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Non-Compete Agreements in Labor Relations
In the context of an increasingly developing knowledge economy, protecting trade secrets and competitive advantages has become a top priority for businesses. That is why “non-compete agreements” (NCAs) are becoming more and more popular in Vietnam. However, the reality is that disputes related to this type of agreement are also increasing, primarily because Vietnamese law lacks specific and clear regulations on this issue.
How to understand non-compete agreements with employees
Accordingly, a non-compete agreement (NCA) with an employee is a contractual commitment that a company or business requires an employee to sign before or during their employment at the business. This agreement aims to protect the confidential information and business interests of the industry by preventing employees from using or disclosing important information or engaging in competitive activities after they leave the business. A non-compete agreement usually includes the following provisions:
Non-competition commitment
Employees commit that they will not establish, work for, or participate in activities that directly or indirectly compete with the enterprise after the termination of the employment relationship.
Time limit
The agreement usually specifies a specific period that the employee must comply with the non-compete agreement after they leave the business.
Penalties for violations
The agreement often stipulates the fine or penalty that the employee will face if they violate the non-compete commitment.
Geographic scope
The agreement may specify where the non-compete covenant is effective. It may cover a specific geographic area, or it may apply globally.
Indemnity Agreement
The agreement may include provisions for indemnification of employees in the event they comply with a non-compete undertaking and do not engage in competitive activity.
A non-compete agreement is intended to protect a company’s business interests by ensuring that employees cannot use confidential information or knowledge gained from the company to harm the business or help competitors. However, it must comply with the regulations and limitations set by labor laws and specific regional laws.
Legal effect of non-compete agreements
Under Vietnamese law, there is no specific law that explicitly prohibits or restricts non-compete agreements. The Labor Code 2019 and the Intellectual Property Law 2005 provide for employers and employees to agree on the protection of trade secrets and intellectual property. However, there is no comprehensive law regulating non-compete agreements.
- Voluntary Nature: The enforceability of a non-compete agreement often depends on whether the employee voluntarily enters into it. The requirement that the agreement be “entirely voluntary” is a general principle in many legal systems.
- Compliance with Law and Morality: Non-compete agreements must also comply with other laws and morals. If an agreement violates established law or goes against morals, it may be deemed unenforceable.
- Case-by-Case: The enforceability of a non-compete agreement is often determined on a case-by-case basis. The specific circumstances of each agreement, including the scope of the restriction, the duration, and the compensation provided to the employee, may affect its enforceability.
It is important to consult a legal professional in Vietnam for specific guidance on non-compete agreements and their enforceability. Legal practices and interpretations can vary, and a qualified attorney can provide you with advice tailored to your situation and the current legal landscape.
Non-compete agreements: Restrictions or legal protection tools?
A non-compete agreement is a legal agreement whereby an employee commits not to work for a competitor or start their own business in a similar field after the termination of the employment contract. The main purpose of this agreement is to protect the intangible assets of the enterprise, such as technological secrets, customer lists, or business strategies.
However, the legal value of NCA in Vietnam is still controversial. On the one hand, it is considered a civil agreement, protected by the principle of freedom of commitment and agreement of the Civil Code. On the other hand, many opinions say that NCA violates the right of employees to “choose their career, job, and workplace” as stipulated in the Constitution and the Labor Code.
Contradictions in Judicial Practice: Are Non-Compete Agreements Recognized or Not?
The lack of a clear legal framework has led to inconsistent judgments from the Courts. In typical cases, the Labor Court tends to reject the request of the enterprise, declaring the NCA invalid because it restricts the freedom of the employee to work.
However, a remarkable turning point has occurred. Precedent No. 69/2023/AL has determined that the dispute over the NCA is an agreement independent of the labor contract and falls under the jurisdiction of the Commercial Arbitration. This judgment not only opens a new direction for enterprises but also implicitly acknowledges the independence and civil nature of the non-compete agreement.
Advice for Businesses and Employees
To ensure a non-compete agreement is highly enforceable, both parties should keep in mind the following:
- For Businesses
- Adequate compensation is key: This is the most important condition for the NCA to be recognized as valid. Without compensation, the agreement may be considered unfair and easily declared void.
- Reasonable scope: Time limit (usually not more than 12-18 months for most cases), scope (clearly identify competitors, field of operation, and specific geographical scope), and work must be reasonable, consistent with the business secret to be protected.
- Suitable subjects: Only apply NCA to senior employees or those directly holding important business secrets.
- Compensation: Commit to compensate a reasonable amount of money to the employee during the binding period. The compensation level can be a percentage (e.g, 50%-70%) of the basic salary before leaving the job, paid monthly.
- For Employees
- Know your rights: Make sure the agreement includes specific compensation. You have the right to negotiate the amount, duration, and scope of the restrictions.
- Be careful before signing: Signing an agreement without compensation can make it very difficult for you to find a new job later.
Conclusion
A non-compete agreement is a necessary tool to protect business interests, but it needs to be built based on fairness, transparency, and a balance of interests. Until Vietnamese law has more detailed regulations, understanding and complying with the above principles will help parties minimize legal risks and create a healthy and sustainable working environment.
Contact thele.blog for advice on specific cases.
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