In modern business, competition sets strict “game rules”, and companies strive to protect their interests from potential threats from former employees and partners. One of the effective tools for this is non-competition agreements. These agreements serve as a protective barrier that limits the ability of an employee or company to work for a competitor for a certain period after the termination of an employment or business relationship. Understanding the essence and specifics of non-competition clauses is becoming key for business owners and employees, as their formulation not only creates a legal basis for protecting trade secrets and the customer base but also helps avoid litigation and conflicts. This article will examine non-competition agreements, their legal aspects, and the main points to consider when developing and implementing them.
General Information about the Classes on Non-Competition
A non–competition agreement is a bilateral agreement in which one party (usually a former employee or business partner) agrees not to conduct business or work in a specific area that may compete with the interests of the other party (usually an employer or company) for a certain period and in a certain territory after the end of their business relationship. Such agreements are widely used in various industries to protect trade secrets, the customer base and other strategically important resources.
Non-competition agreements are also called non-compete agreements (NCA) or non-compete clauses (NCC). The purpose of concluding such an agreement is to prevent competitive actions on the part of a former employee of the company (contractor) after dismissal from the company (termination of business relations):
- Do not allow a former employee (contractor) to work for a competitor after being fired.
- To prevent a former employee (former contractor) from disclosing important information to the company.
NCAs must, to a certain extent, guarantee the former employer the preservation of his market position and business confidential information.
It does not matter for what reason the employment or business relationship ended; the very fact of termination is important for executing the NCA.
The Main Clauses of Non-Competition Agreements
Non-competition agreements can be difficult to enforce, and their formulation requires careful legal review to ensure their legality and enforcement. It is important to draft such agreements correctly to minimize risks to the business and ensure the protection of its interests in a competitive environment.
The main clauses of the non-competition agreements include:
1. Validity Period
Determines how long a party will be limited in its competitive activities after being dismissed or ending business cooperation.
2. Territory
Specify the geographical region where the restrictions apply. It can range from a narrow local area (for example, a city) to broader markets (for example, a certain state).
3. Scope of Restriction
They describe specific competitive activities in which an employee or contractor is restricted.
4. Compensation
In many jurisdictions, the initiator of the NCA is required to determine the compensation for concluding the agreement, the terms, and the procedure for its payment. It is especially true for former employees, who are often paid their average earnings during the term of the NCA for agreeing.
5. Responsibility
The NCA usually prescribes the responsibility of a former employee or partner for violating the provisions of the agreement.
What to Pay Attention to When Concluding an NCA
When concluding an NCA, you need to pay attention to some important points:
1. NCAs are peculiar in that they are signed at the beginning of work with an employee or contractor, not after an employment or business relationship is terminated. After terminating negotiations with the NCA initiator companies, former employees and contractors have no reason to sign such agreements.
2. When concluding an NCA, you must know that such agreements are not legally binding everywhere. The effectiveness and legality of such agreements may vary depending on the legislation of a particular country or region. Some jurisdictions (for example, the state of California, USA) may restrict or even prohibit such agreements. Courts can also cancel such agreements when they are excessive or unreasonable.
3. Non-competition agreements are not concluded with all employees (contractors, partners). Usually, an NCA is included with those with access to important information and technologies.
Which Industries Use Non-Competition Agreements
A non-competition agreement is applied in various sectors of the economy to protect business interests and prevent competition from former employees or partners. Here are some of the main sectors of the economy where NCAs are commonly used:
1. Technology and IT
Companies use NCAs to protect their developments, software, and other intellectual assets from competition from former employees.
2. Financial Services
In this industry, the NCA helps prevent clients from leaving and protects confidential financial information from former employees or consultants.
3. Consulting
Consultancy companies use NCAs to protect their methodologies and clients from competition from former consultants.
4. Retail Trade
Retailers apply the NCA to prevent former employees from opening competitive stores nearby.
5. Manufacturing Sector
In this area, the NCA can protect technologies and production processes that competitors can use.
6. Healthcare
Doctors and medical professionals can sign NCAs to prevent competition and clients from moving to other practices.
7. Cinema and Creativity
NCAs can protect original ideas and concepts from disclosure and competition.
8. Construction and Real Estate
Construction companies can use NCAs to prevent competition from former employees who may set up their firms.
