The non-competition agreement once the employment relationship has ended

1. Legality of the non-compete clause

The Labor Code does not regulate the non-competition clause once the employment contract has ended. However, the Second Chamber of the Supreme Court of Justice has referred to in various judgments about the legality of the non-competition agreements agreed upon as a result of the termination of the employment contract:

"Confidentiality or non-competition or competition agreements between workers and employers, with effects subsequent to the termination of the employment contract, are not contrary to the legal system, but quite the opposite, because through them they seek to prevent a socially reprehensible and legally illegal, such as unfair competition, through the use of knowledge or information acquired during the extinct relationship. Thus, in no way can it be said that business organizations cannot protect themselves from an activity in this sense, through contracts in which the worker's commitment is agreed not to work after the end of his contract, for himself or for another businessman, in activities similar to those he had been carrying out" (Res: 2003-00089, Second Chamber of the Supreme Court of Justice).

2. What requirements must the post-contractual non-competition clause meet for there to be a duty to comply with it?

From the perspective of labor law, the Second Chamber of the Supreme Court of Justice has conditioned the legality of said agreement to the fulfillment of a series of requirements without which its compliance cannot be demanded of the worker. In this regard, he states:

"... But, as this type of clauses can be in conflict with another important principle, such as freedom of work, the criteria of some of the doctrinists cited in the Court ruling is reasonable (Alfredo Montoya Melgar (Derecho de Trabajo) and Ernesto Krotoschin (Tratado Práctico de Derecho de Trabajo), that its validity can only be tolerated if it is agreed for a reasonable term and if at the same time, adequate financial compensation is paid to the worker..." (Res: 2003 -00089, Second Chamber of the Supreme Court of Justice).

Likewise, since civil law is of supplementary application to labor legislation, the legality of the agreed obligation would be additionally associated with compliance with the three essential elements for the validity of a contract: consent, object, and cause provided for in article 627 of the Civil Code.

For example, for the cause of the non-competition contract to be lawful, it is not only necessary that the information held by the worker be directly related to the company's activity, but the employer must also have an effective industrial or commercial interest in it; therefore, said information must constitute a fundamental element within the business environment. The preceding is relevant because the non-competition agreement, in turn, implies a limitation to the employee's constitutional right to work.

3. How long can the non-compete agreement be in force?

The Second Chamber has not defined what would be a "reasonable" term for the duration of the non-competition agreement; however, in one of the judicial resolutions, it was estimated that it could be two years:

"... In the specific case, the agreement was limited to two years, which is reasonable..." (Res: 2003-00089, from 9:10 am on February 28, 2003).

On the other hand, in a subsequent resolution, the Second Chamber interpreted as disproportionate the clause that established a prohibition of non-competition for four years. To reach this conclusion, the breadth of the geographical area that the worker could not work in and that the compensation was equivalent to 30% of his net salary was decisive.

"The position in which the plaintiff held (Ref. Sales Supervisor) according to the principles of reasonableness and proportionality, in no way can it be considered that he had access to information regarding production or patents related to the products that the plaintiff sold and cause you serious harm. The information regarding prices and customers, although it is important within the scope of competition and marketing of a company, does not warrant such a disproportionate restriction as the fact of not being able to work for the competition for a period of 4 years and, with much more reason if it was extended to the entire Latin American region, for a compensation of only thirty percent of the salary" (Res: 2016-000977, Second Chamber of the Supreme Court of Justice).

In no case, not even when the activities are delimited and the geographical area is restricted, can the obligation that the worker acquires with his previous employer be indefinite since a perpetual limitation on the worker's right to seek a new job would be disproportionate.

4. How much must be paid as financial compensation during the term of the non-compete agreement?

The limitation imposed by the non-competition agreement on the worker to access job opportunities implies that the latter must be "adequately" compensated.

In this sense, for the Second Chamber, the damage caused to the worker by having been imposed the obligation of non-competition without the payment of any remuneration was evident since the area on which the prohibition dealt was precisely where he had the most significant market and professional knowledge.

"Taking into consideration that the plaintiff was related to the defendant for a long time -for more than twenty years- in the food sector; (from 1973 to March 1996), the latter date for which he held the positions of President of Griffith Panama and Laboratorio Griffith de Centroamérica S.A., in Costa Rica; lead the Chamber to consider that his best employment possibilities were in this area and, therefore, an obligation such as the one imposed, as stated, without any remuneration, caused him significant patrimonial damage" (Res: 2003-00089, 9:10 am on February 28, 2003).

To determine which amount is adequate, the jurisprudence of the Second Chamber of the Supreme Court of Justice does not define a procedure for calculating the compensatory amount. However, it does indicate certain variables that must be assessed.

In one of the specific cases heard by said court, the commitment not to compete was for two years, and it was considered "adequate" to pay an amount equivalent to 50% of what the worker had earned as salary for the agreed term, based on the monthly salary received in the same company with which he signed the clause. Likewise, as a relevant criterion to determine the amount of compensation, the possibility that the worker had to continue working in areas that the agreement did not prohibit was considered.

"... But neither, as mentioned, can the twenty-four months to which the appellant alludes be granted, because, it is repeated, even with said limitation, he could provide services in other areas. Thus, it is fair to raise the compensation for said concept during the entire time of the imposed limitation, but reduce the amount to fifty percent of the income received during the term of the employment relationship..." (Res: 2003-00089, at 9:10 am on February 28, 2003).

