Non-Compete Clauses: What Should Be Guided By In Ukraine
Authors: Illya Kostin, Attorney-at-law, Partner at Legal Alliance Company, Anna Minakova, Junior Associate at Legal Alliance Company, Sofiya Hodovana, Junior Associate at Legal Alliance Company
A non-compete clause (hereinafter referred to as NCC) is gaining popularity among employers in Ukraine. NCC imposes a restriction on an Employee to enter an identical position or engage in similar activity to that which the Employee does in the relevant company.
Such NCC practice has lot of benefits for the Employer, as it ensures the Employer’s competitive ability in the market.
In the European Union and other countries, in particular Canada, there is a variety of practices in applying such clauses, given the long development of such regulation.
Thus, Article 136 of the Portuguese Labour Code stipulates that NCC may be concluded only under specific conditions are met, namely:
- specification of the non-compete clause in the employment agreement;
- proof of the possibility of harming the employer by the Employee’s similar employment;
- compulsory lump-sum payment of compensation to the Employee that in case of unlawful dismissal of the Employee by the Employer or in the event of voluntary resignation for valid reasons, may constitute the Employee’s salary over the period to which the restrictions apply.
Such a clause shall be concluded for a maximum period of two years, and in case where the Employee has access to particularly sensitive information, the limitation may last up to three years.
The situation is more settled in Belgium, where there is a full section on non-competition in Section III “Termination of Employment Contract” of the Employment contract Act of July 3, 1978.
Thus, the following conditions for non-compete clauses are defined:
- non-compete clauses apply only to employees formally employed for more than 6 months with the Employer;
- written provisions in the employment agreement;
- exercise of the same activity by the employee in relation to the Employer’s activity;
- restriction applies only to a specific territory, which should not go beyond the scope of the territory of Belgium;
- duration of such provisions cannot exceed 12 months;
- apply only to employees whose annual salaries exceeds EUR 36,201 and whose job duties may be competitive, as well as all employees whose annual salaries exceed EUR 72,402;
- granting of compulsory compensation, the minimum amount of which is equal to half the period of the Employee’s work restriction.
It is worth noting that for violation of the non-compete clause, the Employee will have to reimburse the Employer for the compensation provided and pay an additional amount equivalent to such compensation.
In terms of Canada, there are also NCCs that must specify the time frame, geographic scope, provisions for the protection of confidential information about the Employer’s activities, etc. However, in accordance with the 2000 Lyons v. Multary case it is noted what is more important for non-competition are the so-called “non-solicitation agreement,” which prohibit the Employee from using for own benefit the Employer’s information regarding his/her clients, client bases, customers, etc.
Thus, foreign countries have a variety of practices on NCC, but what should be guided by in Ukraine?
The Ukrainian legislation in force does not stipulate clearly defined conditions for the Employer’s use of non-compete clause, but it is still necessary to highlight certain requirements.
In particular, Article 51 of the Labour Code of Ukraine stipulates the government guarantees Ukraine’s citizens free choice of type of activity, while Article 9 of the Code guarantees the invalidity of employment agreements that worsen the situation of employees.
Therefore, in order to mitigate the risks of the recognition of non-compete provisions in the employment agreement, it is recommended not to include such conditions in the employment agreement, but directly conclude a separate non-compete clause with the Employee.
Although, NCC is a common practice for employers, in particular with reference to the wording of Article 21 of the Labour Code of Ukraine that “the conditions of termination of the contract, including early termination, may be established by agreement of the parties.” Thus, this gives the Employer the right to establish separate provisions at own discretion, unless they contradict Ukraine’s current legislation.
It should be mentioned that the Employer’s restriction of the Employee’s part-time job as a form of non-competition support. In particular, Ministry of Social Policy Letter No.06/2-4/123 “On the inclusion of restrictions on part-time work in the employment agreement” of April 30, 2002 provides that Employers of both private and state ownership are entitled to prohibit the Employee from working for a part-time job.
Taking into consideration the fact that the NCC institution in Ukraine is still developing, there is now a few of court rulings on non-compete clauses, which have already been considered in various studies on non-compete clauses.
One of the most recent court rulings on the non-compete clause is the ruling in case No.588/34/21, where the position of the Ukrainian courts with regard to non-compete clauses was noted.
Thus, while stating in its ruling on the agreement’s part that concerns non-competition, Trostianetsky District Court says the contentious point of the Clause is temporary (terminated on February 6, 2020) and extends to the parties’ legal relations after the employment agreement termination. These legal relations are civil, and therefore by virtue of the contractual freedom principle under Articles 6 and 627 of the Civil Code of Ukraine, they may be independently regulated by the parties.
The plaintiff did not invoke specific factual background, which under the commitments imposed on her by clause 5.2 of the Clause, placed too heavy a burden on the plaintiff and deprived her of the opportunity, considering her specialty and practical skills, to fulfill her potential in the relevant scopes of activities.
Thus, the Ukrainian courts increasingly drift toward the position that non-compete clauses do not constitute discrimination by the Employer, but display the need to promote competition and ensure restriction of the Employee’s use of the Employer’s inside information. Moreover, the conclusion of such an agreement is the parties’ right to adjust their relations in the agreement.
