Non-competition agreements, with effect after the termination of the employment contract, are of paramount importance for companies with a view of safeguarding their competitive advantages and, often, the substantial investments in specific training provided to employees, which may otherwise be of their competitor’s benefit if the employees move there.
Aware of this reality, the Portuguese Labour Law allows (albeit with limitations) the execution of non-compete agreements with effects after the termination of the employment contract, provided that the following conditions are met:
- The agreement is in writing (although not necessarily in the employment contract);
- There is a specific danger of the activity to cause damages to the employer (the so-called “differential competition”);
- The employee is paid a compensation for the duration of the activity’s limitation;
- The limitation period does not exceed 2 years after the termination of the employment contract (which can be extended for up to 3 years in cases of employees who are engaged in the performance of activities that entail a high level of trust or that have access to particularly sensitive information from a competition standpoint).
The legal framework is designed to strike a balance between, on the one hand, employees’ constitutionally protected right to freedom of choice of profession and type of work – which encompasses the freedom to leave an employment relationship in order, for example, to start another one with a different employer – and, on the other, the aforementioned business interests.
One should also bear in mind that the limitation on freedom of work flowing from the execution of a non-competition agreement with effects after the termination of the employment contract occurs not only after this termination takes place, but also during the performance of the work itself, since the employer is aware that if he wants to change employer, he will be limited in the type of work he will be able to carry out next.
It is within this landscape that the question has been raised as to whether, when the employment contract is terminated (or at an earlier stage), the employer can waive the non-competition agreement, for example, on the grounds that at that point the real risk of competition no longer exists, thus avoiding the need to pay the employee the compensation due for the non-competition.
Despite some legal opinion discussion around this issue, national case law has been consolidating the view that this is not possible. In this regard, please refer to the recent Ruling of the Évora Court of Appeals of 12/07/2023, the summary of which reads:
«3. The contractual mechanism by which the employer can unilaterally waive the non-competition pact, up to 15 days after the termination of the employment contract, and thus exempt itself from the payment of that compensation, is null and void, as it breaches a mandatory provision of the law.»
This is the overwhelming majority view in national case law[1], which we tend to agree with, given the way non-compete agreements are typically drafted.
In our view, however, the solution to this issue may not be as straightforward as that resulting from the aforementioned case law (also followed by the overwhelming majority of legal opinion), and that it should be taken into account that we are dealing with a contract of continuous performance, in which the evolution of the employee’s professional career within the company may mean that, at certain times, he is actually working in a sector or area that is critical in terms of competition and, later on (for example, when the contract comes to an end), he is no longer there, and the enforcement of the agreement becomes totally inconsequential. There is, however, no way to turnaround the fact that at least for part of the performance of the employment contract, the employee’s freedom to quit was limited, and that this limitation will have to be compensated for. And it is in this context that we believe that mechanisms can be found to balance the interests of the company and the employee, and which respect the onerous and bilateral nature of the agreement, which may include the introduction of (i) time limits, (ii) the establishment of strong causal links between the performance of specific duties and the risk of competition and (iii), of no less importance, the timing and form of the payment of compensation to the employee, which allow the employer to ensure some level of control over the effective application of the non-competition pact and, above all, that only in cases where the employee is actually in a position to compete with it – and provided it is within parameters of good faith, it goes without saying – is such an agreement enforced.
Labour Department
Hugo Martins Braz | Tiago Lopes Fernandez
[1] Please also refer to, among other examples, to the Ruling of the Lisbon Court of Appeals of 09/13/2023, in which the Court looked at an interesting clause which included a suspensive condition to the agreement, which rendered its application dependent on an evaluation by the employer at the termination date, and the Ruling of the Supreme Court of Justice from 04/30/2014, both available at www.dgsi.pt.
