Is it possible to restrict a worker from working for competitors after the termination of employment? If yes, describe any relevant requirements or limitations.
Employment & Labour Law (2nd Edition)
In Thailand, it is possible to restrict an employee from working for competitors of the employer or engaging in a business that is the same as or which is in competition with the employer’s business after the termination of employment. The precedent of the Thai Supreme Court suggests that such restrictive clause to protect commercial rights and benefits of employers, who may suffer from the loss if the employee breaches the restrictive agreement, is valid if the restriction:
- does not entirely prohibit or hinder the employee from making a living; and
- is enforced on specific restricted business and/or for a restricted time period which is considered to be fair.
Restriction can be either geographical, which prohibits the carrying out of the restricted business in a certain area, and/or for a specified time, provided that the geographical area and time specified is deemed to be fair. Nevertheless, in an event that the Court views that such restriction imposes too much of a burden on the employee, the Court has the power to alter the restriction at its discretion under the Unfair Contract Terms Act B.E. 2540 (“Unfair Contract Term Act”).
The starting position for employers is that such an obligation is void as being in restraint of trade. However, employers can impose obligations (commonly referred to as “restrictive covenants”) that restrict where an employee can work after the termination of employment, provided that the purpose of such an obligation is to protect a legitimate interest of the employer and the obligation is no more restrictive than is necessary to protect this interest. Protection from competition itself is not a legitimate interest but the protection of confidential information, customer and supplier connections, goodwill and the stability of the workforce are all legitimate interests that can be protected. Restrictive covenants are commonly found in contracts of employment for directors and senior management employees, as well as those who have access to the employer’s confidential information, and/or to customers and suppliers and information about the employer’s dealings with them.
The validity of a restrictive covenant is assessed based on the time the employer and employee entered into them, and the employer should therefore regularly review them.
It is possible to restrict a worker from working for competitors post-termination, but certain limitations apply. Canadian courts generally consider non-competition covenants to be in restraint of trade and prima facie unenforceable unless an employer can establish that the covenant:
- Goes no further than is necessary to protect the rights that the employer is entitled to protect;
- Does not unduly restrain the employee from making use of his or her skills and talent; and
- Is not contrary to the public interest.
The clause must be reasonable in duration, geographic scope and all other aspects (such as scope of activity covered) in light of the interest that the employer is seeking to protect. The clause must also be sufficiently clear and certain; ambiguous or vague clauses will likely be voided for uncertainty.
The employer is not entitled to use a non-competition clause to protect its competitive position, but only to protect proprietary interests, which, under the circumstances, reasonably need protection. The courts will not enforce a non-competition clause unless the employer can demonstrate that a non-solicitation clause is insufficient to protect the employer’s proprietary interest.
In Québec, an employer cannot rely on a non-competition covenant if the employer terminated the employment relationship without ‘serious reason’ (i.e. just cause). An employer can rely on an otherwise valid non-competition provision if the employee resigns or if the employee is terminated for ‘serious reason’.
Another method for deterring departing employees from competing is the concept of ‘golden handcuffs’. Golden Handcuffs are essentially a financial punishment if the former employee competes. In Ontario, payments which are conditional upon compliance with non-competition covenants are generally not viewed as being in restraint of trade and therefore do not have to satisfy the rigorous ‘reasonable’ analysis to which Canadian courts will subject traditional restrictive covenants. Québec courts have rejected the Ontario approach, which British Columbia courts have sought to carve out a middle ground by holding that a conditional benefit clause may be in restraint of trade if it effectively prevents the employee from working in his or her chosen field.
It is possible to restrict a worker from working for competitors through a non-compete clause, provided that the same is reasonable, based on the following:
(a) Protection of a legitimate business interest of the employer;
(b) Creation an undue burden on the employee;
(c) Injury to the public welfare;
(d) Reasonableness of the time, trade and territorial limitations; and
(e) Reasonableness from the standpoint of public policy.
Covenants not to compete are rarely enforced in Israel. In general, Israeli law prefers, prima facie, the employee’s freedom of occupation over the employer’s right that a former employee will not compete with it. Accordingly, an employee is prohibited from competing with a former employer only if such competition may harm a legitimate interest of the employer (such as the breach of a trade secret).