9. Marketing and Advertising
Agencies can use NCAs to protect their customer bases and creative solutions from competition from former employees.
NCA in Belarus
In Belarus, there are no restrictions on companies’ conclusions of NCAs. However, the government has not defined the procedure for concluding NCAs and the requirements for such agreements only for companies that are residents of the Belarusian Hi-Tech Park. The Hi-Tech Park is a special legal regime established for resident companies of the Park that work in new and high technologies. The peculiarity of the Hi-Tech Park regime is that its residents have more preferential conditions for paying taxes and doing business (in particular, with non-residents).
NCA Clauses in Contracts with Employees of Companies of the Hi-Tech Park
High-Tech Park resident companies may include non-competition clauses in contracts with certain employees. NCA clauses are usually included in contracts with highly qualified employees who gain access to the company’s business processes and technologies. The NCA is valid for no more than one year after the termination of the employment relationship.
The clauses of the NCA contracts include the following conditions:
1. According to the clauses of the NCA, a former employee of the company is employed after dismissal for no more than one year must not:
- Work with competing companies for hire or as a contractor.
- Create his own business in an activity similar to where he worked with this employer.
- Open and participate in managing competing companies of his former employer. It means that a former employee must not become the head or member of the collegial management body of a competing company.
2. The former employee receives compensation specified in the agreement for fulfilling the terms of the NCA during its validity period.
3. Territorial boundaries of the obligation of non-competition.
4. A certain type of activity for which an employee commits to non-competition.
5. Liability for violation of the provisions of the agreement.
6. The terms of the agreement.
Compensation for NCA
The minimum compensation for the conclusion of the NCA is set only for companies that are residents of the Hi-Tech Park. For former employees of such companies, the minimum compensation for the conclusion and execution of the NDA is at least 1/3 of the average monthly earnings (determined by earnings for the last year of work in the company) for each month of meeting the conditions of the NCA.
There is an opinion that it makes sense to compensate an employee for concluding an NCA not only after the termination of the employment relationship but also during the employee’s work in the company. For example, the practice of many European countries follows this path.
In other states, the amount of monthly compensation for meeting the conditions of the NCA varies from 30 to 50% of an employee’s average salary.
The Advantages and Disadvantages of an NCA for an Employee and an Employer
Entering into a non-competition agreement (NCA) has pros and cons for both the employee and the employer. Let’s look at them in more detail:
Advantages for the Employee
- Additional Benefits
The employer may offer improved working conditions or remuneration for agreeing to sign the NCA or compensation for signing the agreement during work. - Protection from Direct Competition
In some cases, the NCA can ensure that the employee will not face competition in the event of dismissal.
Disadvantages for the Employee
- Limitation of Professional Activity
After being fired, an employee may face difficulties finding a new job in their field, as the NCA may limit their employment opportunities. - Loss of Opportunity for Self-Realization
The NCA can be a significant obstacle for employees who want to start their own businesses or switch to competitors. - Legal Consequences
If an employee violates the agreement’s provisions, there may be consequences in the form of litigation and fines.
Advantages for the Employer
- Protecting Business Interests
The NCA helps prevent qualified employees from leaving for competitors and protects intellectual property and trade secrets. - Maintaining the Customer Base
This agreement allows the employer to protect its relationships with clients and prevent them from moving to competitors. - Incentive to Invest in Employees
Having an NCA can motivate a company to invest in employee training and development, knowing that they cannot easily switch to competitors.
Disadvantages for the Employer
- Restrictions on Recruitment
In some markets, the presence of an NCA may make it more difficult to find new employees, as potential candidates may fear restrictions. - Legal Difficulties
If the NCA is not reasonable and balanced, it can lead to legal proceedings and disputes. - Reputational Risks
The strict application of the NCA can negatively affect the company’s image and cause employee discontent.
The conclusion of an NCA requires careful analysis and informed decisions on the part of both the employer and the employee to ensure the agreement’s fairness and legality.
We are ready to advise you on all issues related to the conclusion and execution of the NCA.
How to contact us
For more information or advice on issues related to non-competition agreements in Belarus, do not hesitate to contact us. We are here to help and support you.
Phone and email communication options are available for your convenience:
- +375293664477 (WhatsApp/Telegram/Viber);
- info@spex.by.
