Non-Competes and Employment Contracts

I. What is a non-compete clause in an employment contract?

A non-compete clause (or non-competition clause), is a clause in an employment contract that prevents or restricts an employee from any activity that directly competes against his former employer once the employment contract has ended.

II. Do all employment contracts have non-compete clauses?

No, however, where an employee’s duties include access to company secrets or becoming acquainted with the employers’ customers, his employment contract will likely contain a non-compete clause.

III. What is the purpose of a non-compete clause?

The purpose of the non-compete clause is to protect the legitimate business interests of the employer. A former employee is not allowed to use the business secrets acquired while working for a former employer or make use of the former employer’s business customers to directly compete with the former employer.

IV. What laws govern non-compete clauses?

The UAE Labor Law, its Executive Regulations, and the Civil Code as set out below allow for non-compete clauses in employment contracts and set out the conditions that must be met for a non-compete to be valid.

  • Federal Decree -Law No. (33) of 2021 (the “Labor Law”) Articles: (10);
  • Cabinet Resolution No. (1) of 2022 On the Executive Regulations of Federal Decree-Law No. (33) of 2021 (the “Executive Regulations”) Article: (12);
  • UAE Federal Law No. (5) of 1985 concerning Civil Transactions (“Civil Code”) Articles (909) and (910).

 

1) Article 10 of the Labor Law, states:

“Where the worker performs a Work which gives him access to Employer’s customers or business secrets, the Employer may make a provision in the Employment Contract that the Worker shall not compete with, or be engaged in any business which competes with him in the same Sector after the expiry of the Contract. Such clause shall specify the place, time, and type of Work to the extent necessary to protect the legitimate business interests, and the non-competition period shall not exceed two (2) years after the expiration of the Contract.”

2) Article (12(1)) of the Executive Regulations States:

“Subject to the provisions of Article (10) of the Labor Law, it is required for the application of the non-competition clause stipulated therein that the following must be determined:

a) The geographical scope for the application of the condition.
b) The term of the condition, provided that it does not exceed two years from the date of the expiry of the contract.
c) The nature of the work so as such nature seriously harms the legitimate interests of the employer.”

3) Article 909 of the Civil Code states:

a) “If the work of the employee is such as to permit him to have access to work secrets or to make acquaintance with the customers of the business, it shall be permissible for both parties to agree that it shall not be permissible for the employee to compete with the employer or to engage in employment which competes with him after the termination of the contract.

b) Provided that such agreement shall not be valid unless it is limited in time, place, and kind of work, to such extent as may be necessary to protect the lawful interests of the employer.

c) It shall not be permissible for the employer to rely on that agreement if he terminates the contract without any act on the part of the employee justifying that course, and likewise it shall not be permissible for him to rely on the agreement if he commits any act which justifies the employee terminating the contract.”

4) Article 910 of the Civil Code states:
“If both parties agree that the employee should be liable in the event that he is in breach of his agreement not to compete, and such liability is fixed at an exorbitant amount in such a way to compel him to remain with the employer, such a provision shall be invalid.”

V. What is a valid non-compete clause?

As set out above, the Labor Law and the Civil Code set out the following conditions which must be evaluated to determine if the non-compete is valid. A non-compete must protect the employer’s legitimate business interests while ensuring the employee is not deprived of his right to work.

  • The non-compete must be necessary to protect the legitimate business interests of the employer – An employer has a legitimate business interest in preventing a former employee from sharing his business secrets or customer information with his competitor.This means that a non-compete must be limited to employees who because of their position had access to employer secrets and/or are acquainted with the employer’s customers. It would be usual to have a non-compete clause for a director or sales manager, but not for an assistant or general office employee who because of their work did not have access to employer secrets nor became acquainted with its customers.
  • The non-compete must be limited in its geographic scope – The restriction should only be as broad as required to protect the employer’s business interest while at the same time not prohibiting the former employee from finding work. For example, if the former employee was a luxury car salesman for all of Dubai, a non-compete clause that restricts him from working in car sales throughout the entire UAE would likely be viewed as too broad and would, in almost all circumstances, be found unenforceable.
  • The non-compete must be limited in its duration – The non-compete is effective when the employment contract terminates, after the notice period. A non-compete can be from three months to two years. Whether the duration is appropriate depends upon the specific circumstances of the former employee’s position with the former employer. Similar to the other limitations, the length of time must be reasonable under the specific circumstances of the situation and strike a balancing act between protecting the employer’s business interests while permitting the former employee to find gainful employment in his field or profession.
  • The restriction must set out the nature of the restriction – The restriction should set out the actual nature/type of work being restricted. Returning to the luxury sales employee example: A restriction preventing the employee from all sales of cars in Dubai is broad as it does not consider the employer’s specific business interest, the sale of luxury cars. Further, by preventing the former employee from all car sales this restriction essentially does not allow the former employee to find work in the car sales business. A restriction that restrains the former employee from selling luxury cars for the employer’s direct competitors in Dubai may be better, as it protects the employer’s business interest and allows for employee to find employment.

 

VI. Are non-competes enforceable?

Yes, the Civil Law provides for compensation for actual losses suffered by the employer due to a former employee’s breach of the non-compete. Gathering evidence that proves actual monetary losses were the direct result of the former employee’s breach of a non-compete is time-consuming and may be difficult.

Further, onshore courts do not have the power to issue restraining orders to immediately stop an ongoing breach and damages flowing from the former employee’s breach of a non-compete clause.

 

VII. Is there anything further an employer can do to protect his business interests?

The Executive Regulations Article (12)(4) of the Labor Law allows the parties to prevent execution of a non-compete where the employer and employee have also entered into a written agreement whereby the employee (or his new employer) agrees to pay an amount of up to three (3) months’ salary should the former employee be in breach of the non-compete. In this situation, the former employee has the burden to show that he has not breached the non-compete otherwise he will have to pay the agree upon amount to the employer.

It is important that an employer identify key positions in his Company and protect his legitimate business interests by ensuring that non-compete clauses are drafted specifically tailored to the particular employee’s position vis-à-vis the company business.  Given that no injunctive relief is available to stop an ongoing breach and ensuing economic losses immediately, an employer may consider executing an agreement with the employee that allows the employer to seek an agreed-upon payment from the former employee should the latter breach the non-compete.

 

 

 

Disclaimer

This publication does not provide any legal advice and it is for information purposes only. You should not rely upon the material or information in this publication as a basis for making any business, legal or other decisions. Therefore, any reliance on such material is strictly at your own risk.

Author: Gloria Estolano (Strategic Partner)

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Strategic Partner – Employment Law – Gloria Estolano

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Strategic Partner – Employment Law – Gloria Estolano

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