Many businesses have asked their employees to sign a non-compete agreement (“NCA”) at the same time assigning a labor contract. However, due to the lack of regulation, NCA still has many different views on NCA. The following article will provide some ideas about NCA so that businesses and employees can understand and use it in accordance with the law.
1. Definition of Non-Competition Agreement
Businesses will invest a lot of money and manpower to collect, develop and secure information such as knowledge, technological know-how, business strategy, and customer list,… with the aim of serving commercial activities (collectively referred to as confidential information). Employees may know certain types of confidential information depending on their job position. Then, they may use this information to benefit by disclosing confidential information to business competitors, or establishing or working for businesses in the same industry that they previously worked.
Therefore, to protect confidential information, and business advantages, as well as prevent acts that cause damage to enterprises, most businesses require employees to sign NCA before working. Accordingly, the employees commit not to establish or work for enterprises in the same industry as the enterprise for which the employees previously worked, either during the implementation of labor relations or after the termination of the labor relationship.
2. Legal validity of Non-Competition Agreement
In terms of labor code, NCA has restricted the right to work of employees, and violated the principle of “freedom of labor”. In the 2013 Constitution, Clause 1 of Article 35 stipulates that “Citizens have the right to work and to choose their occupations, employment and workplaces.” In the Labor Code 2019, Article 5.1 stipulates the right of employees to “work; freely choose an occupation, workplace or occupation”; Article 10.1 stipulates the employee’s right to “choose the employment, employer in any location that is not prohibited by law” and Article 19.1 allows “An employee may enter into employment contracts with more than one employer, provided that he/she fully performs all terms and conditions contained in the concluded contracts.” In the Law on Employment 2013, Article 4.1 stipulates the principles of employment “Ensuring the right to work and freely choose jobs and workplaces” and Article 9.6 stipulates Prohibited acts as “Obstructing, or causing difficulties or damage to, the lawful rights and interests of workers or employers.”
In case NCA is included in a labor contract (in the form of a term or an annex to the labor contract), NCA violates principles for the conclusion of an employment contract specified in Article 15.2 of Labor Code 2019, “Freedom to enter into an employment contract which is not contrary to the law, the collective bargaining agreement and social ethics“. Is it regarded as a civil agreement if the NCA is not contained in the labor contract or the contract appendix but is signed in a separate document, independent of the labor contract? To answer this question, we need to consider the nature of NCA. NCA emerges from labor relations, only when the labor relations arise, the employees can access confidential information. Then, the enterprise requires employees to sign NCA to preserve benefits and competitive advantage. If the employees sign the NCA without obtaining any advantages to compensate for the duties originating from the NCA during and after working for the enterprise, there is more basis to confirm the NCA’s dependence on labor relations. Therefore, NCA is not considered a civil relationship but is considered a labor relationship, regulated by the labor law, with a high chance of being declared invalid by the Court due to violation of the law.
In Judgment No. 420/2019/LD-PT dated May 15, 2019, the Ho Chi Minh City People’s Court based on the right of employees to “work; freely choose an occupation, workplace or occupation” to decide “Do not accept the petition of Enterprise U for forcing Mr. Phan Thanh B not to continue working for Enterprise P, a direct competitor of Enterprise U”. Contrary to this point of view, on June 12, 2018, the Ho Chi Minh City People’s Court issued Decision No. 755/2018/QD-PQTT to recognize the validity of the decision of arbitral tribunal of Vietnam International Arbitration Centre (VIAC). The court judged that the employee gave up her rights by voluntarily entering into the NCA, so she must comply with this agreement and suffer legal consequences when working for a competitor in the commitment period. It can be seen that Judgment No. 420/2019/LD-PT and Decision No. 755/2018/QD-PQTT were both issued by the Ho Chi Minh City People’s Court, but the Court gave two different views on the same problem which is determining the legitimacy of the NCA. Thus, the NCA’s validity determination will depend entirely on the internal beliefs and legal views of each judge when resolving the dispute.
3. How do protect confidential information?
Because the purpose of the Non-Disclosure Agreement (“NDA”) or NCA is to prevent acts of disclosing confidential information and causing damage to the business, the enterprise may sign NDA instead of signing the NCA. This is a safe solution for businesses as Article 21.2 of the Labor Code 2019 has specified “If the employee’s job is directly related to the business secret, technological know-how as prescribed by law, the employer has the rights to sign a written agreement with the employee on the content and duration of the protection of the business secret, technology know-how, and on the benefit and the compensation obligation in case of violation by the employee.” NDA must include at least the following contents: i) A list of trade secrets and technical know-how; ii) Scope of using trade secrets and technical know-how; iii) Duration of protection of trade secrets and technical know-how; iv) Methods of protection of trade secrets and technical know-how; v) Rights, obligations, liabilities of the employer, employee during the duration of protection of trade secrets and technical know-how; vi) Actions against breaches of the arrangement for protection of the trade secret and technical know-how.
In case of enterprises still wants to sign the NCA with the employees, enterprises should pay attention to the following contents so that this agreement can be accepted by the Court:
First, enterprises should specify the NCA in a document separate from the labor contract; in other words, the NCA should not be specified as a provision in the labor contract or the labor contract annex. Because if NCA is regulated in a labor contract, the Court will likely consider it from the perspective of labor law instead of a civil agreement from the perspective of civil law.
Second, enterprises should set a reasonable validity period and scope’s application of NCA.
Third, enterprises should specify that employees will be compensated or get advantages for completing NCA. This confirms the voluntary will of employees when they agree to receive compensation to give up their rights rather than being compelled to sign an NCA.
Fourth, enterprises should not completely prohibit employees from working for a third party. Because the right to freedom of work is a human constitution, it is illegal to prohibit employees from working for a third party. Instead, enterprises may prescribe the legal responsibilities that employees must suffer when they violate the agreements in the NCA. Thus, enterprises can both require the employees to pay fines or compensation and confirm that the NCA is a civil agreement.
Above is an article about “Non-compete agreement – How to perform it in accordance with the law?” sent by TNTP to readers. Hope this article will help you.
TNTP and Associates International Law Firm
Attorney: Nguyen Thanh Ha