The Brazilian labor law contemplates some so-called special clauses that can be placed in labor contracts but that still create uncertainty as to the effectiveness and scope, and often the discussion ends up in the Judiciary. We will discuss below the conditions of validity of one of these special provisions called “non-compete clause”.
This clause is very important for some business segments that face strong competition in the market, and it is a fact that the employer needs to protect itself during the term of the employment relationship and especially after its termination, which is why the clause must be inserted in the employment contract as from the beginning of the labor relationship.
The objective of this clause is to ensure that after contractual termination, at least for a period, the ex-employee shall not act as a direct competitor of his former employer or work for the latter’s competitors using information and/or privileged knowledge. Hence it is of the utmost concern to watch the manner and form of regulating this clause in contracts, especially in relation to Articles 9, 444 and 468 of the Labor Code, that strive for the protection of labor relations and workers.
By narrowly interpreting these articles, one comes to the conclusion that the clause is not valid for a restrictive nature and impeding the exercise of the same activity by former employees, because it violates the constitutional principle of the right to work as established in the Federal Constitution from 1988 provided in its Articles 6 and 170, paragraph VIII.
But the interpretation of these articles should be made more broadly, taking into account the rights and duties of the parties in a given and more concrete situation, i.e. whether there is a need to also protect the employer from the competition due to his long-term investment in research and development. If this is the case, there is also the need for a financial contribution to the employee after termination of employment, balancing both interests. What the Labor Court seeks to avoid is to ban a non-compete clause without corresponding compensation.
For the validity and effectiveness of this clause some conditions must be present: the employee must have specific knowledge of issues related to the company’s segment, competition brings losses to the company, geographical zone, average duration and, most importantly, adequate financial compensation to the employee for not engaging in a competing activity. No clause can be deemed valid without a corresponding compensation.
Labor courts differ on the subject, which is why the clause should be inserted in the work contract within a context that does not lead to loss of its validity and effectiveness. The Higher Labor Court of São Paulo (TRT 2nd Region) has positioned itself in both directions, sometimes declaring such a clause void and sometimes fully effective. See the following examples:
Contrary position: “… the employment contract includes rights and obligations that end with its extinction. A non-compete clause that should apply after termination of contract is null and void, according to provisions of article 9 of the Consolidation of Labor Laws.”
Favorable position “… it is valid to insert a noncompete clause in the employment contract, as long as it is restricted to a certain market segment and established for a reasonable period of time, in addition to providing compensatory damages …”
In short, and despite different court understandings depending on the given case, if the non-compete clause is established for a reasonable time with payment of an adequate compensation, taking into account the principles of reasonableness and proportionality, it will be considered valid. The employer may release the employee from compliance with such a non-compete clause by simply formalizing it in writing, in which case the financial compensation will be removed.
Valdirene Laginski was associate at Pacheco Neto Sanden Teisseire Law Firm.
Renato Pacheco e Silva Bacellar Neto is partner at Pacheco Neto Sanden Teisseire Law Firm.
