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Examining Employee Non-Compete Restrictions: A Comprehensive Overview
Berfin Demirtaş | TRAINEE25.05.2023
Ece Aksel | JUNIOR ASSOCIATE25.05.2023
During their employment, workers are likely to learn the employer's trade secrets, proprietary information and professional methods, depending on their position and job description. In some cases, there is a significant risk that employees may act against the employer's interest by using such confidential information that they have inevitably learned, thereby causing significant damage to the employer. In such cases, since the employer has a worth preserving legitimate interest , legal remedies are provided to prevent workers from competing with the employer.
It is not difficult to imagine that the employee should not be competing with the employer during the period of employment under the employment contract. As a matter of fact, the employment contract comes into existence on the basis of mutual trust between the employee and the employer. Within the scope of this mutual trust relationship, the employee undertakes to fulfill his/her obligation to the employer "loyally" and not to compete with the employer during the service period. In other words, the obligation of the employee not to compete with the employer during the term of the employment contract arises from the "duty of loyalty" of the employee. Since the duty of loyalty derives its source from the law, there is no need for an exclusive agreement signed between the parties or a special provision to be included in the employment contract in order to talk about the employee's obligation not to compete during the service period. The behaviors of the employee that will be considered as competition during the term of the employment contract will mean a breach of the duty of loyalty and entitle the employer to terminate the employment contract immediately and without compensation.
However, in some cases, the obligation of the employee not to compete against the employer may continue even after the employment contract is terminated and the duty of loyalty is no longer owed. As a matter of fact, the professional and technical knowledge and trade secrets acquired by the employee during his/her employment may be of critical importance for the employer, and even after the termination of the employment relationship, learning or use of such information by a competitor may cause great damage to the employer. In order to prevent such situations, the parties may stipulate in the employment contract that the employee shall not compete even after the termination of the employment contract, either by establishing his/her own business or by working for a competitor, or may conclude a separate non-competition agreement. Thus, the non-competition obligation, which is a manifestation of the employee's duty of loyalty during the service period, is transformed into a "non-competition" upon the termination of the service relationship. Therefore, let us take a look at how the non-competition obligation foreseen for the employee is defined by positive law, its conditions, limitations, sanctions and termination.
Prohibition of Competition after Termination of Employment Contract
In order for the employee's non-compete to continue after the termination of the employment relationship, a contract must be signed or a provision must be included in the employment contract. Labor Law No. 4857 does not contain a regulation on the non-competition agreement. However, the provisions of the Turkish Code of Obligations No. 6098 (“TBK”) 444-447 apply to the non-competition clause included in the employment contracts or to the non-competition agreement to be signed exclusively.
Pursuant to Article 444/1 of the TBK, after the termination of the employment contract, the employee opening a competing business on his own account, working in another competing business and entering into another type of interest relationship with the competing business are stated as the main cases of competition. At this point, an enterprise that offers the same goods or services to the same customers is considered a rival enterprise.
A non-competition agreement must have certain conditions in order to be valid. These conditions are regulated under Article 444 of the TBK. In the said article;
“A worker who has the capacity to act may undertake in writing to refrain from competing with the employer in any way after the termination of the contract, in particular from opening a competing enterprise on his own account, working in another competing enterprise or otherwise entering into a relationship of interest with the competing enterprise.
The non-competition clause is valid only if the service relationship provides the employee with the opportunity to obtain information about the customer environment or production secrets or the employer's business, and at the same time, the use of this information is of a nature to cause significant damage to the employer.”
As can be understood from the provision, non-competition agreements must be in writing in order to be considered valid. However, in order to stipulate a non-compete for the employee, the employer must have an interest worth protecting. If there is no such interest, the non-competition agreement should be deemed invalid. In order to be able to talk about a legitimate interest worthy of protection, it is not enough for the employee to know the customers or to learn business secrets, but there must also be a possibility of significant damage to the employer if this information is used. As a matter of fact, as a settled case law, in the decision of the Supreme Court of Appeals General Assembly of Civil Chambers dated 22.09.2008, E. 2008/9-517, K 2008/566; “The non-competition undertaking is valid only in cases where there is a possibility that the employee may cause significant damage to the employer by using the information belonging to the employer's customer circle or business and production secrets. Therefore, even if the employee is in possession of the employer's customer circle or business and production secrets, if the use of this information is not likely to cause significant damage to the employer, the non-competition agreement cannot be considered valid.”
However, the conditions mentioned above alone are not sufficient and the non-competition clause, which may jeopardize the economic future of the employee, must be equitable, proportionate to the employer's legitimate interest, and subject to certain limits in terms of time, place and subject matter.
Limitation of Non-Competition in terms of Time, Place and Subject Matter
It is unthinkable that the parties have complete and absolute freedom when concluding a non-competition agreement. As a matter of fact, the employee's freedom to work and contract, which is guaranteed by the Constitution, must not be violated and the balance between the just interests of the employer and the employee must be observed. A non-competition agreement is valid only on the condition that the economic future of the employee is not jeopardized unfairly.
In accordance with Article 445 of the TBK, a prohibition on competition may not contain undue limitations in terms of place, duration and types of work that can unduly jeopardise an employee's economic prospects within two years unless there are special circumstances or conditions. If the prohibitions do not limit their scope in terms of location, duration and nature of work, as explained above, noncompetitive agreements shall be invalid.
