Turkey: Non-Competition In Turkish Labor Law

NON-COMPETITION IN TURKISH LABOR LAW

The employee owes a duty of loyalty to the employer throughout the duration of the employment relationship. The duty of loyalty is, in general, the obligation of the employee to protect the interests of the employer. In the doctrine, the duty of loyalty is defined as "protecting employer's interests and interests of the workplace and avoiding any behavior that may commercially or professionally harm the employer". 

Non-competition stands out as an obligation falling under the scope of the employee's duty of loyalty across the existence of the service relationship. The duty of loyalty and non-competition is worded in paragraph 3 of Article 396 of the Code of Obligations as "the employee may not, as long as the service relationship continues, provide services to a third party for a consideration against the duty of loyalty, and may not, in particular, engage in competition with his own employer".

Termination of the employment relationship brings forth the cessation of the obligation of loyalty along with the other contractual obligations of the parties. However, employee's use of business secrets, information about the customer circles and certain business information learned by employee in favor of a rival employer will harm the employer. That being the case, a non-compete agreement may be concluded between the employee and the employer to avert the preceding use. The employer and employee determine in that agreement that employee will not be employed at a competing business or start a competing business after the termination of the employment contract between them.

Non-competition is hence a significant legal arrangement that aims to protect the balance between the parties in business relations and to ensure fair trade. Non-competition is an essential tool to guarantee fair competition in business relations and to protect the legitimate interests of the employer. This allows employees to develop their careers and seek new opportunities, while allowing employers to protect their trade secrets and customer relationships. Having a clear, unambiguous and balanced non-compete agreement in place between the parties will help prevent and resolve potential disputes. This article will examine the principles of non-competition under Turkish Labor Law.

A. NON-COMPETE AGREEMENT

Doctrine defines non-compete agreement as a contract that prohibits the employee after the termination of the employment contract from engaging in behavior that constitutes competition with the employer in a specific line of business, in a specific geographical area and within a set period of time, as the employee has had access to knowledge of employer's customers or business secrets during the employment relationship. 

Non-compete clause is usually prescribed as a special clause in employment contracts, but it is also possible to conclude a separate agreement between the employee and the employer regarding non-competition. 

While a non-compete agreement is crucial for the protection of the employer's interests, it is a high probability that it could violate the employee's constitutionally-secured freedom of work and contract by restricting the employee's activity in a particular field. In this context, non-compete agreements should be able to provide a balance between both interests. The restrictions imposed by such agreements must be reasonable and proportionate. In this context, the judge may intervene ex officio  if a non-compete clause is exorbitant and may limit it by canvassing the nature of the case in hand and whether a payment is made to the employee in respect of performance.

The employee's signature is sufficient for a non-compete agreement to be valid, as the validity of the agreement is not contingent on a counter-performance in Turkish Law, as opposed to foreign legal systems. However, paragraph 2 of Article 445 of the Turkish Code of Obligations No. 6098 has paved the way for this.According to that article "... the judge may limit exorbitant non-compete clause in regard to its scope or duration by freely assessing all the circumstances and conditions and in lightof the counter-performance the employer may have undertaken in an equitable manner”. In that vein, if the non-competition agreement is made for a valuable consideration, the employer must also sign the agreement.

If the workplace has been transferred during the continuation of the employment contract in accordance with Article 6 of the Labor Law, the non-compete clause will survive as it is, provided that the transferee employer carries on a commercial activity that utilizes business secrets and customer circles protected by the non-compete clause . However, if the transferee employer does not run and utilize the same field of business, customer circle or existing business secrets and adopts new technical and commercial features, the non-competition agreement must terminate.

A non-competition agreement is a legal arrangement used between parties in business relationships. This agreement usually includes an non-compete undertaking that will apply in a particular geographical area, sector or for a certain customer group, for a certain period of time. The key attributes of the agreement are that it is for a fixed duration and scope, it is based on valid reasons, its content and conclusion is agreed on by free will of the parties thereto, it incorporates reasonable and fair terms, it lists the sanctions applicable in case of breach, it reflects the commitment of the parties, and that the agreement should pass the test of reasonableness as an eligibility requirement. These attributes mark the validity and enforceability of the agreement. 

B. VALIDITY REQUIREMENTS OF A NON-COMPETITION AGREEMENT

According to paragraph 2 of Article 444 of the Turkish Code of Obligations, validity of a contract is subject to satisfaction of certain conditions. A contract that does not satisfy these conditions will be void and null. The conditions that will warrant the validity of the non-compete agreement are as follows:

1. The employee's capacity to act: The first condition is having the capacity to act by employee. Whereas the Code of Obligations No. 818 refers to the requirement for the employee to be of legal age at the time the agreement is concluded, the Turkish Code of Obligations No. 6098 stipulates the existence of capacity to act of the employee as a condition. In this context, the employee must have the capacity of discernment, be an adult and not be restricted. The condition of having the capacity to act should be evaluated with regard to the moment the non-compete agreement is concluded.