According to case law, non-compete covenants that are incurred by employees will not be enforced unless there are specific circumstances, such as the following: (1) the former employer owns a trade secret that is unlawfully used by the employee; (2) the former employer has invested unique and valuable resources in the employee’s training; (3) upon termination of the employee’s employment with the former employer, the employee received special consideration in return for his or her non-compete undertaking; and (4) when a balance between the extent of the employee’s good faith in taking the new position and the employee’s obligation of fidelity towards his or her former employer indicates that the enforcement of the employee’s non-compete covenant can be justified. In this respect the courts will also consider the position of the employee and the field in which the employer operates.
It is possible to restrict the employee from working for competitors through post-termination restriction covenants set out in the employment agreement or as a separate agreement. The post-termination restriction covenants are only valid if certain conditions are met. In principle, the post-termination restriction covenants should only be used when the employee’s position require such restriction, i.e. if there is an aggravated risk that the employee handles, and is able to reveal, trade secrets. In addition to the above, post-termination restrictions are only enforceable if they are reasonable.
The duration of a non-competition covenant should normally be nine months and shall not exceed 18 months. A non-competition covenant may be considered unfair if the employee does not receive compensation for the inconvenience the covenant imposes on the employee. According to an authoritative collective bargaining agreement and market practice, employees are entitled to the difference between their salary at the time of the expiry of their employment and the income they may earn from a new non-competing employment. This compensation is however capped at 60 per cent of the salary at the expiry of the employment.
A non-competition covenant is usually combined with a contractual penalty. The penalty is normally set between three and six monthly salaries for each breach.
Yes. However, such restrictions are presumed to be unlawful as being in restraint of trade so that Irish courts will only enforce such restrictions if satisfied that the employer has a legitimate interest to protect and the restriction goes no further than is reasonably necessary to protect that interest. This is assessed by reference to a number of factors including the duration of the restriction, its geographical scope and the nature of the business to which it is to apply.
It is possible to restrict a worker from working for competitors after the termination of employment for a max. period of two years if the agreement is concluded in writing, if this is necessary to safeguard a justified commercial interest of the employer and if it does not unfairly jeopardize the employee’s future career. However, the employer must compensate the employee with at least half of his former salary (including all bonuses). If the employee earns money during the period, the compensation is reduced if earnings and compensation together exceed 110% of the employee’s previous remuneration (125% if the employee had to move to another place due to the non-competition obligation). In practise, competition clauses are only seldom used due to the fact that the costs are usually higher than the employer’s interest in the employee not working for a competitor.
Non-compete covenants are enforceable under French law as long as they are justified by the company’s legitimate interests, limited in time and space, financially compensated, and do not make it impossible for the employee to find another employment. The covenant may allow the possibility to waive the non-compete covenant upon termination, hence avoiding payment of the compensation.
Yes. A non-competition restriction will only be justified if there is a “particularly weighty” reason related to the employer’s business and operations or the employee's position and duties. Such agreement is usually considered valid e.g. if the employee’s duties relate to product development, research or other similar activities and the employee possesses information and know-how which is not in the public domain. Non-competition obligations are generally included in employment contracts of the more senior management of the company.
A non-competition agreement may restrict the employee’s right to engage in competing activities for a maximum period of six months from the end of employment. If the employee receives fair compensation, the restricted period may be extended to a maximum of one year. Although not defined by law and always determined on a case-by-case basis, “fair compensation” has generally amounted to between 50 % and 100 % of the employee’s last monthly salary per month exceeding the non-compensated first six months.
The restrictions on the duration of the non-competition obligation (and the amount of contractual penalty) do not apply to employees who are considered to be engaged in the management of the company or an independent part of it or have an independent status comparable to such positions. A managing director is always excluded from the limitations to applicability of the above restrictions.
The legitimate reason for concluding a non-competition agreement must be present both when concluding the contract and at the time of enforcing it. The assessment of the particular weight of the reason is made on an overall basis, considering the nature of the business, the need to keep a business or trade secret confidential, special training provided to the employee by the employer as well as the employee’s status and duties.
