Non compete agreement in labor law

HO CHI MINH CITY UNIVERSITY OF LAW MANAGING BOARD OF SPECIAL PROGRAMS  - BACHELOR’S THESIS OF REGULAR TRAINING 34th MAJOR: CIVIL LAW NON-COMPETE AGREEMENT IN LABOR LAW Student: DAO THI AI Student number: 0955010319 Class: ADVANCE CLASS 34th COURSE Supervisor: Ph.D LE THI THUY HUONG HO CHI MINH CITY, 2013 HO CHI MINH CITY UNIVERSITY OF LAW MANAGING BOARD OF SPECIAL TRAINING PROGRAMS  - BACHELOR’S THESIS OF REGULAR TRAINING 34th MAJOR OF CIVIL LAW NON-COMPETE AGREEMENT IN LABOR LAW Student: DAO THI AI Student number: 0955010319 Class: CLC34 Supervisor: Ph.D LE THI THUY HUONG HO CHI MINH CITY, 2013 COMMITMENT This thesis represents my own work and I have duly acknowledged in the bibliography the sources which I have consulted for the purpose of this study The total word count for this thesis is 20,986 words DAO THI AI ACKNOWLEDGEMENTS First and foremost, I would like to express my gratitude to my supervisor, Ph.D Le Thi Thuy Huong Without her, this thesis would not be possible Since the beginning of this journey, she has always been encouraging me to written this thesis by English, advising me what to to perfect my thesis whenever I did not know how to go on and patiently guiding me through every process Secondly, I would like to thank my family for their unconditional love and wholehearted support They were always there for me whenever I needed help Thirdly, I would like to give thanks to my friends: Huynh Quang Hung, Pham Chau Yen Thuy, Nguyen Thanh Nga, Le Huynh Anh Duc and Ms Joy, who have been constantly supporting for the past three months No matter whether they are in Viet Nam, Singapore, Australia, whenever I was stressed, they always cheered me up Had it not been for them, the journey would have been more painful I would also like to thank my other friends who have been regularly asking me if I was doing fine Last but not least, I would like to say thanks to all my respondents, whose participation in this thesis was invaluable ABBREVIATION CC Vietnamese Civil Code 2005 DOLISA Department of Labor - Invalids and Social Affairs Draft The draft of the LC 2012 EU European Union LC 2012 Vietnamese Labor Code 2012 MOLISA Ministry of Labor - War Invalids and Social Affairs NCA Non-compete agreement ILRs Internal labor regulations VCL Vietnamese Competition Law 2005 TABLE OF CONTENTS INTRODUCTION CHAPTER 1: OVERVIEW OF NON-COMPETE AGREEMENT IN LABOUR LAW Definition of the NCA General Characteristics Classification 10 Roles of the NCA 15 The development of the NCA 15 Enforcement of the NCA 19 6.1 Social – economic reasons of enforcement of the NCA: 20 6.2 Principles of law supporting for the NCA 21 6.2.1.Principle of free and voluntary undertaking and agreement 21 6.2.2.Principle of pacta sunt servanda 22 6.2.3.Principle of balance benefits 23 6.2.4.Principle of protecting employer’s interest in labor law 24 Conclusion of chapter 1: 25 CHAPTER 2: NON-COMPETE AGREEMENT IN LABOR LAW OF EUROPEAN UNION’S COUNTRIES 27 Legal backgrounds of the NCA 27 General legal requirements of the NCA 29 2.1 Capacity of the contractual parties 29 2.2 Written form 30 2.3 Reasonable Test of NCA 31 2.3.1.Time limit of a NCA 31 2.3.2.Geographic location 33 2.3.3.Industry 33 2.3.4.Consideration 34 2.3.5.“Garden Leave Clause” 37 Blue pencil and Red pencil 38 Remedies 40 4.1 Injunction 40 4.2 A penalty clause 41 4.3 Damages 42 Others 43 5.1.The responsibility of new employer regarding NCA 43 5.2.Dismissal .44 5.3.Change of work 44 Conclusion of chapter 45 CHAPTER 3: NON-COMPETE AGREEMENT IN VIETNAMESE LABOR LAW – PRACTICES AND THE PROPOSALS 46 Legal background of the NCA in Vietnam 46 Proposal for the governance of the NCA in Vietnamese labor law 52 3.1 To amend and implement some articles of the LC 2012 52 3.1.1.Article 23.2 of the LC 2012 52 3.1.2.Article 21of the LC 2012 52 3.1.3.Article 10.1of the LC 2012 53 3.1.4.Article 37.3 of LC 2012 53 3.2 To promulgate a new decree implementing in detail and guiding the LC 2012 on the NCA .54 3.2.1.To adopt a new decree 54 3.2.2.The suggestions for contents of the decree on the NCA 55 3.3 Settlement disputes of NCA .60 3.3.1.Authority and order 60 3.3.2.Method of settling disputes 60 Conclusion of chapter 61 CONCLUSION 62 INTRODUCTION The necessity of research Non-compete agreement (hereinafter referred to as “NCA”) is one of the popular terms in employment contract in which the employers prevent their employees from doing something against them Due to the great speed of the economy development, the human resource is very important which directly impacts on the success of business Additionally, the mobility of employment and the rapidly developing of technology have become main challenges facing the employers Hence, the employers intentionally expect to agree the NCA in the labor contract for the