Author: Anastasia Holovatyuk, Lawyer at F&P
Non-compete clauses are provisions in a contract (agreement) under which an employee agrees not to work for the competitors of their employer, nor to engage in any activities that compete or may compete with the activities of the employer for a certain period of time, in a certain territory, or in certain positions. In most European countries and in the USA, the use of non-compete clauses / non-competing agreements is quite a common practice. Yes, recently the state of California (USA) has been increasingly attracting employees, particularly IT specialists. Employers promote the conclusion of non-compete agreements, as such transactions have become an effective tool for preventing employees from engaging in competitive activities. However, California law has changed in the context of invalidating contractual provisions that prevent a person from engaging in a lawful profession, trade, or business. The cancellation of non-compete agreements is interpreted as the invalidation of any non-compete agreements in the context of employment or any non-compete clause in a contract, including an employment contract. Therefore, any agreement that restricts the entrepreneurial activity or profession of any person is invalid, except under certain circumstances:
- The sale of a business, under which non-compete agreements may be valid if they are part of the business sale agreement or its assets.
- confidential information, when the restrictions may pertain to the protection of confidential information or trade secrets.
However, in Ukraine, the practice of applying non-competition clauses is just gaining popularity. For the first time at the legislative level, a non-compete agreement was enshrined in the Law of Ukraine “On Stimulating the Development of the Digital Economy in Ukraine,” which regulates the activities of Diya City Residents. This has given new meaning to the conclusion of such agreements in the IT sector, as the legislator has clearly defined the possibility of their conclusion, established key conditions, and provided for the consequences of violating the requirements regarding the content and form of the agreement. The specified law defines that the essential terms of such a contract are:
- the term of the obligation, which shall terminate no later than 12 months from the date of termination of employment, civil, or economic relations between the specialist and the Diia City resident;
- the territory to which the obligation applies;
- an exhaustive list of activities considered to be competing activities, and/or individuals engaged in competing activities;
- material goods that the specialist receives in return for the obligation to refrain from engaging in competitive activities.
The contract may provide for obligations to refrain from such actions:
- conclusion of employment contracts, gig contracts, or other civil law or commercial law contracts with other persons engaged in activities similar to those of such a Diia City resident (competing activities);
- engaging in competing activities as an individual entrepreneur;
- ownership directly or indirectly of a share in another legal entity that engages in competing activities;
- holding the position of a member of the governing body of another legal entity that engages in competing activities, etc.
It should be noted that failure to comply with the requirement for agreeing on essential terms when concluding such a contract renders it null and void. There is a diverse practice regarding the application of such agreements, considering the long-term development of similar regulations. Usually, when addressing this issue, attention should be paid to the following conditions for the operation of non-compete provisions:
- the circle of individuals to whom the non-compete provision may apply (usually this pertains to employee-employer relationships);
- written provision in the employment contract or the conclusion of a separate non-compete agreement;
- the person engaging in activities similar to those of the company;
- the presence of a restriction regarding a specific territory, which should not exceed the territory where the company is usually located;
- the duration of such provisions should be within a reasonable timeframe (as mentioned in Ukraine, no more than 12 months);
- the procedure for establishing a breach of a non-compete agreement and liability for it.
It is important to note that for violating the non-compete clause, the employee will have to reimburse the employer for the provided compensation and pay an additional amount equivalent to that compensation. Undoubtedly, the non-compete clause should be based on one of the fundamental principles of labor law—the invalidity of conditions that worsen the position of employees, as well as the coercion of an employee to enter into agreements without mutual consent. In summary, we would like to note that non-compete clauses are an effective tool for protecting businesses from unfair competition by former employees; however, their application must comply with legislative requirements. In Ukraine, the legal regulation of such agreements is still being developed, and to date, they are only established in the IT sector, specifically for residents of Diya City. The law firm Fedoryshyn & Partners can assist with drafting non-compete agreements, develop individual terms considering the specifics of the business, and provide legal consultation on the application of non-compete terms in a specific case.
