One of the most debated issues in an employment agreement is the legality of restrictive covenant provisions, such as a non-compete clause which prevents employees from working for a competitor upon termination of their employment agreement. Courts are generally reluctant in enforcing non-compete clauses where they impose an unfair set of conditions on the former employee. Non-compete clauses are examined taking into consideration the factual background specific to each employment agreement.
Definition of a non-compete clause
A non-compete clause is a written restrictive clause placed on the employee within an employment contract or ancillary agreement. Under this clause, the employee agrees to refrain from engaging in any activity which is directly in competition with that of the employer, for a limited period of time, within a limited geographical area and within defined fields of activity upon the termination of his employment contract, regardless of the grounds for termination. A non-compete clause prohibits an employee from:
- Working for competitors of his former employer
- Conducting any business activity with clients of his former employer
- Soliciting colleagues currently working for his former employer
When will a non-compete clause take effect?
Non-compete clauses come into effect on the date of termination of the employment contract, after the notice period has been served. In the absence of a notice period, this restrictive covenant shall apply as of the day the employee actually ceases to be employed by his former employer.
Legislative provisions dealing with non-compete clauses
Under UAE laws, provisions of law dealing with non-compete clauses can be found in:
- Article (127) of UAE Federal Law no. (8) of 1980 ("Labor Law"); and
- Articles (909) and (910) of UAE Federal Law no. (5) of 1985 concerning Civil Transactions ("Civil Code").
Article (127) of the Labour Law states that:
"Where the work assigned to a worker allows him to become acquainted with the employer's clients or to have access to his business secrets, the employer may require him to undertake not to compete with him or participate in any enterprise competing with his own, after the termination of his contract. For such an undertaking to be valid, the worker must be at least 21 Gregorian years of age at the time the agreement is concluded, and the agreement must be confined, in terms of time, place and the nature of the business, to the extent necessary to safeguard the employer's legitimate interests."
Article (909) of the Civil Code states:
- "If a worker, in the course of his work, has access to the secrets of the work or gets acquainted with the customers of the firm, the two parties may agree that the worker may not compete with the employer or take part in work competitive to his work after termination of the contract.
- Nevertheless, such an agreement shall not be valid unless it is restricted to time, place, and type of work, to the extent which is necessary for protection of the legitimate interests of the employer.
- It shall not be permissible for the employer to rely on that agreement if he terminates the contract without any act on the part of the worker justifying that course, and likewise it shall not be permissible for him to rely on the agreement if he commits any act which justifies the worker in terminating the contract."
Article (910) of the Civil Code states:
"If both parties agree that the worker shall be liable for damages if he does not abstain from competition with such liability being unreasonably excessive in order to coerce him to stay with the employer, the condition shall not be valid."
Geographical, temporal and functional limitations
In order for a non-compete clause to be valid, it must comply with the five cumulative conditions set out in Articles (127) of the Labour Law and (909) of the Civil Code1. If any one of these conditions is not met, the non-compete clause shall be considered as null and void, and employees shall be released from their obligations under this restrictive covenant.
- In order for a non-compete clause to be binding, the employee agreeing to it must be at least 21 years old at the time they agree to abide by this restrictive covenant.
- The non-compete-clause must be necessary to protect the
legitimate interests of the employer.
This means for instance that a non-compete clause could be justified for a senior executive or a salesman, but not for an assistant or a secretary. Court precedents show that in order for a non-compete clause to be valid between employer and employee, the employer must have "a serious interest in imposing the non-competition clause on the employee upon the termination of the employment agreement such as where the work entrusted to the employee allows him to get acquainted with the customers of the employer or to have access to the secrets of his business." 2 - The non-compete clause must be limited in its geographical
scope.
The geographical reach of a non-compete clause must be proportionate with the working area of the employee, for example, an employee working in the Emirate of Abu Dhabi could not reasonably be forbidden to work in the wider UAE or GCC countries following the termination of their contract. But, an executive working within the entire UAE market could be required to refrain from competing with his employer in the UAE. This being said, the scope of application of a non-compete clause must not be so broad that it unfairly denies the employee the right to work. - The non-compete clause must be limited in its duration.
A reasonable duration for non-compete obligations normally ranges from 3 to 24 months from the date of termination of the employment contract. - The non-compete clause must be limited to the nature of
business activity of the former employer.
The application of the non-compete clause must not prevent the former employee from securing new employment, taking into account his position and qualifications with regard to the relevant sector of activity.
In essence, non-compete clauses must be "reasonable" to be enforceable and this is determined by the courts based on the facts of each case. .. Generally, non-compete clauses are more likely to be upheld by UAE courts where the geographic restriction is smaller, its duration is shorter and the nature of the activity is clearly defined and narrow. Non-compete clauses are also more likely to be upheld if the employee is only restricted from soliciting the former employer's customers.
No compensation in return for agreeing to non-compete obligations
Under UAE law, there is no statutory obligation on employers to provide financial compensation to an employee committing to a non-compete clause, during the validity of the obligation. This being said, nothing prohibits the employer and the employee from contractually agreeing otherwise.
Enforceability of a non-compete clause
If an employee breaches a non-compete obligation, the employer can lodge a claim before the UAE courts to seek compensation for the damages they have incurred, provided that the employer can prove that he has incurred these damages as a direct result of the breach3.
Where the non-compete clause contains a predetermined financial penalty on the employee for breaching their obligations under the non-compete clause, the burden of proof is on the employee . In a decision by the Dubai Court of Cassation, the Court ruled that where the restrictive covenant specifies the amount of compensation due to the former employer in the event of breach by the former employee, then the burden of proof lies with the latter. If the employee manages to substantiate that no loss has been sustained by the former employer then no compensation is payable.4
In practice, substantiating the existence or the absence of a loss in case of a breach to non-compete obligations is difficult to make. Courts rely essentially on experts' reports and tend to deny the existence of a loss if no sufficient evidence has been provided to support the claim.
Absence of a non-compete clause
As it imposes a restriction on the right of an individual to work freely, the existence of a non-compete clause may not be assumed. It must be drafted in writing and the scope of its application must be clearly defined.
Conclusion
Employers seeking to insert restrictive covenants in their employment contracts are highly recommended to carefully consider the wording and scope of such provisions, in order to maximize the likelihood of them being upheld by the courts in the event of a breach by a former employee.
In sum, employers must ensure that non-compete clauses provide for a small geographic restriction, a short duration and a specified activity.
Footnotes
1. Dubai Court of Cassation, petition no. 105/2008, judgment of 30/3/2009 ; Dubai Court of Cassation, petition no. 87/2008, judgment of 22/12/2008.
2. Ibid.
3. Dubai Court of Cassation, petition no. 58/2008, judgment of 28/9/2008.
4. Dubai Court of Cassation, petition no. 122/2006, judgment of 17/12/2006.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