2. The agreement must be in writing: The second condition is that the agreement must be in writing according to paragraph 1 of Article 444 of the Turkish Code of Obligations. This requirement is designed to ensure that the employee is informed about the scope of the prohibition.

3. The existence of a legitimate interest of the employer worthy of protection: The third condition is the existence of a legitimate interest of the employer worthy of protection. Requisites for the fulfilment of this condition are that the employee has opportunity to obtain information about the employer's production secrets, business and customer environment and that there must be a possibility of causing substantial damage to the employer as a result.

3.1) The possibility of obtaining information about production secrets, the employer's business or the customer environment:Not all information can be used for competitive purposes and nor may it be said that all information would cause substantial damage to the employer. It is not imperative that the employee has actually learned the information; it is sufficient for the employee to be in a position to learn it under objective conditions. Production secrets and work-related information that will be subject to the non-compete agreement must have the nature of confidential information and secrets, and thus, the position of the employee in the workplace matters; because this agreement can only be made mention of if the employee is in any positions enabling them to obtain competitive information. To give an example, the Court of Cassation ruled that a nurse cannot be privy to business secrets but concluded that a sales representative is privy to business secrets.

Production secrets are defined as facts related to the enterprise, which are known only to a certain group of people and cannot be easily learned by others, and in which the employer has a justified interest in keeping them confidential. Production technology, special forms of production, production process, content of a special product, organizational structure of the enterprise that is not publicly known, computer programs, price levels, market plans, consumer areas, raw material sources, credit facilities, investment, balance sheet calculation plans and techniques, inventory and accounting records of the enterprise, employee inventions owned by the employer, personnel planning can be given as examples in the light of the case in hand.

3.2) The possibility of substantial damage to the employer:  Having such information is necessary and yet, is not sufficient alone for the fulfilment of third condition. For the validity of the non-compete agreement, such information must be of a nature that may cause substantial damage to the employer as a result of its use by the employee. Such damage must arise from the employee's use of such information to the detriment of the employer, and must not arise from the employee's personal ability or the use of his/her professional experience. 'Substantial' damage may be considered to exist if it causes a serious decline in the earnings or orders of the workplace, significantly limits the employer's business opportunities, creates a deterioration in its competitive power in the relevant market, thereby making the damage incapable of being easily compensated for.

4. It should not harm the employee: According to paragraph 1, Article 445 of the Turkish Code of Obligations, '' The non-compete clause may not contain inappropriate limitations in terms of place, time and type of work in such a way as to unfairly jeopardize the economic future of the employee, and its duration may not exceed two years, except for special circumstances and conditions.'' Thus, it is stated that the non-compete clause must be limited in terms of duration, place and subject matter in order to keep employee's economic future from being jeopardized in a disproportionate and unfair manner. The purpose of the foregoing paragraph is that employee's ability to earn or maintain his/her living is not unreasonably restricted by non-compete clause. With that, the non-compete clause will be null and void in the presence of an agreement that jeopardizes the economic future of the employee, and will not create any concomitant liability for the employee.

C. LIMITATION OF THE NON-COMPETE AGREEMENT

1. Limitation of non-compete agreement as to duration: Article 445/1 of TCO No. 6098 states that the non-competition agreement may be executed for a maximum period of 2 years. The Court of Cassation also assesses for each case in hand whether the duration is equitable. The reasonableness of the duration should be evaluated in light of geographical area and the type of work to which the scope of the prohibition applies, as well as criteria such as the employee's position in the workplace, his/her expertise, and his/her comprehensive knowledge of the employer's technical business secrets related to production. The duration of the non-compete clause begins on the date of termination of the employment contract. The burden of proof to demonstrate the existence of 'special circumstances and conditions' calling for a non-compete period over two years is on the employer.

2. Limitation of non-compete agreement as to location: Likewise, paragraph 1 of Article 445 of the Turkish Code of Obligations alludes to the further necessity of placing a limitation as to location. The location may be a geographical region or city, as well as the area of influence of the employer's activity. However, it should be noted here that this location should cover the area in whose protection the employer has an interest. In this context, the prohibition of competition may not outreach the boundaries of the area where employer is actually doing business. Provisions that aim to expand employer's market in order to impose prohibitions cannot be included in the agreement. According to the Court of Cassation, an arrangement in the form of an acceptance and undertaking not to work in any banks is invalid as it does not impose restrictions as to location and work and also unfairly jeopardizes employee's economic future.

On the matter of whether the geographical area should cover the whole of Turkey, one doctrinal opinion is that if the employee's field of business covers the whole of Turkey and the employer has legitimate interests worthy of protection in imposing the prohibition, it may be imposed, but in this case, the prohibition should not unfairly constrain employee's economic future in terms of duration and type of work. A second opinion maintains that prohibition extending beyond the country may be determined. Conversely, the Court of Cassation does not approbate non-compete agreements covering the whole of Turkey, and upholds limiting them to provincial borders or a certain region. However, the Court of Cassation states that it may be possible to determine the non-compete clause with the borders of the country for foreign nationals who spend most of their working life outside Turkey. 

