Employment Law Series: 04 Non-Compete Agreements in Labor Law

Definition of Non-Compete Agreements

Noncompetition may be viewed as two distinct types; as a non-compete commitment by an employee while an employment relation continues, and as a non-compete agreement, which takes effect upon the termination of a labor contract. An employee’s commitment to noncompetition during an employment relationship is an obligation within the scope of the duty of loyalty, which means an employee will not compete in order to protect the rightful interests of their employer. The duty of loyalty comes to an end with the termination of the employment contract, so the employee will not be subject to any other restrictions in this respect. However, an employer may need more comprehensive and long-term protection in order to prevent possible losses and disclosures in matters such as trade secrets or customer portfolios. In order to maintain the noncompetition obligation, a clause may be added to an employment contract, or a separate noncompetition agreement may be signed.

Non-compete agreements or noncompetition clauses in employment contracts have been deemed valid to the extent necessary for the protection of business interests. It is obvious that an unbounded and open-ended prohibition of competition will largely eliminate an employee's freedom to work. The main reason that non-compete regulations are subject to certain restrictions is for the protection of the constitutional rights of employees, such as freedom of employment and contract. A non-compete agreement should be concluded in a manner that does not endanger the economic future of an employee.

The Validity of Non-Compete Agreements in Turkish Labor Law

Certain conditions and various restrictions have been imposed on noncompetition within the framework of the Supreme Court’s legislation and case-law. Since there is no regulation regarding noncompetition in the Labor Law, for a non-compete agreement to be valid and binding, it must comply with the requirements of the Turkish Code of Obligations. In accordance with the Article 444 of the Turkish Code of Obligations, it has been regulated that an employee who has the capacity to act may undertake in writing to refrain from competing with an employer in any way, such as opening a rival business, working in another competitor venture, or entering into any other kind of interest relationship with a rival enterprise after the termination of an employment contract. In addition, the legislator specifies non-competition clauses to be valid only if the employer provides an employee with information about the customer portfolio or production secrets or the work of the employer, and judges seek for the possible significant harm that the use of this information may cause.

A non-compete agreement must be concluded so that it will not endanger the economic future of an employee inequitably. Since the regulations regarding the prohibition are of a proportional, imperative nature, it is possible to decide in favour of an employee, and the burden of proof will be on the employer. Herein, the main criterion is to determine between the parties the extent necessary for a prohibition to protect legitimate business interests. An unlimited and open-ended non-compete clause will not be considered valid as it will remove an employee's freedom to work, therefore, general and ambiguous non-compete agreements will not find a field of application. If the scope of noncompetition has not been clearly and concretely determined in a contract, an interpretation will be made in favor of the employee.

How to Find the Balance of Proportionality in Non-Compete Agreements

It has been accepted that noncompetition agreements cannot contain inappropriate restrictions in terms of time, place and type of work that will endanger an employee’s economic future. Such non-compete agreements may be deemed null or partially invalid or subject to the intervention of a judge. Therefore, the employer must determine that the terms of the contract comply with the mandatory provisions.

Regulations regarding the limitation of non-compete agreements in terms of time, place, and subject are included in article 445 of the Turkish Code of Obligations. The first paragraph states that the noncompetition period cannot be more than two years except in special circumstances and conditions. In this framework, it can be regulated in a non-compete agreement that an employee cannot compete for a maximum of two years from the date of termination of their employment contract. The main purpose of this regulation is to prevent indefinite-term or long-continued non-compete agreements.

In terms of place, the agreement should clearly state which geographical area that an employee has been obliged to avoid competition in. Herein, the boundaries of an employer's field of activity will be of importance. The limitation may vary according to the nature of the business and the subject of activity; therefore, evaluation should be made in line with an employer's market area, not according to the workplace location. Restrictions that pass beyond the field of activity will not be valid since an employer will not have an interest that is worth protecting with a prohibition outside the field of activity.

With regard to subject, the scope of noncompetition is limited to the employer's activity and type of work. Since there is no competition in terms of job roles outside the field of activity, there is no legitimate interest for employers to impose a prohibition. Therefore, only the work performed by an employee during an employment relationship can be included in the scope of noncompetition and it may be limited to the field of business in which the employer operates, and the subject of the work conducted.

Potential Consequences of Non-Compete Agreements

In the light of the regulations and restrictions detailed above, it is possible for a judge to limit non-compete agreements. The judge may freely evaluate the excessive nature of a non-competition by reviewing all conditions and limit the prohibition in terms of scope or duration, considering the counter risk that the employer may have undertaken in an equitable manner. If a non-compete agreement concluded in accordance with legal regulations is violated by an employee, they will be liable to pay the damages incurred by the employer and/or the penal clause agreed. If an employee violates the prohibition of competition, an employer may also request that behaviour that is contrary to noncompetition cease. It should be also noted that excessive penal clause amounts can be reduced to a reasonable level by the intervention of a judge.

Conclusion

The scope and limits of noncompetition are determined within the framework of the provisions of the Code of Obligations, and certain conditions have been introduced to protect the economic future of employees. Employers can protect their legitimate interests only if they comply with the specified conditions and restrictions. Failure to do so will result in their non-compete agreements being considered invalid.