purpose of maintaining the stable human resources and protecting their commercial interests On the other sides, the employee can suffer some such damages caused by the restriction of NCA, for example, the difficulty of looking for higher paid job and the ensure of their stabilize life during restriction period Most of developed countries have made the legal framework in which the validity of the NCA is obviously determined by reasonable test Therein, the NCA can be valid in case of satisfying entirely the legal requirements; otherwise, it will be unenforceable The mainstream of this test is balance benefit between employers and employees rule Consequently, the employers cannot take advantage of the NCA to push the employee in such difficult situation despite of their dominant position and big control power in negotiation of labor contract In return, the employees are bound by their promise and strictly perform the contract As far as developing country is concerned, the NCA has been considered as a new term and has not regulated in any labor law In practice, the NCA is utilized day by day but is variously agreed in such confuse way It is suggested that developing country should create the legal framework of the NCA in which the rule of balance benefits between employer and employee is an essential kernel of enforcement of the NCA Respect to concrete situation in Vietnam, it is the great changes in Viet Nam labor field that the LC 2012 has taken effect since May 1, 2013 Therein, NCA which is initiative stipulated in law It lays the foundation an open a development of labor law in Viet Nam However, this provision indirectly regulates NCA in detail and may leads to the confused application in practice For the above-mentioned reasons, the topic “Non-compete agreement in labor law” is favored as the author‟s graduation thesis Because of limitation on time and wide scope of topic, it‟s hard for author to offer a profound study covering entire relating issues However, the author shall the best to provide a deep analysis on few particular issues All comments and advices are always welcomed to help the author improve the thesis for better contribution to Vietnamese labor laws The purpose of the thesis Firstly, the thesis shall provide the literature research on the general knowledge of NCA with the intention of turn out the nature of the NCA and the necessary in governing the NCA Secondly, the thesis summarizes and analyses the governance of NCA in Labor Law of many countries in order to make the proposal for Vietnamese legislation Delimitation of the thesis 3.1 Delimitation of the study I divide mechanisms of my thesis into two groups including internal and external mechanism External mechanisms base on the legislation of some developed countries in Europe and is the summary the typical of governing the NCA with many examples In contrast, internal mechanisms base on the legal theory to explain the necessary in promulgating guidance to governing the NCA Therein, this thesis does not present the reality and practical methods in enforcement of the NCA 53 the LC 2012 should be amended that: “The employee the employee may conclude contracts with multiple employers as long as they can ensure the implementation of the concluded contents which is prescribed in Article 23 of this Code and agreed by contractual parties.” Due to this amendment, the contents of articles are more logical and more harmonious if both Article 21 and Article 23.3 of the LC 2012 are put in the same chapter which stipulates labor contract 3.1.3 Article 10.1of the LC 2012 On the other hands, Article 10.1 of LC 2012 provides that: “The employee is entitled to work for any employer at any place that the law does not prohibit.” This concept of “any employer at any place” is so large that it allows employee to work for the rival employers during employment period It is contrary to the duty of loyalty in employment relationship and unintentionally neutralizes the validity of Article 23.3 of the LC 2012 As a result, the NCA is unenforceable in most of cases which are resolved by both civil procedures and labor procedures Therefore, Article 10.1 of the LC 2012 should be amended as “The employee is entitled to work for any employer at any place that the law does not prohibit and does not against to the former employer” 3.1.4 Article 37.3 of LC 2012 The essential purpose of NCA is protecting the legitimate interest of employer As analysed above, „the expansion of the limitation on notice time before resignation‟, namely Garden Leave Clause92 can be considered as an effective way for serve this purpose Nonetheless, Article 37.3 of the LC 2012 provides two circumstances of limitation on notice in case of unilaterally terminate the labor contract of the employer: notified in advance at least 45 days or