By Tariq M. Hassan
Q. It has become a trend that all employers make their employees sign labour contracts which include a clause banning them from working for competitors for a certain number of years. Is this a legal practice? And what would be the situation if my employer with whom I signed such a clause, terminated my services?
A. An employment contract is a binding contract between two parties and which enforces reciprocal obligations between them. Federal Labour Law No. 8 of 1980 regulates the relationship between the employer and the employee and their respective obligations towards each other. It also regulates the rights of each party during and after the expiration of employment process and states the rules to be followed in each situation.
A labour contract may contain a stipulation which debars an employee from working for a competitor after termination of the labour contract.
The non-competition clause is governed by Article 909 of the Civil Transaction Law being Federal Law No. 5 of 1985 as well as Article 127 of the Labour Law. Article 127 states: “Where the work assigned to worker allows him to become acquainted with the employer's clients or to become familiar with the secrets of his business, the employer may require him to refrain, after the termination of his contract from competing with him or participating in any enterprise competing with his own. Such agreement shall be valid only on condition that the worker is at least 21 years of age at the time of its conclusion that the agreement is limited, as regards the time, the place and the nature of the business to the extent necessary to safeguard the employer's lawful interest.”
Article 909 stipulates the same rules; but adds a condition which is detailed as: “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 employee 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 employee in terminating the contract.”
The above stated condition may be agreed upon before or during the employment contract, but it will only come into effect on termination of the employment relationship. The non competition clause is not absolute, as the law has placed certain restrictions with regards to the date, place and objectives.
The conditions that need to be fulfilled in order to apply the condition of non-competition are:
1. The work assigned to the employee allows him to become familiar with business secrets and acquainted with the employer's clients.
The intention of this condition is that the employee shall not refrain from the work which he was performing in order to prejudice his employer and to benefit from his employer only to compete with him. Additionally, this clause comes into effect if the employee during his employment a) gains any commercial or manufacturer's secrets or b) knows the employer's clients or c) has received training and thereafter left the employment to join a competitor.
In the event that the above said conditions do not apply then the non-competition clause cannot be used. For example an accountant working in a commercial firm has no contact with the clients of his employers, then in that event, the employee has the right after leaving his job, to join a competitive firm even if there exists a non-competition clause in the contract.
2. The employee to whom the competition clause shall apply shall be at least 21 years of age.
3. The non-competition clause has to be restricted by time, place and type of work. The non-competition clause shall not be absolute with regard to the period of time and of place. It is mandatory for the non-competition clause to specifically determine the amount of time and the limitation of the geographical area to which it applies.
4. The employer shall have no right to insist on the application of this condition if he terminates the contract.
5. The employer may impose on the employee a reasonable amount as a guarantee in the event of breach of the non-competition clause.
Q. What are the consequences of obligations of non-competition?
Consequences of obligations of non-competition:
1- as to the employee:
In the event that all the conditions as aforesaid apply, then on termination of the labour contract if the employee commits a breach of any of the conditions contained therein, the employer has the right to either restrain the employee and/or seek compensation for the breach of his contractual duties.
2- as the third parties:
If an employer is aware of his employee's non-competition clause and continues to employ him then he is liable to compensate the former employer for damages sustained as a result of this.
The non-competition clause being highly restrictive vis-a-vis the employee should be clear or else it runs the risk if it is vague in favour of the employee.
? Compiled by Eman Al Baik
Tariq M. Hassan is Legal Consultant of Al Shamsi and Partner in Dubai.
