An employee non-compete clause is the effective legal instrument for an employer to protect its business secrets or otherwise prevent information leaks.
Non-compete clause under the Labour Code
Employee non-compete clauses are regulated by Sections 310 and 311 of the Labour Code (the “Labour Code“)1. It is no surprise that non-compete clauses have recently gained in popularity, as they are an effective legal instrument to protect business secrets and prevent information leaks.
Under the Labour Code, a non-compete clause is basically a written agreement between the employer and the employee under which the employee is obliged to refrain from engaging in activities in the same line of business as the employer’s, or to refrain from activities that compete against the employer for a period of at least one year from the termination of the employment agreement. In return, the employer undertakes to provide the employee proportionate compensation at least in the amount of one half of the employee’s average monthly salary. Non-compete clauses cannot be concluded with anyone, however – only with employees – which is reasonable considering the nature of the information, knowledge, working knowledge and technological processes that they have gained or will gain in the course of their employment, the use of which in a competing activity, could seriously hamper the employer’s business. Therefore it will affect particularly employees in decision-making positions. Given that the non-compete clause is not among the mandatory requirements of the employment agreement, concluding one is optional and employees cannot be forced to sign it.
The legal regulation of non-compete clauses contained in the Labour Code has been relatively stable for several years. With the adoption of new civil law, in particular the adoption of the new Civil Code (the “Civil Code“)2, a new general legal framework for non-compete clauses, regardless of the nature of the contractual relationship, has been established. The question therefore arises whether such an arrangement is generally applicable to employment relations and thus an employee non-compete clause.
Does the Civil Code need to be applied?
The relationship between the Civil Code (as a general private law) and the Labour Code, even after the recodification of private law, is characterised by the principle of subsidiarity. Section 2401 of the Civil Code expressly refers to special legislation, when it declares that the employment relationship and the rights and obligations of employees and employers in an employment relationship are governed by another law – the Labour Code. In other words, this means that the Civil Code will apply to employment relations only if a particular issue is not explicitly regulated. The principle of subsidiarity is also incorporated in Section 4 of the Labour Code, which states that employment relations are governed by the Labour Code, but that the Civil Code will be applied if it cannot be used.
The general rules of non-compete clauses within the Civil Code are systematically included among the provisions relating to abuse and restriction of competition. These provisions will therefore apply, unless any special private law does not apply to the respective legal issue. According to the Civil Code, every non-compete clause must contain the following elements: (i) the territory covered by the prohibition of competitive activity; (ii) the scope of activities covered by the prohibition of competitive activity; and (iii) the range of third parties to which the prohibition of competitive activity applies3. In the absence of any of these requirements, the non-compete clause would be disregarded.
The relevant case law expressly declaring (or rebutting) that the provisions of Section 2975 of the Civil Code must be applied to an employee’s non-compete clause does not yet exist. Nevertheless, as the Labour Code does not address these issues, the only conclusion that can be reached is that compliance with these essential elements is a required condition for the valid conclusion of a non-compete clause, even in relations between employers and employees.
An employee’s non-compete clause must therefore specify, among other things, the essential elements set out in Section 2975 of the Civil Code. Otherwise, it would be considered a putative clause, i.e. it would not give rise to any legal effects.
The special legal regulation on employee non-compete clauses contained in the Labour Code also has to be viewed through the lens of a general regulation of non-compete clauses resulting from the Civil Code. Therefore, when negotiating an employee non-compete clause, not only mandatory provisions of the Labour Code (and related case law) must be taken into account, but also the relevant provisions of the Civil Code. Otherwise the non-compete clause would not be validly concluded and the protection of the employer cannot be guaranteed.
When negotiating an employee non-compete clause, not only mandatory provisions of the Labour Code (and related case law) must be taken into account, but also the relevant provisions of the Civil Code. Otherwise the non-compete clause would not be validly concluded and the protection of the employer cannot be guaranteed.