A non-competition obligation may not cover duties that do not need to be subject to competitive restrictions from the employer’s point of view. Neither is it allowed to enter into a non-competition agreement only in order to restrict normal, healthy competition or to prevent the employee from exploiting his expertise. Thus, with reference to the freedom of trade, the employee’s possibilities to make a living through work corresponding to his expertise and the right to freely choose the place of work will affect the assessment of the validity of the restriction. In general, the more restricted the non-competition obligation is, the more likely it will be found to be reasonable.
A non-competition agreement that has been concluded without a particularly weighty reason is considered void as a whole. However, if the covenant is for a longer time than is permitted by law, the covenant is void only to the part exceeding the statutory maximum limit.
Breaches of non-competition obligation may be backed up with a contractual penalty. The contractual penalty is always subject to agreement, whereas general tort law is applied to the breach in the absence of an agreement on contractual penalty. The contractual penalty may not exceed the employee’s pay for the six months preceding termination.
Yes, the employer may restrict an employee from working for competitors after the termination of employment where the following requirements are satisfied:
A. Non-competition clauses or a non-competition agreement shall be concluded between the employer and employees who fall into the scope of senior managers, senior technicians, and the other employees who have the obligation to keep trade secrets of employers; and
B. the non-competition agreement shall not be contrary to any laws or regulations and shall include all the requisite contents like the scope, geographical range and time limit for non-competition (not exceeding two years), etc.; and
C. the non-competition behaviours are generally limited to work in any other employers producing or engaging in products of the same category, or to engage in business of the same category as this employer; and
D. the employer shall pay compensation legally for non-competition within the non-competition period by month.
If an employee violates stipulations of a valid non-competition, it must pay the employer a penalty for breaching the contract and continue to fulfil the non-competition obligation as agreed.
For employees earning more than 68.361,00 EUR per year (amount as from 1 January 2018, subject to indexation), a non-competition clause can be inserted into the employment contract. Its validity is subject to four conditions: (i) to concern similar activities, (ii) to be geographically limited to places with a real risk of competition (at a maximum the Belgian territory), (iii) to be limited to 12 months as from the end of the employment contract, (iv) to foresee the payment of an indemnity (at least the remuneration of half of the period under (iii)).
The employer can renounce the non-competition clause in a delay of 15 days as from the termination of the employment contract. Moreover, the clause remains without effect if the contract is terminated during the first six months of employment, or after this period by the employer without serious cause.
In case of breach of the clause by the employee, he will have to reimburse the indemnity perceived and pay an equivalent indemnity to the employer, without prejudice to the reparation of the real loss suffered.
There is also a derogatory non-competition clause, which is applicable to companies with (i) an international activity field or important economical, technical or financial interest in the international markets or (ii) having their own research service. For these companies, it is possible to provide that the clause will take effect during the first six months or in case of dismissal with notice period/indemnity of notice.
Non-compete clauses are in general permitted in Austrian law; an employment contract can include a term stating that after leaving the company, the employee cannot engage in any activity that represents competition for the previous employer. However, they are to a large extent subject to restrictions. The maximum term for such a clause is one year. Furthermore, the clause must be fair and reasonable considering the subject, time and geographical scope; and any non-compete clause that strongly restricts the employee’s career advancement is ineffective.
The extent to which a non-compete agreement is permissible by law varies by state. Generally, courts in states that enforce non-compete agreements hold that a covenant restricting the activities of an employee upon the termination of his or her employment with the employer will be enforced if it protects a legitimate business interest, is reasonably limited in scope, time and place, and is supported by consideration, and is reasonable.
The reasonableness of a restrictive employment covenant often is considered using the following six factors:
- Length of time the restriction operates;
- Geographical area covered;
- Scope of business covered;
- Fairness of and business need for the protection accorded to the employer;
- Extent of the restraint on the employee’s opportunity to pursue his occupation; and
- Extent of interference with the public’s interests.
Notably, in California and North Dakota non-compete agreements are invalid and unenforceable. Oklahoma law prohibits non-compete agreements, except that an employer may prohibit former employees from directly soliciting the sale of goods, services, or a combination of goods and services from “established customers”. Montana generally prohibits restrictive covenants except under certain narrow factual circumstances.