It was previously mentioned that in resolution 2016-000977, the Second Chamber of the Supreme Court of Justice considered it unreasonable and disproportionate that a non-competition clause had been agreed upon for four years after considering the geographical area in which the limitation was imposed (the entire Latin American region) and that the worker only be compensated with 30% of his salary.

Likewise, it should be noted that in other jurisdictions such as Spain, the Labor Chamber of the Supreme Court, in addition to considering the term of the non-competition agreement and the proportion between the economic compensation that the worker receives as a result of the agreement in contrast to the salary received during the term of the labor relationship, it has established another factor that must be taken into account to determine if the economic compensation is adequate: the "amount of compensation that the worker must pay to the company in case of non-compliance" (STS 1018/2021, of October 13, 2021). In this sense, it would be possible to demonstrate the insufficiency of the compensation if, in the event of a breach of the non-competition agreement, there is a disproportion between the compensation received by the worker and the compensation that must be paid as a result of the violation of the agreement.

On the other hand, on the part of the doctrine, Todolí Signes has analyzed the jurisprudence of the labor courts of Spain and determined that the judge should take into account the following criteria to determine if the compensation is adequate in a post-contractual non-competition agreement:

a) The salary received by the worker during the employment relationship.
b) The worker's professional value, which relates to the knowledge and expertise that he will not be able to use. This, in turn, implies that the more such skills are valued in the labor market, the more compensation the worker should receive.
c) The areas and functions not prohibited by the agreement and that the worker can continue to perform. The worker should receive more compensation depending on the term and the number of functions included in the agreement.
d) The future compensation the worker renounced as a consequence of the agreement. The more value the worker's knowledge has in the labor market, the more compensation he should receive.
e) The validity of the non-competition agreement. The longer the duration of the limitation, the more compensation the worker should receive. (Criteria taken from Todolí, A. (December 2, 2021) La falta de competencia daña a los trabajadores. Criterios para el cálculo de compensación adecuada en un pacto de no competencia postcontractual (STS 18/10/2021). Argumentos en Derecho Laboral.

Consequently, economic compensation constitutes a validity requirement in the post-contractual non-competition agreement. If payment is not agreed upon or if this is not proportional to the limitation imposed, the agreement would be flawed with absolute nullity, as the Second Chamber of the Court recalls in the following extract:

"In the specific case, the agreement was limited to two years, which is reasonable, but no economic compensation was stipulated, which must be taken as the result of an imposition by the employer since it is not normal for a worker to accept, at the time of being terminated to refrain from working without receiving any benefits in exchange, precisely, in the activity that he knows best and where he may have the possibility of continuing as an active worker. This omission, following the classical doctrine, constitutes a lack of cause of obligation, since in this way, the commitment that the plaintiff acquired, -which, as was said, affected his freedom to work-, was left without foundation or reason for being, which constitutes a vice of that obligation, since "It is not possible, in the field of law, for the person to be bound, or be bound, without there being a rational and fair foundation that has produced the binding bond" (Alberto Brenes Córdoba. Obligations and Contracts, No. 35). This defect affects the validity of the contract in light of the provisions of article 627, subsection 3, in harmony with 835, subsection 1, both of the Civil Code and vitiates the contract with absolute nullity" (Res: 2003-00089, Second Chamber of the Supreme Court of Justice).

In the event that the non-competition agreement is flawed with absolute nullity, the worker may not be required to comply with it; in addition, in the event of a breach of the agreement, he will not be required to repair any damage caused to his former employer.

In this same case, the company's attempt to demand compliance with an absolutely null non-competition agreement could cause the worker to claim an indemnity associated with the time in which his right to seek a new job was limited and to be taken into consideration as a parameter, among others, the monthly salary he received before his departure. However, if the worker had ignored the clause or is employed under conditions of competition with his former employer, there would be no damage, and no compensation would be justifiable.

On the other hand, the sum that is paid as part of the post-contractual non-competition agreement does not have a salary nature since it is provided once the employment relationship has ended, and it fulfills a specific purpose (to compensate the worker for the limitation imposed on his right to work). Therefore, its nature is compensatory and must be identified as such when paid. As it is called in this way and has a nature other than salary, said amount is not part of the salary base that is relevant for social security or taxation purposes. Likewise, it should not be counted for the payment of the christmas bonus or vacations.

5. At what point should the post-contractual non-competition agreement be entered into?

The post-contractual non-competition agreement can be agreed at any time during the employment relationship: at the beginning, through the employment contract; during the term or after its termination.

Suppose the non-competition agreement is agreed upon before the termination of the employment relationship. In that case, it is relevant that the possibility that the company may waive its compliance once the employment relationship has terminated has been provided, according to specific objective and reasonable causes.

The foregoing is due to the fact that the previously agreed non-competition agreement would generate an expectation of the worker's right both to receive eventual compensation and to perform in the future in other activities, functions, or areas in which he may have previously been preparing. Therefore, in the event of a unilateral waiver by the employer of not demanding compliance with the non-competition agreement, the worker could claim the payment for the damages or losses caused.

On the other hand, there are various reasons for the non-compete agreement to be agreed upon after the termination of the employment relationship. One of them is that when hiring a worker, there is not so much certainty about the degree of relevance that the commercial or industrial information accumulated by him can have at the end of the contract, the position of the company in the market, the geographical expansion of its operations or other similar variables, the protection of which is the basis of the non-competition agreement.

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About the Autor

Alejandro Godínez Tobón

Alejandro Godínez Tobón

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