the case prescribed in Article 156 of this Code”93 Due to the notice in advance, the employers can recruit new employee as well as re-set up their human resource However, it is so ambiguous that whether the employer and employee are entitled to expand the 92 See at 2.3.5 in chapter “depends on the time limit set by the competent medical facility” This is applied for the pregnant employee 93 54 limitation notice time over 45 days or not By acquiring the spirit of Garden Leave Clause from law in EU countries, Article 37.3 of the LC 2012 should add one more circumstance in which the contractual parties are allowed to agree new limitation on notice time, for example, “The employee who works under an indefinite-term labor contracts is entitled to unilaterally terminate labor contract The employee must be notified in advance according to the agreement of contractual parties, but not exceed six months before the termination, except for the case prescribed in Article 156 of this Code” With this amendment, the content of Article 37.3 of the LC 2012 is clearer and creates the legal framework of restriction covenant though a agreement of notice in advance as Garden Leave Clause Therein, the employer and employee are entitled to intentionally expand the time of notice which is longer than 45 days Besides, they can extend this agreement that the employees not go to work and receive their full salary during this time, so the benefit of the employee is ensured Respect to the benefit of the employers, they can prevent their employee from competitive actions Because the labor contract does not expire, so whatever disputes arisen from this clause is resolved by labor procedures 3.2 To promulgate a new decree implementing in detail and guiding the LC 2012 on the NCA 3.2.1 To adopt a new decree I suggest that the Government should promulgate a new decree which on the NCA in order to make it is effectively enforceable in practice This suggestion is based on the following reasons Firstly, the LC 2012 has taken into effect since May 1, 2013 The amendment a law procedure is so serious and complicated that it takes a lot of time to amend and implement some articles of this Code Hence, it does not immediately respond to the high demand of governing the NCA Promulgating new decree is considered as an effective solution to resolve the confusing application of the NCA in practice Additionally, the promulgation of the new decree is a legal performance which complies with the Article 242 of the LC 2012: “The Government and the 55 competent authorities shall stipulate in detail and make guidance of the implementation of articles and clauses in the Code” Actually, since the effective date of the LC 2012, many decrees have been published alternatively to make the guidance of applying articles in this Code As pointed out above, although a part of the NCA is stipulated in Article 23.2 of the LC 2012, this provision does not cover all legal issues of the NCA It is also not obvious enough for the court as well as the contractual parties to understand and utilize legitimately 3.2.2 The suggestions for contents of the decree on the NCA  Limitations of the NCA The duration, the geographic location and the industry are three important elements that the Government should intentionally stipulate in order to balance the benefit between employee and employer Regarding the limitation of time, it is generally agreed that if the NCA is bound during employment period, the restrictive time will be equal to the length of employment However, it is quite difficult and ambiguous to determine how long is too long in the post-employment context As pointed out in chapter 2, some countries distinguish between skilled employee and non-skilled employees According to a report of General Office for Population Family Planning “Labor and work in Viet Nam 2011”94 among 51,4 million employees, about 15,6% of them were skilled employees It seems necessary in stipulation of different times for two types of employees Therefore, based on the real situation in Vietnam, the Government should provide certainly a maximum time that the contractual parties can agree As discussed in previous part, the draft of the LC 2012, some drafters suggested that “Restrictive time does not exceed years from the termination date of labor contract” Unfortunately, it was excluded when the LC 2012 was adopted In author‟s opinion, the Government should acquire the spirits of this proposal and use it in concrete situation of NCA 94 General Office for Population Family Planning(2011), Labor and work in Viet Nam 2011 , available at http://www.gopfp.gov.vn/home;jsessionid=D0BE38055F900ABE80719D775D074C1C?p_p_id=62_INSTA NCE_mRd7&p_p_lifecycle=0&p_p_state=maximized&p_p_mode=view&_62_INSTANCE_mRd7_struts_a