While an employer cannot unilaterally restrict the employee from working for a competitor after the termination of employment, the parties are principally free to agree on a post-contractual prohibition of competition.
In order to be valid, such non-competition agreement must fulfil the following requirements, however:
- The Employee must have been capable of acting when concluding the agreement;
- The agreement must observe the written form;
- The employment must have provided the employee insight into the employer's clientele or manufacturing and trade secrets and the use of such knowledge must potentially cause substantial harm to the employer; and
- The employer must (still) have a substantial interest in the prohibition of competition (this interest ceases in case of a termination of employment by the employer without the employee having given it any good cause or in case of a termination of employment by the employee for good cause attributable to the employer).
Furthermore, the prohibited competition must be appropriately limited with regard to place, time and scope so that it does not unfairly compromise the employee's future economic activity. Excessive prohibitions of competition may be reduced at a court’s discretion.
Finally, it is important to know that the employer may only insist on the rectification of a situation that breaches the non-competition agreement if this is expressly agreed in writing and only to the extent justified by the injury or threat to the employer's interests and the employee’s conduct.
Yes, it is possible. However, any restrictive covenant imposed by the employer that acts as a restraint of trade is unlawful and unenforceable unless the employer is able to show that:
(i) there is a legitimate interest to be protected by the restrictive covenant; and
(ii) the restrictive covenant is reasonable in the interests of the parties and the public.
The restrictive covenant should not be wider than necessary to protect the legitimate interest of the employer.
In determining its enforceability, the courts would consider all the circumstances of the case, including but not limited to the nature of the interests sought to be protected, period of restraint, the geographical restriction, as well as the seniority of the employee in question. The burden of proof is on the employer who is seeking to rely on such restrictive covenants to establish that the restrictive covenants are reasonable.
Restraint of trade covenants are not illegal under the illegal contracts provisions of the Contract and Commercial Law Act 2017, but are prima facie unenforceable at common law for public policy reasons.
The courts, however, have previously signalled that restraint of trade covenants are to be taken seriously by the parties that have expressly entered into them. Such covenants are amenable to enforcement by injunction to the extent that they are reasonable and otherwise lawful. Both the Employment Relations Authority and Employment Court have the power to issue interim and interlocutory injunctions to prevent breaches of restraint of trade covenants.
Restraint of trade covenants typically take two forms: ‘non-competition’ and ‘non-solicitation’.
A non-competition restraint will generally seek to prevent direct or indirect competition (to varying degrees) with the employer’s business for a specified period, and often in respect of a specified geographical area. Such restraint will only be enforced to the extent that it is necessary to protect an employer’s legitimate proprietary business interest, commonly a trade secret, client lists or financial information. A restraint will not be allowed to operate to protect an employer against mere competition.
A non-solicitation restraint will generally seek to prevent canvassing, soliciting or accepting business or work from customers/clients or suppliers of the employer with whom the ex-employee had dealings, or from soliciting or enticing an employee of the employer to cease employment.
Consideration is required for a restraint. Where the restraint is entered into at the same time as the employment relationship the remuneration is not necessary that any consideration over and above the remuneration for the underlying agreement be provided.
In determining whether a provision is enforceable, the courts will consider a number of factors including the nature of the proprietary interest that is sought to be protected, the reasonableness of duration and the geographic scope of the restraint, and considering the context of the employment agreement, and background and circumstances that existed when the clause was entered into.
Non-solicitation clauses are, generally, more likely to be upheld than non-competition clauses on the basis that that they are less restrictive. The enforceability of a non-competition or non-solicitation clause increases with the employee’s seniority, among with factors that increase the access which an employee has to the employer’s confidential information, clients or other proprietary interests.
The Mexican Constitution includes the general principle of “freedom of work”, whereby an individual cannot be prevented from working or performing a lawful activity, unless there is a judgment stating otherwise issued by a competent court.
Based on the above, the general accepted interpretation is that non-compete obligations and in general restrictive covenants are not enforceable in Mexico. This interpretation would not vary, even if the obligation is limited to a certain period, territory, product or to identified competitors.
