Non-compete Clause: What Employees And Employers Need To Know?
Updated July 14, 2023
Businesses put significant investments in their new recruits, by training and nurturing them, with the ultimate goal to grow in the market. The employees are developed using resources and materials, which are expensive and designed as per client requirements and work culture. These resources could contain trade secrets, customer data, sensitive information, etc.
What is Non-compete Clause and when is it used?
A non-compete clause is a binding clause that prohibits any resigning employees from competing with the previous employer, by working with competitors in the market, or by being direct competition to the previous employer.
Specific clauses are enacted under Article 10 of Federal Decree-Law No. 33 of 2021 to govern non-compete restrictive covenants to protect an employer’s business when an employee leaves the organisation. Under Article 10(1) of Federal Decree-Law No. 33 of 2021, it is clearly stated that:
“If the work assigned to the worker allows him to gain knowledge of the employer’s clients or have access to its work secrets, the employer may require that the worker under the employment contract shall not, after the expiry of the contract, compete with the employer or be engaged in any competing project in the same sector, provided that the requirement is specified, in terms of time, place and type of work, to the extent necessary to protect the legitimate business interests. The non-competition period shall not be more than two years from the expiry date of the contract.”
Elements of the non-compete clause:
1) Geographical application of the clause – Non-compete clause/agreement should specify a certain mile radius or area to determine the geographical enforceability of the clause.
2) Term/Duration of the clause – As already mentioned above, the term of the clause shall not exceed two years from the contract expiry date.
3) Nature/Scope of the work – This clause would define the restrictive work and services
Non-compete Agreement is essential in the following industry:
1) Service Industry – An industry that is service providers usually developed their client base through marketing, referrals, networks, etc. These clients have shared their personal details, payment details, and other crucial information with the service provider. Based on that, companies have built an effective client-base. If an employee is to leave the company and open their own, they may influence the clients with their personal information, inadvertently taking the clients with them.
2) Selling Business – Non-compete clauses are mandatory when businesses are sold for the exorbitant high price. The purchaser invests in such businesses to utilize the client base. However, if the previous owner opens a direct competition in the market and influences the client base, then it could be a failed investment for the purchaser. In such a scenario, the new owner should consider a non-compete clause or a non-compete agreement.
3) Tech Industry or Nuclear Industry – In the tech or nuclear industry, the employee may have access to highly confidential information. This information could be in technological formulae, algorithms, data related to national security, and many more. Non- compete clause is an essential clause in such an industry, considering that such information going into the hands of the competitors is likely to be an essential recipe for disaster.
Exemption from the Non-Competition Clause
Under Article 12 of Cabinet Resolution No. 1 of 2022, the worker shall be exempted from the non-competition clause under the following conditions:
1) If the worker or the new employer pays to the previous employer, compensation not exceeding three months of the worker’s wage as agreed upon in the last contract, subject to the previous employer’s written consent thereto.
2) If the contract is terminated during the probationary period.
3) If the reason for terminating the contract is attributed to the employer or the breach of his legal or contractual obligations.
What happens in case of a breach?
If a dispute arises over the non-competition clause and it is not settled amicably, the matter shall be referred to the judiciary. The onus of proving the alleged damage shall lie upon the employer. Also, this clause shall not be enforceable if the complaint is filed by the employer after one year of discovering the violation of the above clause by the worker.