You probably have a love-hate relationship when it comes to non-compete clause in an employment contract. Conflicting views depending on your job and position; employer or employee? You may even be both.
Are you one of the many employees who willingly accepted a non-compete clause in your employment contract? Or perhaps you were forced to accept a non-compete as a condition for getting the new job?
In more and more countries around the world, the non-compete clause is illegal, or it comes with a lot of restrictions. The list of countries on this list is growing.
On the other hand, there are still many jurisdictions including Thailand in which such contracts have been examined by the courts and deemed them to be legally binding. So long as the clause contains reasonable limitations as to the geographical area and time period in which an employee of a company may not compete it’s enforceable.
Definition and purpose of non-compete clause
A non-compete clause in the employment contract is to prevent employees from leaving for a competitor or starting a competing business for months or years after their current employment.
The purpose is to restrict the employee or the new employer from gaining a competitive advantage by exploiting confidential information about the former employer’s operations or trade secrets, or sensitive information such as customer/client lists, business practices, upcoming products, and marketing plans.
In contract law, a non-compete clause is also known as a covenant not to compete. Some courts refer to these as restrictive covenants.
How countries deal with non-compete agreements
About half of the U.S. states significantly constrain the use of non-competes, and a small number have deemed them largely unenforceable including California.
In January 2023, the US Federal Trade Commission proposed a rule that would block companies from limiting their employees’ ability to work for a rival.
The proposal, and it is still a proposal, requires employers to withdraw existing non-competes and to inform staff they no longer apply.
Even President Joe Biden hailed this initiative. He said:
“These agreements block workers from taking a better job, getting better pay and benefits, in the same field.”
In Belgium, a valid non-compete clause requires that it is drafted in Dutch or French language, limited to 12 months, and more importantly, that it provides for the payment of an indemnity of at least 50% of the gross remuneration for the duration of the clause (not required for sales representatives) if the employee’s gross annual salary exceeds EUR 66,944.
The non-competed is enforceable if the employment is terminated after the first 6 months of employment (with a few exceptions).
In China, the parties may negotiate the amount to be paid by the employer during the non-compete period, which can be up to two years.
In France, a non-compete clause is enforceable if limited both in time (usually 6 months to a year) and in space (usually a few regions in France are covered, more rarely the entire French territory or even abroad).
The employer needs to pay financial compensation referred to as a “non-compete indemnity” and cannot be a negligible amount of money. Case law generally considers no less than 33% of the employee’s monthly wages as a minimum but may even go up to 66%.
In Germany, an agreement is enforceable if in writing and signed by the employer, has a maximum duration of two years, includes a specific geographical area, and offers a mandatory financial compensation for the agreed non-compete period of at least 50% of the employee’s benefits of the previous year (salary, bonuses, allowances).
In Thailand, non-compete clauses in employment contracts are acceptable. Thai courts base their evaluations whether non-compete clauses are valid usually under the Thai Civil and Commercial Code, the Thai Unfair Contract Terms Act and the Thai Labour Protection Act.
When protecting against a former employee disclosing such trade secrets to any competitors, the employer will have to prove that the purpose of protection of such trade secrets is to maintain the stability of the organization and that failure to do so have caused damages.
For non-disclosure cases, they are not automatically treated as precedents, as the Thai courts have the right to decide each case based on its own merits.
The agreement should only be a prohibition against engaging in very specific businesses that competes with the employer for a limited period of time in a defined geographical area and should state clearly the types of businesses.
- Non-competition clauses that apply after the employment has ended can be uncertain subject to the discretion and scrutiny of Thai courts;
- Non-competition clauses that impose restrictions for an indefinite period of time are typically found to be unenforceable, while those time periods of restriction between 6 months and 2 years are likely to be held to be fair and reasonable, thereby being enforceable.
- Non-competition clauses that are drafted so broad that it undermines the ability of the employee to earn a living are likely to be unenforceable because the freedom of occupation is protected under the Thai Constitution. Those clauses that are specific by naming competitors or identifying job positions are generally enforceable.
- Non-competition clauses that can be proved to be for good business reasons, for example that the employer has proprietary interest or confidential information that needs to be protected from competitors, are more likely to be enforceable.
In United Kingdom, employees are limited if proportionate contractual restrictions are agreed. Usual restrictions cover working for a competitor in specified geographical areas, soliciting and dealing with clients/potential clients, and poaching staff.
There is no obligation for an employer to pay the employee during a period of restriction. There is no maximum duration, but 12 months tends to be upper limit which the court will uphold for non-compete restrictions for the most senior of employees (CEO/Director-level).
International best practices and drafting tips
- Consider if the protection of a non-solicitation clause is more appropriate.
- Apply it only for particularly trusted employees.
- Restrictions should be tailored to the employee’s role and seniority.
- Include a reason why such clause is required.
- Apply if the employee has completed at least six months’ continuous employment.
- Valid for a maximum of 12 months.
- Restrictions only for customers the employee has been doing business with.
- Be specific about the geographical limitation (country or region of a country)
- Compensation to employee of 40-60% of monthly salary for non-compete period.
The information provided in this blog article published in January 2023 does not, and is not intended to, constitute legal advice.
All information is for general informational purposes only and may not constitute the most up-to-date legal or other information.
Whether being an employer or an employee, you should contact your attorney, lawyer, or counsel to obtain advice with respect to any legal matter about non-compete contracts.
Sources and acknowledgements
Clyde & Co, DLA Piper, Ellint, L&E Global, Meritas, SCB Interlaw, Siam Legal, Tilleke & Gibbins.
By Tom Sorensen
Managing Partner of Tom Sorensen | NPAworldwide