Labor Law defines non-competition clause as an agreement between employee and employer intended to restrict employee's performance of actions on his/her own account or through third parties, in view of strategic and confidential information acquired throughout employment period which represent an unequal competition, such as for example, solicitation of clients after employment contract termination.
This agreement is normally included in the employment contract, although it may be agreed upon even on termination of the employment relationship.
As there is no specific legislation on the subject, the application and lawfulness of this clause in Labor Law, in the opinion of jurists, is subject to controversy.
This controversial issue derives from the dilemma between the protection of the worker's right to free access to the job market and the company's right to intellectual property, as both are protected by the Federal Constitution.
Most of the decisions by the Labor Court acknowledge the validity of the non-competition clause so long as the restriction meets some concurrent requisites, namely: time limitation; material limitation; geographic limitation; and, especially, the grant of a financial consideration to employee.
The time limitation corresponds to the setting of a reasonable term of effectiveness of the clause, so as not to exclude employee from the job market.
The material limitation is defined as a restriction related only to the field of activity performed by employee, thus avoiding a conflict with the Federal Constitution, which forbids any measure that prevents employee from exercising the right to a job. That is, an employee in the manufacturing business cannot be prevented from working in the trade business under the non-competition clause.
As to geographic restriction, that is defined as the limits of the territory where the clause may be in force, given that it is not fair to restrict employee from working in a place where the former employer does not carry out any economic activity, both at domestic and international levels.
The major issue in relation to this requisite is to forestall the e-mails with confidential information, to the extent that technology makes information flow from one company to another company anywhere in the world in a matter of seconds. Hence, this restriction calls for a careful analysis as regards any concrete case.
Lastly, in the opinion of our Courts the validity of a non-competition clause calls for the definition of a compensatory and high indemnification in view of the restriction faced by employee.
The indemnification does not need to be bound to the salaries the employee would not earn during the non-competition period, but it is important to have a balance between the obligations, so that the indemnification is neither greater nor lesser than the limitation faced by employee.
Once the non-competition clause is agreed upon and the requisites mentioned above are met, an analysis of the consequences to both employee and employer of the failure to comply with the clause is called for.
In the event of employee's failure to comply with clause, employer may seek reimbursement of the amounts paid on account of compensation, added with an indemnification for the losses and damage it might have suffered or may suffer. Employer may further request that employee comply again with the terms of the non-competition clause, on pain of daily fine for failure to comply with the agreement.
The employer, in turn, also has the duty to comply with the provisions in the non-competition agreement, and pay the agreed indemnification. In case of failure to comply with its duties in the agreement, the former employee may claim termination of the clause and release from the restrictions under the agreement, with the possibility to even work for a competitor or seek payment of the indemnification provided in the clause, added with an indemnification for losses and damage suffered during the period not worked.
Lastly, we are noticing that the inclusion of non-competition clause in employment contracts is growing in Brazil, as a result of the strong competition in the market and the easiness to transmit information through the media. Under this context, the clause seems an excellent tool for employer to protect its property rights against unfair competition.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.