Turkey: Non-Competition Obligation In Employment Agreements

Nowadays, intense commercial competitiveness between companies leads employers to attempt to attract qualified and key employees from other competitors or non-competitors by offering better working conditions. To combat this, it is common for employers seeking to prevent such solicitations by having employment agreements with their qualified and key employees that include non-competition clauses.

This review looks at the validity of non-competition obligation within the scope of the constitutional¹ freedom of labour and contract, in accordance with the current legislation and case law of the Court of Cassation.

"Non-Competition" obligation of employees under Turkish Law

Under Turkish Employment Law, non-competition obligations can be examined in two stages: during the term of the employment agreement and following its termination.

The non-competition obligation during the term of the employment agreement arises from the employee's duty of loyalty, which is inherent to the employer/employee relationship. Therefore, this non-competition obligation does not need to be explicitly set out in the employment agreement. This obligation will cease to exist once the employment agreement is terminated, regardless of the cause of termination. The employer may also terminate the employment agreement if the employee breaches this obligation.

That being said, if the employer wishes the non-competition clause to survive the end of the employment agreement, the parties must agree on this in writing² – either by negotiating a separate non-competition agreement or by including a non-competition clause in the employment agreement. Since the non-competition obligation prohibiting the employee from competing with the employer after the termination of the employment agreement has an impact on the employee's economic future, it is subject to certain limitations by law.

Although Labour Law No 4857 (the "Labour Law") does not contain any regulation regarding non-competition obligations after the termination of the employment agreement, this is included in Article 444 titled "Non-Competition" of the TCO.

According to this article, employees may undertake not to compete with their employer after the termination of the employment agreement. In particular, employees may undertake, in writing, to refrain from opening a competitive business on their own account, working in another competitive business or otherwise entering into a relationship of interest with a competing business, limited in terms of a certain period of time, geography and field of activity.

A non-competition obligation primarily includes a prohibition on working for or becoming a partner in a competitive business, or establishing or benefiting from a competitive company. A company that provides the same products or services to the same clients is considered as competitive. However, businesses that produce different goods or services cannot be viewed as competitors.

Pursuant to Article 444, the employee's undertaking regarding non-competition is deemed valid if the employment relationship provides the employee with the opportunity to obtain information about the customer environment or secrets about production or the employer's business, where the use of this information could cause significant damage to the employer. This point has also been emphasised in the decisions of the Court of Cassation. ³

On the other hand, regarding the "termination" of a non-competition obligation, Article 447/2 of the TCO states that the non-competition clause does not endure beyond termination in the event that there is no real benefit for the employer to maintain the non-competition clause, or the employment contract between the parties is terminated by the employee with just cause for reasons attributable to the employer.

In order to speak of a valid non-competition agreement, all of the aforementioned conditions must be present together, as they arise from imperative provisions of law. This means that the agreement will be invalid if any of them are not met. The burden of proof that these conditions have been met falls on the employer.

Validity of a non-competition obligation according to the judicial practice of the Court of Cassation

The Court of Cassation also handles non-competition actions by prioritising the freedom of labour. In its consistent case law, the Court of Cassation has taken a balanced position between the freedom to labour, as defined in the Constitution, the limitations set forth in Article 444 of the TCO and the interests of the employer that are worth protecting.

In the case law of the Court of Cassation, it is emphasised that if one or more employees working within a company resign and then start a job in a competitive company operating in the same sector, this does not constitute a violation of the non-competition obligation or unfair competition in itself, and that accepting the contrary view would mean a violation of the freedom of labour as guaranteed by Article 48 of the Turkish Constitution. ⁴

In the case law of the Court of Cassation, the following conditions are required for a non-competition obligation to be valid:

The Court of Cassation has also emphasised that a non-competition clause can only be applied to employees who have access to proprietary information that may be considered as "trade secrets" due to their duties and position within the company they work for. Therefore, in order for a non-competition obligation to be valid, in addition to the other validity conditions mentioned above, it is essential that the employer has "an interest worth protecting" against the former employee.

An employee who does not have access to any proprietary information or trade secret data due to their duties and position, cannot be considered in breach of a non-competition obligation if they start to work for a competitor in the same sector.

On the other hand, the Court of Cassation has considered it an act of unfair competition when a sales manager in a company, who is therefore in a position to know the performance of the sales consultants within the company, resigns along with other employees in the team and soon after starts working in their own workplace⁵.

Penalty for a breach of a non-competition obligation

Article 446 of the TCO sets out that employees who breach their valid and legally regulated non-competition obligations must compensate the employer for all losses incurred as a result.

On the other hand, since Article 446 of the TCO imposes the burden of proof on the employer, the most common sanction in practice is for the employer to include a penalty amount in the employment agreement that is not conditional on any damages pursuant to Article 180 of the TCO. Accordingly, employers aim to provide more of a deterrent for employees by including a clause in the employment agreement regarding the non-competition obligation that the Employee will be obliged to pay (a certain amount of money) to the Employer if they violate the non-competition obligation.

Recently, agreements or actions taken by employers to prevent labour transfers among competitors have come under more intense examination and investigation by the Competition Authority. However, there is nothing to stop employers including non-competition clauses in their employment agreements with employees who are in possession of trade secrets.

Footnotes

^{1. Article 48 of the Constitution of the Republic of Turkey entitled "Freedom of Labour and Contract" stipulates that everyone has the freedom to work in the field of their choice and to establish private enterprises.}

^{2. The format of non-competition clauses are governed by the terms of Article 13 et seq. of the Turkish Code of Obligations No 6098 (the "TCO"). Pursuant to Article 14 of the TCO, agreements that are in writing must include the debtors' signatures. The employee's signature alone is sufficient for the non-competition agreement to be valid, since the non-competition obligation is only imposed on the employee. If the parties conclude an agreement setting out a counter-performance for the employer, then the employer must sign it as well. According to the doctrine, the absence of the employer's signature should not necessarily render a non-competition agreement with a counter-performance invalid. For instance, if an elevated amount is agreed upon as a counter-performance of the employer, the agreement should not be deemed invalid just because the employer's signature is missing.}

^{3. Court of Cassation General Assembly's decision dated 22 September 2008 and numbered E.2008/9-517; 2008/566}

^{4. Decision of the 11th Civil Chamber of the Court of Cassation dated 22 May 2023 and numbered 2021/8960 E. and 2023/3137 K.}

^{5. Decision of the 11th Civil Chamber of the Court of Cassation dated 23 May 2018 and numbered 2016/12294 E. and 2018/3888 K.}

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.