• In the context of the limitation of the prohibition of competition on the basis of its location, the limit to be imposed should not exceed the geographical area in which the employer actually operates. But the question of whether such a ban can be enforced in all Turkey is based on the fact that employers operate throughout Turkey. However, considering the existence of employers operating throughout Turkey, the question arises whether this prohibition can be regulated throughout Turkey. In the decision of the 9th Civil Chamber of the Court of Cassation dated 24.12.2009, E. 2009/26954, K. 2009/36971, which can be considered as a precedent regarding this issue, “...Our Chamber has not recognized the validity of the regulations stipulated in terms of non-competition within the borders of Turkey. However, for a foreign national employee who has spent most of his/her working life outside Turkey, it may be possible to determine the non-competition within the borders of the country. Again, limitation to provincial borders or a certain region may be deemed appropriate according to the nature of the work...”
• Regarding the limitation of the prohibition of competition in terms of location, the limit to be regulated should not exceed the geographical area where the employer actually carries out its activities. However, considering the existence of employers operating throughout Turkey, the question arises whether this prohibition can be regulated throughout Turkey. In the decision of the 9th Civil Chamber of the Court of Cassation dated 24.12.2009, E. 2009/26954, K. 2009/36971, which can be considered as a precedent regarding this issue, “...Our Chamber has not recognized the validity of the regulations stipulated in terms of non-competition within the borders of Turkey. However, for a foreign national employee who has spent most of his/her working life outside Turkey, it may be possible to determine the non-competition within the borders of the country. Again, limitation to provincial borders or a certain region may be deemed appropriate according to the nature of the work...”
• By limiting the non-competition in terms of subject matter, it is meant that the non-competition should be foreseen not in terms of the employer's entire field of activity, but in terms of a type of work that is directly related to the work that the employee performs in the enterprise and limited to his concrete duty. The non-compete should be limited to the subjects in which the employee learns the information that justifies the non-compete.
Article 445 of the TBK provides that “The judge may limit the excessive non-competition clause in terms of its scope or duration, by freely evaluating all the circumstances and conditions and taking into account the counter-performance that the employer may have undertaken in an equitable manner.” In other words, a judge may have discretion to limit the clause of noncompetitive conduct which he deems unfair and excessive.
As can be seen, the non-competition clause to be regulated must be determined in a manner that will not have severe consequences for the economic future of the employee and in accordance with the rules of honesty, taking into account the nature of the work performed by the employee.
Consequences of Breach of Non-Competition Agreement
If there is a valid non-competition agreement after the termination of the employment contract, the employee must act in accordance with the non-competition obligation arising from the contract. In case of breach of the non-compete, the employee will face certain consequences. These are as follows;
Article 446/1 of the TBK states: "The employee who violates the non-competition clause is obliged to compensate all damages incurred by the employer as a result thereof." Therefore, if the employee violates the non-competition clause, it means that the employee has not duly fulfilled his/her contractual obligation and the employee is liable for compensation. In this context, the proof of the existence and amount of the damage belongs to the employer. The employer is entitled to compensation by proving that the non-competition clause has been violated, that this has caused damage and that there is a causal link between the violation and the damage.
However, since it may be difficult and challenging for employers to prove the damages suffered due to the breach of the non-competition agreement, employers prefer to add a penalty clause to the agreement in practice. Pursuant to Article 180/1 of the TBK, the employer has the right to demand the penalty clause agreed in the agreement without having to prove any damages. In order for the employer to claim the penalty clause, it is sufficient for the employer to prove that the non-competition agreement has been breached. If the employer's damages exceed the amount of the penalty clause, the employee is obliged to compensate for the excess. In this case, the employer is obliged to prove that the damage was caused by the employee's own fault. It should also be noted that, pursuant to Article 182 of the TBK, if the penalty clause is excessively high, it may be reduced by the judge.
Furthermore, Article 446/2 of the TBK states that “If the breach of the prohibition is subject to a penalty clause and there is no provision to the contrary in the contract, the employee may be released from the non-competition obligation by paying the prescribed amount; however, the employee must compensate for the damage exceeding this amount” According to the relevant provision, it is possible for the employee to be released from the non-competition obligation by paying the penal clause stipulated in the contract. However, the aforementioned provision is a regulatory rule of law and the contrary can always be agreed in the contract.
Termination of the Employee's Non-Competition Obligation
- Where the employer does not have any genuine interest in maintaining a noncompetitive relationship, the agreement shall cease to exist. In fact, as provided in Article 447/1 of the TBK; "Any agreement to refrain from a competition shall be terminated if it is established that the employer does not have any genuine interest in continuing this prohibition."Examples of situations where the employer no longer has a valid interest are; the employer's changing the field of work, a secret that previously existed and caused the non-competition agreement to be concluded, becoming publicly known, and the disappearance of the possibility of harm by the employee.
- On the other hand, pursuant to Article 447/2 of the TBK, if the employment contract of the employee is terminated without just cause, the non-competition agreement shall also terminate. According to that provision, the termination of the noncompete obligation does not result from a justified termination pursuant to Article 25 of the Labour Act or Article 435 of the TBK.
- As stated in Article 447/2 of the TBK; "if the contract is terminated by the employer without just cause or by the employee for a reason attributable to the employer", the non-competition clause is terminated.
As a result; while the employer's legitimate interests are respected and protected within the scope of the non-compete, care should be taken not to deal a heavy blow to the employee's freedom of work and economic future. In this respect, an equitable and measured balance between the interests of the employer and the employee should be tried to be achieved. In cases where this balance is disrupted to the detriment of the employee, the non-competition clause may be deemed invalid or its limits may be narrowed. It should not be forgotten that in each concrete case, whether the employer has an interest worth protecting and, if so, the limits of the prohibition area required by this interest may differ, and therefore, in order to foresee a prohibition of competition for the employee, each element must be evaluated exclusively according to the circumstances of the case.