provision reads:

"No employer shall enter into an employment contract or other agreement with an employee that is, or that includes, a non-compete agreement."

A "non-compete agreement" is defined as an agreement, or part of an agreement, between an employer and an employee 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.

Contravention results in the non-compete provision being void. The rest of the employment agreement is not affected.

1.1 Scope of the Prohibition

The prohibition applies to:

• New employment contracts entered into on or after October 25, 2021;
• Employment contract amendments made on or after October 25, 2021 that add or modify a non-compete clause;
• Stand-alone non-compete agreements entered into between employer and employee on or after October 25, 2021.

Non-compete clauses in employment agreements entered into before October 25, 2021 continue to be assessed under the pre-existing common law reasonableness test.

2. The Executive and Sale of Business Exception: ESA s.67.2(2)

ESA s.67.2(2) provides two exceptions to the prohibition:

2.1 Sale of Business Exception

A non-compete is permitted where:

1. It is entered into between a seller and purchaser of a business (or the assets of a business) as part of the sale; and
2. Following the sale, the seller becomes an employee of the purchaser.

This exception recognizes that in a commercial sale of business, a non-compete from the selling founder or key employee is often essential to the value of what the purchaser is buying. The non-compete in this context is assessed under the common law reasonableness test, not automatically prohibited.

2.2 Implication: C-Suite Employees

The Ontario government issued guidance suggesting that non-competes may be permissible for "executives" in the context of a sale of business — typically the president, CEO, COO, CFO, CIO, CLO, CHRO, and CRO. Outside the sale of business context, even executives are subject to the prohibition.

3. Non-Solicitation Clauses: Not Prohibited by ESA s.67.2

Non-solicitation clauses — restricting an employee from soliciting former clients or colleagues after leaving — are not prohibited by ESA s.67.2. The prohibition applies only to non-compete clauses (prohibiting competitive business activity).

Non-solicitation clauses remain enforceable at common law if they satisfy the reasonableness test (see Section 4 below). Employers should ensure their post-employment restrictions are framed as non-solicitation clauses rather than non-compete clauses to avoid the ESA prohibition.

4. The Common Law Reasonableness Test for Restrictive Covenants

For restrictive covenants that are not prohibited by ESA s.67.2 (e.g., non-solicitation clauses, non-competes in sale of business agreements, pre-2021 employment non-competes), the common law reasonableness test applies. From Elsley v J.G. Collins Insurance Agencies Ltd [1978] 2 SCR 916 and subsequent Ontario jurisprudence:

1. Legitimate proprietary interest: The employer must have a genuine proprietary interest that requires protection — trade secrets, confidential information, or demonstrably close client relationships (not merely an employer preference to prevent competition).
2. Reasonable as between the parties: The restriction must be limited in:
   • Duration: Courts have enforced 6–24 months; longer periods require compelling justification. Indefinite non-competes are void.
   • Geographic scope: Limited to the area where the employee actually competed or had client relationships. Worldwide or overly broad geographic clauses are often struck down.
   • Activity: Limited to activities actually in competition with the employer, not all business activities.
3. Not contrary to the public interest: Restrictions that unduly limit competition in a market or that prevent employees from earning a living in their field may be void on public policy grounds.

5. Shafron v KRG Insurance: The Blue-Pencil Limit

In Shafron v KRG Insurance Brokers (Western) Inc 2009 SCC 6, the Supreme Court of Canada held that "notional severance" — reading down or rewriting an unreasonable restrictive covenant to make it reasonable — is not available for employment restrictive covenants. The Court distinguished:

• True blue-pencil severance: Striking out a clearly severable, unreasonable portion, leaving the remainder unchanged and enforceable. Available, but only where the contract still makes sense without the deleted words.
• Notional severance / reading down: Rewriting, modifying, or reading down the clause to make it reasonable. Not available for employment restrictive covenants — the employer wrote the clause and should bear the consequences of drafting it too broadly.

The practical consequence: an overly broad non-solicitation clause is entirely void, not merely reduced to what a court considers reasonable. Counsel must draft carefully.