It should be pointed out to the Employers that the more detailed the restrictions in the non-compete clause, the easier it will be to prove to the court that the Employee is actually violating the clause’s terms.
What are the consequences of the lack of detail in the non-compete clause?
Let us examine situation No.1: The Employer, the law firm, operating in the form of LLC, specializing in domestic relations law and the Employee, the senior associate, have signed a non-compete clause which provides the prohibition of employment in a competitive company in a similar position for a year from the date of the employment agreement termination. Violation of this clause’s terms are punishable by fines. The parties did not define terms “competitive company” and “similar position” in the clause.
After the dismissal, the employee got hired at bar association, focusing on competition law, as an attorney-at-law.
The Employer applies to court for a fine, arguing that the former Employee has joined a competitive firm for a similar position. In fact, the bar association by its very nature engaged in similar activities as the law firm, that is provides legal aid, and therefore is the competitor.
However, the former Employee notes that the bar association is not in competition with the law firm specializing in domestic relations law. His/her position is also different, since he/she served as a senior associate in the previous company, and now as an attorney-at-law.
Thus, the court may, taking into account the Employee’s arguments, refuse to sustain the Employer’s claim, since the absence of definitions “competitive company” and “similar position” in the non-compete clause gives the court de facto discretionary powers to decide whether or not the Employee has breached the non-compete clause.
Let us examine situation No.2: The Employer, the law firm specializing in pharmaceutical law, and the Employee, holding the position of senior associate, have signed a non-compete clause, which prohibits employment in a competitive company in a similar position within a year from the date of employment agreement termination. Violations of this clause’s terms are punishable by a fine.
In the clause, the parties provided that the term “competitive company” means any law firm, whose principal activity is a pharmaceutical law, or any legal entity whose core economic activity is the medicine manufacturing. The parties define the term “similar position” as any position related to the professional activity of an associate, including but not limited to an associate, a senior associate, an attorney-at-law, etc.
The Employee was employed by a pharmaceutical manufacturer as head of the legal department.
The Employer applies to the court for a fine for violation of the non-compete clause’s terms. The Employee tries to prove that the pharmaceutical manufacturer is not the competitor for the law firm, since the company’s core activity is not related to the provision of legal services, but is aimed to medicine manufacturing. The Employee’s new position is not similar, because the list of similar job titles does not include such a position as “head of the legal department.”
In this case, it would be much easier for the Employer to prove to the court that the Employee has violated the non-compete clause’s terms, since the clause defines what the parties mean by the terms of “competitive company” and “similar position.” Therefore, a company whose core activity is the medicine manufacturing falls under the category of a competitive company, and the list of similar job titles is not full.
What actions should be taken by the Employer if he/she becomes aware of ex-Employee’s breach of the non-compete clause?
If the Employer finds out that the Employee has breached the non-compete clause, such as taking a position with a competitor in a similar position, the Employer must first obtain evidence that the Employee has breached the clause’s terms.
Ways of obtaining information about the place of work and the position of the Employer must be lawful. In particular, the following publicly available sources should be used: information on a competitor’s website, information from personal pages on the Employee’s social networks, and others. It is also possible to contact attorneys for legal aid and obtain such information by submitting a lawyer’s request to the Employee.
After receiving confirmation of the Employee’s new place of work and the position, the Employer may file a complaint for the recovery of fines provided for violation of the non-compete clause or part of the employment agreement on non-competition. The Employer shall enclose a certified copy of the non-compete clause to this complaint, as well as his/her evidence of a breach of its terms.
If the Employer received information about the new place of work from public sources, it is advisable to make use of the right referred to in Article 93 of the Civil Procedure Code of Ukraine, namely, to ask other party to the case about the circumstances relevant to the case. Thus, the Employer may ask specific questions about the Employee’s place of work and position.
So, the Employer is required to take the following steps to ensure that the fine can be imposed on the Employee who has breached the non-compete clause’s terms:
- stipulate in the non-compete clause detailed conditions which cannot be violated by the Employee. For instance, specify what parties mean by “competitor,” “similar position,” etc. The clause’s terms should be as detailed and personalized as possible for each Employee, since this reduces the Employee’s chances of proving that there has been no breach of the clause’s terms;
- gather sufficient evidence to prove that the Employee violated the clause’s terms. Such evidence may include a response to the lawyer’s request, information from the competitor’s website, information on the Employee’s social networks and any other sources not banned by law;
- apply to the court for a fine for violation of the non-compete clause by the Employee.
Hence, the NCC is a sufficiently new but rapidly developing institution contributing to mitigate the risks of violation of the Employer’s rights by former employees. Such non-compete clauses strengthen the position of the Employer in the market and mitigate the risks related to his/her activity.
In our opinion, however it is necessary to establish in Ukraine’s current legislation the provisions that, at least at a minimum level settle the essence of the NCC issue. Given that, the lack of legal regulation of that institution could lead to abuse by both employers and employees.