3. Limitation of non-competition in terms of subject matter: Pursuant to TCO 445/1, limitation in terms of subject matter is a condition for the validity of the agreement. In this context, the type of activity that the employee cannot perform must be clearly indicated in the contract. The non-competition cannot cover the entire field of activity of the employer; it must be directly related to the work that the employee performs in the enterprise, and must be limited to his/her actual duties and to the subjects from which he/she learns the confidential information that constitutes the basis of the prohibition. The field of activity that may be constrained by the prohibition of competition will be determined according to the termination date of the employment contract; accordingly, the employer who changes his field of activity during the continuation of the employment relationship will not be able to include the activities they ceased doing and the new activities they embarked on after the termination of the employment contract. 

D. SANCTIONS FOR BREACH OF NON-COMPETE AGREEMENT

1. Compensation for damages:  The party acting contrary to the non-compete clause may generally be imposed a compensatory liability for damages arising from breach of the employment contract. According to paragraph 1 of Article 446 of the Turkish Code of Obligations, "The employee who violates the non-compete clause is obliged to compensate all damages incurred by the employer as a result thereof. The  legal basis of compensation is the failure to fulfill the contractual obligation and will be determined in accordance with Articles 112 et seq. of the Turkish Code of Obligations. This may vary depending on the extent and duration of the breach and the potential damages. The competent court in such disputes is the Labor Courts. While it is obligatory for the employee to prove the damage to receive compensation, the employee must prove that he/she is not at fault in order to get rid of obligation to pay compensation. The damage to be compensated by the employee in this context is positive damage, which is the difference between the current state of the employer's assets and the state they would have been in had the prohibition not been violated. It appears as actual damage or loss of earnings.

2. Penalty clause:  According to paragraph 2 of Article 446 of the Turkish Code of Obligations, "If the breach of the prohibition is subject to a penalty clause and there is no provision to the contrary in the contract, the employee may be released from the non-compete obligation by paying the prescribed amount; however, the employee must compensate for the damage exceeding this amount.  In the event of a breach of the non-compete clause, it is more favorable for the employer to invoke penalty clause instead of claiming damages, as there is no need to prove damages in the latter case. However, the Court of Cassation has accepted the authority of the judge to reduce the penalty in line with Article 182 of the TCO in cases where the contractual penalty is excessively high. In cases where a penalty clause is invoked, if the employer has a loss exceeding the penalty, the employee must pay this excess after it is proved by employer.

3. Discontinuance of the Prohibited Behavior:  In case of breach of the prohibition, the employer is also entitled, as an additional remedy, to claim discontinuation of the prohibited behavior. Exercise of this right require fulfilment of two conditions: first, the employer must have expressly reserved this right in writing in the contract; second, the importance of its own interests that are violated or threatened and the employee's behavior must justify the exercise of this right. 

E. CESSATION OF NON-COMPETITION

A non-compete is usually imposed for a certain period of time or subject to certain conditions. However, the non-compete may cease under certain circumstances. The circumstances that may lead to the cessation of the non-competition are as follows:

1. Expiration of the Contract: A non-compete is usually subject to a certain period of time. When this period specified in the employment contract expires, the non-compete automatically ends. However, the non-compete automatically ceases upon the end of the period of time, which is contractually limited to a maximum of 2 years.

2. Lack of benefit of the employer:  According to Article 447/1 of the TCO, "The prohibition of competition shall cease if it is determined that the employer has no actual benefit in maintaining this prohibition.'' 

3. Termination of the contract by the employee or the employer:  According to paragraph 2 of Article 447 of the Turkish Code of Obligations, "If the contract is terminated by the employer without cause or is terminated by the employee for a reason attributable to the employer, the non-competition shall cease.

3.1) Termination of the employment contract by the employer without cause:  Since termination by the employer without cause is an essential requirement sought for the cessation of the non-compete, it is stated that the non-compete will continue in cases where the employer terminates the employment contract with reference to Article 25 of the Labor Law or Article 435 of the Turkish Code of Obligations. In the doctrine, on the other hand, it is argued that the non-compete clause will cease in cases where the employer terminates the employment on account of the employee's behavior or incompetence. 

3.2) Termination of the employment contract by the employee for a reason attributable to the employer:  If employeeterminates the employment contract as per Article 24 of the Labor Law or Article 435 of the Turkish Code of Obligations, or for any reasons attributable to the employer that renders the termination reasonable, the employee's non-compete obligation shall cease to exist. 

CONCLUSION

Non-competition is an essential tool for maintaining balance in employee-employer relations. Employees have the freedom to compete, providing that they comply with time and geographical limitations set out in their employment contracts. This allows employees to develop their careers and seek new opportunities, while allowing employers to protect their trade secrets and customer relationships. To put it briefly, the prohibition of competition in Turkish labor law aims to protect trade secrets and customer relations by maintaining the balance between employers and employees. In this regard, it is important to have employment contracts that contain clear, fair and balanced provisions between the parties. Employers should be vigilant in this regard to ensure that employees obey the non-competition clause and take the necessary steps in the event of a breach. Eventually, careful review of employment contracts or non-compete agreements by the parties contributes to the prevention and effective resolution of legal issues.

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.