6. Confidentiality Clauses and Implied Obligations

Even without an express restrictive covenant, employees owe implied obligations to their employer under the duty of good faith and fidelity:

• During employment: An employee may not compete with the employer, solicit clients, or misuse confidential information while employed.
• After employment: The implied duty does not generally extend to post-employment competition. However, an employee may not misuse or disclose confidential information that rises to the level of a trade secret.

Well-drafted confidentiality clauses remain highly effective post-employment tools, particularly for protecting true trade secrets, pricing information, and proprietary client data. A confidentiality clause is not a "non-compete agreement" within the ESA s.67.2 prohibition.

7. Injunctive Relief for Breach

Where an employee breaches an enforceable restrictive covenant, the employer's primary remedy is often injunctive relief to stop the competitive activity or solicitation. To obtain an interlocutory injunction (pending trial), the employer must satisfy theRJR-MacDonald Inc v Canada [1994] 1 SCR 311 test:

1. Serious question to be tried: The restrictive covenant is prima facie enforceable and the breach is not clearly without merit.
2. Irreparable harm: The harm from the breach cannot be adequately compensated in damages — loss of client relationships, disclosure of trade secrets, and the difficulty of quantifying ongoing damage often satisfy this requirement.
3. Balance of convenience: The harm to the plaintiff from refusing the injunction outweighs the harm to the defendant from granting it.

Courts move quickly on injunction motions in restrictive covenant cases — the employer must act promptly after discovering the breach.

8. Pre-2021 Non-Compete Clauses

Non-compete clauses in employment agreements entered into before October 25, 2021 are not void under ESA s.67.2 — they are assessed under the common law reasonableness test. However, given that courts already applied the reasonableness test strictly and rarely enforced employment non-competes, and that the ESA prohibition reflects public policy against employment non-competes, courts may apply heightened scrutiny to pre-2021 clauses as well.

9. Non-Competes in Commercial Agreements

Non-compete clauses in purely commercial agreements — between businesses, in franchise agreements, shareholder agreements, or partnership agreements — are not subject to the ESA s.67.2 prohibition. They are assessed under the common law reasonableness test applicable to parties of equal bargaining power, which is less strict than the employment context. Courts are more willing to enforce commercial non-competes where both parties had legal advice and negotiated at arm's length.

10. Limitations Act 2002

Claims for breach of a restrictive covenant (damages or injunction) are subject to the general two-year limitation period under the Limitations Act, 2002, running from the date the breach was discovered. Where the breach is continuing (ongoing competitive activity), the limitation period runs from each act of breach. Injunctive relief may be sought while the breach is ongoing without the two-year period barring the claim.

Frequently Asked Questions

Are non-compete clauses enforceable in Ontario employment contracts?

Since October 25, 2021, non-competition clauses in employment agreements are generally void under ESA s.67.2. The prohibition applies to employment contracts entered into (or amended) on or after that date. The only exception is for the sale of a business where the seller becomes an employee of the purchaser. Pre-2021 employment non-competes are assessed under the common law reasonableness test.

What is the sale of business exception to the Ontario non-compete prohibition?

Under ESA s.67.2(2), a non-compete is permitted where it is entered into between a seller and purchaser of a business (or business assets) as part of the sale, and following the sale the seller becomes an employee of the purchaser. Such clauses are assessed under the common law reasonableness test.

Are non-solicitation clauses still enforceable in Ontario?

Yes. Non-solicitation clauses (restricting solicitation of former clients or colleagues) are not prohibited by ESA s.67.2. They remain enforceable at common law if they are reasonable in scope, duration, and geographic area, and protect a legitimate proprietary interest.

What is the common law reasonableness test for non-compete clauses?

The clause must: (1) protect a legitimate proprietary interest (trade secrets, confidential information, goodwill); (2) be reasonable as between the parties — limited in duration, geographic scope, and activity; and (3) not be contrary to the public interest. An overly broad clause is entirely void — courts will not rewrite it (Shafron v KRG Insurance 2009 SCC 6).

Can Ontario courts blue-pencil an unenforceable non-compete?

True blue-pencil severance (deleting clearly severable offending words) is available but narrow. "Notional severance" — reading down or rewriting an unreasonable clause — is not available in the employment context after Shafron v KRG Insurance2009 SCC 6.