Non – Compete Agreement: Some issues enterprises should take into consideration

During working time, employees, especially high–seniority personnel may access confidential information owned by enterprises such as business secret, know-how of manufacturing technology, business strategy, customer data, etc. For such confidential information, the enterprises’ competitors are always enticing these employees to work for them and it is not difficult to imagine damages that the enterprises must encounter if such confidential information is disclosed.

To stay away from the risks, the employees at the stage of recruitment are often requested to enter into Non-Compete Agreement (or referred to as Agreement) committing not to disclose the confidential information during their working time for the enterprises and not to work directly or indirectly for the competitors after resigning.

In this article, LuatViet is going to analyze the legal validity of the Non – Compete Agreement and then provide with some recommendations for the enterprises when entering into the Non – Compete Agreement with their employees.

Legal validity of the Non – Compete Agreement

There exist various perspectives regarding to the legal validity of the Non – Compete Agreement, in which, some say that the Non – Compete Agreement including terms not allowing the employees to work for the competitors after termination of employment contract is considered as infringement of rights to freely choose job or workplace of the employees in the light of the Constitution and the Labor Code. Therefore, this Agreement shall be ineffective and invalid due to breach of legislative provisions.

In the status quo, however, when value of the confidential information increasingly contributes to the success or failure of the enterprises, there are more practical views that this Agreement is effective and valid. Following the cases practically settled down by the dispute settlement authorities, if the enterprises entered into the Non-Compete Agreement with their employees to protect their confidential information provided on the basis of principle of voluntariness, goodwill, honesty of the Civil Code, the Agreement would be legal and valid. The employees, before signing the employment contract, shall be aware of, scrutinize the contents of such Agreement and voluntarily enter into it as a condition for employment contracts later on. When the Non-Compete Agreement is signed based on voluntariness and balance of interest of both the enterprises and their employees, it will make valid and be a legal background for execution.

Recommendations

Firstly, Non – Compete Agreement should be considered as an independent agreement separate from the employment contract.

In practice, the enterprises always merge the contents of non – compete agreement into specific terms of the employment contract, however, this entails the legal risk for the enterprises when such employment contract is terminated, the substance of non – compete agreement will be terminated accordingly and not be able to bind obligations of the employees as consequence.

For sure, the enterprises are recommended to draft the Non – Compete Agreement separate from the employment contract. At that time, such Non-Compete Agreement will be considered as a conditional contract under Article 402.6 of the Civil Code and independent of the employment contract. Consequently, when the employees resign and the employment contract terminates, this Non-Compete Agreement will be still valid and can bind obligations of the employees.

Secondly, Non – Compete Agreement should define the enterprises’ competitors.

It’s not easy to define exactly who can be the enterprises’ competitors and up to now, the laws on competition have not clearly defined such competitors. In case, the enterprises apply listing method to identify their competitors, it is difficult to ensure the adequacy and there may happen deficiency, especially it is unforeseeable for new companies who could become the enterprises’ competitors in the future. Therefore, it is necessary to have clear criteria to specify the enterprises’ competitors. And most reasonably, the enterprises can take advantage of and use their business lines as basis to determine the competitors.

Thirdly, specific compensations and penalties for the employees’ breach should be included in Non-Compete Agreement

Legally, if the employees violate the Non-Compete Agreement causing damages to the enterprises, compensation shall be made by the employees, however, the claim on compensation for damage shall encounter numerous obstacles, especially when the employees are no longer working for the enterprises. Therefore, in order to avoid such risk, Article 360 of the Civil Code allows the enterprises to actively negotiate and include liquidated damages in the Non-Compete Agreement as a basis for claiming compensation from the employees. In addition, the enterprises may stipulate additional penalties if the employees breach the Non-Compete Agreement in order to threat, warn and prevent the employees from their intentions of violating the commitments under Article 418.3 of the Civil Code.

Moreover, the enterprises are also recommended to include in the contents of the Non-Compete Agreement the terms on the material benefits applied to the employees to enhance a legal standing of a mutual benefit transaction.

Hopefully, the contents offered in this article could help the enterprises protect themselves in recruitment and employment process.

If you are interested in the content of this newsletter or you need professional legal advice, please feel free to contact with LuatViet as information follows:

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Tel: +84 (28) 3824 8440 | Fax: +84 (28) 3824 8441
Email: canh.tran@luatviet.com

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Email: linh.tran@hn.luatviet.com

Disclaimer: This article provides an overview of legal issue which you are interested in, is not our legal opinion. Due to this, no lawyer – client relationship is established and no obligation is formulated between us and you. You are recommended to consult lawyer for legal advice when any legal issue arises from your business investment before implementation.