Date of publication: 25 September 2014
Leonid Gilevich, Lawyer
Source: Yurydychna Praktyka
Employer’s restrictions on subsequent employment of its employees will not be binding. Competition, as rivalry between economic agents for the most efficient use of production factors, is one of characteristic features of market economy. Among the elements of such rivalry is reluctance of economic agents to give competitors a chance to employ their current or former employees, who in addition to their professional skills can provide important information and other data about activities of such agents.
Ukraine, which was granted the status of a country with a market economy in 2005, is no exception to the rule. Many employers try draft their employment agreements and contracts so as to secure various restrictions to doing the work for competitors (from establishing a prohibition of part-time work to setting a ban on employment in a particular area of business throughout certain period after termination of employment with the relevant employer). Such willingness can be observed among foreign investors in the Western Europe, USA and Canada, where such restrictions are common practice. Among the most popular such restrictions is a non-compete clause, according to which an employee agrees not to seek employment with competitors of his/her employer, and avoid carrying out any activities constituting competition with the employer’s activities. Non-competition agreements (as well as employment contracts holding a corresponding clause) are concluded and are binding in most states of the USA (though, e.g. in the State of California such agreements can be concluded only in exceptional cases). In the Western Europe, as a rule, an employer needs to provide an adequate justification and substantiation of introducing a relevant clause containing the mentioned restrictive condition into the employment agreement. In Great Britain, for example, the very fact of competition is not a sufficient reason for having a non-compete clause. To use it, the employer must provide a proof of existence of a legitimate business interest calling for protection on the basis of a non-competition agreement. The period of such restriction in Germany cannot exceed two years. In this case the employer must compensate the employee for imposing a restriction onto his employment opportunities. The amount of compensation must not be less than half of the employee’s salary for the same period. In France, a non-competition period is also limited to two years. In addition, the restriction may also have certain geographical borders – it may be effective in the whole country or in some regions or cities, i.e. where new activities of the employee can be competitive. Financial compensation for the restriction is also applicable.
However, in the mentioned and other countries a principle of reasonable restriction of a non-compete clause also applies. With some exceptions, binding is only the restriction which is reasonably necessary to protect the employer’s interests, but only in the appropriate timeframe and geographical borders. In case of violation of this principle in a particular agreement, the agreement may very likely be invalidated in a court. Other restrictive business practices include “garden leave clause” which means suspension of the employee from his or her duties before dismissal to avoid leakage of relevant information, loss of clients or staff while maintaining payment-based employment relationships, “non-disclosure (confidentiality) agreement” whereby the employee agrees not to disclose information relating to the employer and “non-solicitation clause” stipulating for the employee’s non-solicitation commitment. Most of the above restrictive measures are strange to the Ukrainian labor law which is still based on Labor Code of Ukraine of 1971. As a rule, the possibility of such restrictions starts to be considered with reference to Article 43 of the Constitution of Ukraine which stipulates for universal right to labor, including the possibility to earn one’s living through labor that he or she freely chooses or to which he or she freely agrees. For this only reason many people conclude that any restriction is basically impossible and in any case will be unconstitutional. This view can be shared only with regard to restricted employment opportunities after termination of labor relations with a particular employer: indeed, any prohibition or restriction imposed onto the subsequent employment or self-employment is not binding onto the employee. Any relevant agreement of employers will have signs of “ethical agreement” violation of which may be, for example, penalized by exclusion from a certain association.
However, imposing a restriction on working for competitors during labor relations with a particular employer is totally possible. Firstly, there is a number of documents restricting part-time work for certain categories of employees, such as employees of state enterprises, institutions and organizations (resolution of the Cabinet of Ministers of Ukraine dated April 03, 1993, No. 245). Secondly, pursuant to Article 21(2) of the Labor Code of Ukraine an employee is entitled to achieve his or her productive and creative capacities by entering into an employment agreement with one or some enterprises, institutions and organizations, unless otherwise provided by law, collective agreement or agreement between the parties, i.e. restriction (ban on secondary employment – simultaneous work for two or more employers) can still be formalized in a collective bargaining agreement or in a particular employment agreement (contract). The same opinion was expressed, in particular, by the Ministry of Labor and Social Policy of Ukraine in 2002 in the letter “On introduction of restrictions to part-time work into the employment contract” as of April 30, 2002, No. 06/2-4/123 (since then neither the Ministry nor its successor – the Ministry of Social Policy of Ukraine – has not raised any objections against it). The appropriate restrictions and penalties for their violation should be stated very carefully. Thus, an employee is unlikely to be dismissed for violation of such restriction under Article 431 of the Labor Code of Ukraine (dismissal due to restrictions on part-time work as provided by the law) as the relevant restriction is provided by the specific agreement (contract, arrangement) rather than legislation. However, such violation can constitute a ground for dismissal under the initiative of the employer pursuant to paragraph 3, Article 40(1) of the Labor Code of Ukraine (consistent failure to perform duties under the employment contract), paragraph 1, Article 41(1) of the Labor Code (single gross violation of labor duties by the head of the company, his/her deputies, chief accountant or his/her deputies), or under a special provision stipulated by the contract (if the dismissed employee is employed under the employment contract) pursuant to paragraph 8, Article 36(1) of the Labor Code of Ukraine. Much easier is the case with the confidentiality (non-disclosure) agreement. Such agreement means a civil law contract concluded in accordance with Article 6(1) of the Civil Code of Ukraine (agreement not covered by acts of civil legislation consistent with the general principles of civil law), and parties to such an agreement have enough opportunities to determine the scope of information subject to protection, as well as liability for breach of obligations.