ction=%2Fjournal_articles%2Fview&_62_INSTANCE_mRd7_groupId=18&_62_INSTANCE_mRd7_articl eId=390612&_62_INSTANCE_mRd7_version=1.0 last update on 11/07/2013 56 However, by referring to other legislations of EU countries, the duration should not exceed one year rather than three years because the speed of developing technology is so fast that one year is enough for employer to renew his/her ideas of business  Financial amount: If the NCA is applied after the termination of labor contract, the Government should impose paying a financial amount on the employer for their employees This obligation is necessary for ensuring employee‟s living During restriction periods, the employee obtains job more difficultly because he/she is bound by NCA which limits their opportunity to find a job such as professional department, geographic location Thus, it occurs a question that how much money is adequate to the loss of employee during restriction time It is intangible to calculate a financial amount By reference to other countries, the Government can define a minimum amount which is paid based on following two options:  Option 1: The employer shall pay lump sum at the end of terminating labor contract, which must not be lower than the salary of (number) months  Option 2: The employer shall pay a financial amount of at least 50% of the lasted contractual salary received monthly by employees after terminating labor contract In addition, the Government should consider the payment obligation of the employer in case of termination of the non-compete contract Generally, if the contract is bilaterally terminated, each contractual party does not perform continuously his/her obligation However, if the contract is unilaterally terminated, whether the employer shall pay the employee or not will depend on the legitimacy of terminating Another important legal issue is that it is considered as a serious breach of the contract if the employer does not fulfil the payment of financial amount obligation Consequently, the employee is entitled to unilaterally terminate the non-compete contract also claims for damages 57  Form of the NCA: The wording of NCA must be written accurately and unambiguously in order to avoid the conflicts when contractual parties undertake this contract Moreover, it supports them to show evidences in settling disputes Hence, written form is highly recommended in most of legislations in the NCA area Although, Article 22.3 of the LC 2012 requires that non-disclosure agreement shall be in writing, the new decree should define that all types of the NCA must be in writing In addition, the NCA shall be written separately from labor contract Because of protecting his/her interests, the employer is a person who initiatively and intentionally designs non-compete clause in labor contract During negotiation of employment contract process, the employer is usually considered as a dominant position They can abuse this clause or also bind the employee with other expensive obligations in case of scarce job opportunity As far as employee is concerned, he/she does not pay attention to the NCA when he/she enters into labor contract because he/she needs a job and lacks legal knowledge If the NCA is included as a term in labor contract; the employee are more likely to skip the detail of this clause On the contrary, if the NCA is a separate contract, it will grab employee‟s attention and require them to consider seriously this restriction before entering to labor contract He/she can see the importance of NCA and may get the consultation of another one Briefly, the NCA should be stipulated in written form which is separated from labor contract  Termination of the NCA The Government should stipulate which cases of terminating NCA are and whether contractual parties have the right to unilaterally terminate this agreement or not According to some provisions in relation to the termination of labor contract in the LC 2012, the author of this thesis suggests some examples: 58 Article…: Cases of terminating NCA: The valid time of contract expires or both parties agree to terminate the NCA The employee is condemned to imprisonment, to death according to the legal judgment and decision from the Court The employee dies, is declared dead, restricted or loss capacity of civil acts by the Court The employer being individual dies or is declared dead, restricted or loss capacity of civil acts by the Court, the employer not being an individual stops the operation The employee is disciplinarily dismissed as prescribed in Clause Article 125 and Article 126 of the LC 2012 The employee unilaterally terminates the non-compete contract as prescribed in Article 37 of the LC 2012 and Article ….of this Decree The employer unilaterally terminates the non-compete contract as prescribed in Article 38 of the LC 2012 and Article …of this Decree The