In practice, some companies in Mexico have entered into non-compete agreements, following the termination of employment with the employee, agreeing on a compensation for not engaging with a competitor. Although not completely effective, the agreement may be an incentive for the former employee to comply with the same while receiving the agreed compensation. In the event of a violation of the agreement, the company will be entitled to stop paying the agreed compensation and try to recover the compensation already paid, which normally is difficult.
Under Italian Law (Section 2125 of the Italian Civil Code) the post-employment non-compete covenants may be deemed valid and enforceable only if they:
a) are specified in writing;
b) set forth a specific consideration in favour of the employee;
c) have a limited scope and geographical extent;
d) have a specific duration, that shall not exceed three years (five years for “Dirigenti”).
In order to assess the validity of a non-competition covenant, it is necessary to ascertain whether the combination of its terms, extents and conditions prevents or not the employee from finding another employment and/or violates the employee’s right to preserve his/her professionalism.
Case law indicates that the following conditions need to be taken into account when making such evaluation:
(1) the contents of the covenant (particularly with regard to the scope and the geographical extent, to be assessed jointly); and
(2) the skill and experience of the employee.
The assessment must also take into account the amount of the consideration paid to the employee for his/her non-competition obligations.
The law does not provides for a specific amount of the consideration and the case law require that the compensation is “congruous” having regards to restrictions imposed to the employee’s professionalism and his/her right to work. Therefore the compensation has to be evaluated on a case by case basis, in the light of the other terms agreed (i.e. duration, scope, geographical extent and the skill and experience of the employee).
A non-competition clause is the clause by which an employee agrees not to carry out, as a self-employed person, similar activities to those carried out by his/her former employer after the termination of the employment contract, so as not to interfere with such former employer’s interests.
The non-competition clause is therefore only applicable in the framework of an employment relationship between an employee and an employer, and is triggered by the termination of the employment. The scope of application of such legal provision is moreover strictly limited, as it refers to any activity performed by a former employee as a self-employed person only.
Such non-competition clause will therefore not cover situations where former employees carry out an activity as an employee under a contract of employment with a competitor.
Non-competition clauses are enforceable to the extent that they comply with the following legal requirements:
Such clause must be stated in writing in the employment contract or in any subsequent agreement. Failing to be written, the non-competition clause is null and void. Moreover, it is deemed null and void, if, at the time of signature of the contract of employment stating the non-competition covenant, the employee is under 18, or if the employee’s annual remuneration when he/she terminates the employment relationship does not exceed EUR 54.164,35 (at current index 794,54). In addition, the non-competition covenant is only enforceable if the restriction:
- Applies to a specific professional sector and to similar activities to those carried out by the former employer;
- Does not exceed 12 months starting on the date of the termination of the employment contract;
- Is limited to a geographical area (which may not extend beyond the territory of the Grand-Duchy of Luxembourg) where the employee would be in a position to effectively compete with his or her former employer, taking into consideration the nature of the concerned activities and their range.
The non-competition covenant is not enforceable if the employer has abusively terminated the contract of employment with immediate effect or has terminated the contract of employment in breach of the legal requirements governing the notice period.
Yes, it is possible. To this effect, please take into consideration that non-competition agreements to be in force after the employment termination -which may not be higher than 2 years for technical personnel and 6 months for other employees- shall only be valid if the following requirements are met:
(i) that the employer has a current industrial or commercial interest in such; and (ii) that the employee is paid an adequate economic compensation. According to the Spanish Courts rulings, an adequate economic compensation should be equivalent to between 40% and 60% of the fixed gross annual salary per each year the non-competition obligation is in force.
Yes, it is possible to a certain extent. In principle, workers have a contractual duty not to compete with their employer while employed, but their constitutional right to freedom of occupation needs to be respected after the termination of employment. Therefore, provisions in company rules or agreements that restrict employees from working for competitors after the termination of employment are only enforced by a court if they are reasonable in duration, geographic area, and scope of business or activity.
As per Section 27 of the Indian Contract Act 1872 (“Contract Act”), agreements in restraint of trade are void. The courts in India have generally held that while non-compete clauses may be valid during subsistence of the employment contract, they cannot operate post termination of the contract and shall be void. A restrictive covenant extending beyond the term of the contract is void and not enforceable. The doctrine of restraint of trade does not apply during the continuance of the contract of employment and it applies only when the contract comes to end.