employer dismisses the employee due to changes in the mechanism, technology or for some economic reasons, or merger, separation of enterprise, cooperatives without the renewal non-compete contract The change of labor policy which restricts the employer and employee to enter into non-compete contract according to the decision of the official agency Article…: The right to unilaterally terminate the non-compete contract of the employees The employee is entitled to unilaterally terminate the contract sooner in following cases: a) The employee or their family encounters difficulties and the severity of labor market that he/she cannot continue to be performed 59 b) The employer violates the payment of financial amount pursuant to Article ….of this Decree When unilaterally terminate the non-compete contract as prescribed in Clause this Article, the employee must notify the employer in advance at least 45 working days Article….: The right to unilaterally terminate the non-compete contract of the employer: The employer is entitled to unilaterally terminate the contract sooner in following cases: a) The employee regularly fails to complete the promise according to the contract b) The employee gives the employee an announcement of terminating the contract at least 45 working days in advance  Remedies: In order to enforce the NCA, most of legislations also stipulate remedies which provide the legitimate manners for contractual parties to protect their interests by themselves and by asking the court Generally, there are various actions that the contractual party of the NCA can apply when the other party breaches the contract By acquiring experience of these countries and applying to the concrete situation in Vietnam, the Government should create a framework of remedies for the employer and employee in non-compete contract For example:  Asking the court for declaring the invalidity of the non-compete contract;  Applying temporary injunction to prevent the infringement of the other party;  Claiming for damages;  Setting up the penalty clause 60 Additionally, the Government should stipulate whether applying penalty excludes claiming for damages or not If the employer and employee agree on penalty clause in non-compete contract, they are not allowed to claim for damages in case of the similarity in the breach of the contract Finance is not the problem of the employer who is an enterprise, but the employee is different He/she is an individual entity, so his/her financial resource is limited In the majority of practical cases dealing with the NCA, the employee who initiative breaches the contract are the defendant It is feasible and appreciates financial condition of the employee that he/she is able to comply with the compensation and pay for penalty 3.3 Settlement disputes of NCA 3.3.1 Authority and order Disputes of the NCA are considered as personal labor disputes because they are raised from the contract between the employer and the employee in individual According to Article 200 of the LC 2012, there are two authority agencies which is competent to settle individual labor disputes These are the Labor Mediator and the People‟s Court Pursuant to Article 201 of the LC 2012, the individual labor disputes must be settled by the mediators before bringing to the courts, except some certain cases Disputes of non-compete contract not belong to these exceptions, so the Decree should stipulate obviously the authority and procedures of settling these disputes Because of the complication of disputes related to the NCA, it should be directly settled by the court without the pre-court mediation procedures 3.3.2 Method of settling disputes In settlement of disputes process, there are two types of methods which can be applied to resolve the case related to the NCA There are “blue pencil” and “red pencil” method In most of EU countries, the law of NCA provides that the court applies “blue pencil” because this method allows the court to settle dispute in such flexible ways If a part of NCA infringes the statutory provision, the court can modify the remaining part which satisfies all requirements of the law “Blue pencil” is an effective solution in which it not only protects the complying strictly with the 61 law but also maintains the intention of the contractual parties On the contrary, “red pencil” doctrine means that the court cannot modify a NCA which is agreed by the contractual parties Pursuant to the statutory provision provided by the law, the court has to consider the NCA comprehensively then make decisions if noncompete is entirely valid or not For example, the law provides that the limitation of restrictive time is not longer than one year However, contractual parties agree on three years In this case, the court immediately declares that this agreement is invalid and does not reduce this duration to one year Therefore, I recommend that the Government should be in favor of blue pencil doctrine in the method of settling dispute instead of “red pencil” Conclusion of chapter The NCA is considered as a new term in the labor contract in Vietnam Vietnamese legislation provides some provisions which are relevant to the concept of competition or the content of NCA such as non-disclosure agreement However, it is so unclear and ambiguous that leads to the confusion on applying NCA in practice The NCA is designed in various forms and contents Actually, the benefit of the employees is not ensured, for example, a financial amount supporting for their living during restriction period, so they initiatively breach the contract Because of lacking of legal framework regarding to NCA, it is very difficult for employer to protect their interests By acquiring from the governance of NCA in many countries, the proposal provides several suggestions to amend some articles in LC 2012 also to adopt new decree which is guidance for implement NCA in detail The mainstream of these solutions is the rule of balance the benefit between employer and employee and appreciates to the concrete situation in Vietnam 62 CONCLUSION The NCA is one of the popular terms in employment contract in which the employers prevent their employees from doing something against them Most of developed countries have made the legal framework in which the validity of the NCA is obviously determined by reasonable test The mainstream of this test is balance benefit between employers and employees Therein, the NCA can be valid in case of satisfying entirely the legal requirements of law, otherwise, it will be unenforceable However, in many developing countries such as Vietnam, the NCA has been considered as a new term and has not regulated in any labor law In practice, the NCA is utilized day by day but is variously agreed in such confuse way It leads to the high demand of promulgating a law which governs the NCA Due to the combination between the research process on internal and external materials and analyse and summarize methods, the thesis acquires some results as below: Respect to theory, the thesis is presented obviously the typical knowledge of the NCA It is not only the definition, classification and general characteristics but also and the fundamental rules supporting for enforcement of this clause Besides that, this thesis gives a detail description of the international governance of the NCA, especially in some EU countries Respect to practice, the thesis provides some suggestions of governing NCA though acquiring knowledge and applying in Vietnamese concrete situation The proposal presents numerous solutions which are considered as effective ways to enforce the NCA also settle disputes relating to the NCA Therein, the suggestions focus on amending some articles in the LC 2012 and promulgating a new decree regarding the NCA Because of the limitation on time and scope of this thesis, the proposal might uncover all legal issues of the NCA Due to the great changes of the LC 2012 and the promulgating new decrees in turn, the author expects this thesis will contribute 63 to set up a legal framework of the NCA in which the employers can protect their legitimate interests and the employee‟s benefits is also protected It leads to the development of employment relationship on individual and Vietnamese labor law as a whole BIBLIOGRAPHY I Legal documents Constitution of Socialist Public of Vietnam in 1992 (as amended on September 25, 2001) Vietnamese Labor Code No 10/2012/QH13 Vietnamese Civil Code No.33/2005/QH11 Vietnamese Competition Law No.27/2004/QH11 Germany Commercial Code Charter of Fundamental Rights of the EU, which became effective 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http://legal-dictionary.thefreedictionary.com 33 Website Human resource in London, Understanding garden leave, available at http://www.rhhr.com/2/understanding-gardenleave#sthash.E0kd3bvU.dpuf%27, last update on 14/06/2013 34 Website of Cornell Univerity Law school: http://www.law.cornell.edu/wex/injunction, last update on 35 http://en.wikipedia.org/ 36 http://www.wisegeek.org/what-is-a-non-compete-agreement.htm ...HO CHI MINH CITY UNIVERSITY OF LAW MANAGING BOARD OF SPECIAL TRAINING PROGRAMS  - BACHELOR’S THESIS OF REGULAR TRAINING 34th MAJOR OF CIVIL LAW NON- COMPETE AGREEMENT IN LABOR LAW Student:... benefits 23 6.2.4.Principle of protecting employer’s interest in labor law 24 Conclusion of chapter 1: 25 CHAPTER 2: NON- COMPETE AGREEMENT IN LABOR LAW OF EUROPEAN UNION’S COUNTRIES... clause in labor field in order to support for presenting the international governance of the NCA in chapter Chapter2: Non- Competition Agreement in Labor law of European Union countries The main content