"Non-competition "Clause in a Contract for Employment

What is the status of such a clause? What are the remedies available to the employer in the event that an employee violated the non-competition clause and what are the risks of violating the agreement? 

Recently, a client - VP of a large company approached us and asked if he could hire a senior employee who had until recently worked for a competitor and what is legal exposures involved.

In many cases, employers place a non-competition clause in the labor agreement with the worker, meaning "cooling-off period," which ranges from several months to a year and sometimes even longer, in which the employee is asked not to work in competing companies. Moreover, many workers who lose their jobs find themselves returning to the labor market when they are forbidden to compete with the company from which they were fired.

What is the status of these clauses? What are the remedies available to the employer in the event that an employee violated the non-competition clause and what are the risks of violating the agreement?

In short, it can be said that the answer depends on the specific condition, its scope, its reasonableness and the very interest on which it is intended to protect, when each case is examined on its merits. The starting point for examining the legality of the restriction of competition clause is that the restriction must be proportionate and for a proper purpose, since it violates the worker's constitutional right to freedom of occupation. The Labor Court will not be quick to approve a non-competition clause unless it is proved that in the circumstances of the case, the considerations for approving the condition outweigh the violation of the worker's freedom of occupation. 

As early as the end of the 1990s, the National Labor Court (Check Point, at 164/99 Frumer et al. V. Radgard) ruled that it is not sufficient that the employee signed a labor agreement that includes a condition of non-competition in order to obligate him , And it must be proved that the condition was reasonable and protected the interests of both sides.

In order to determine whether the prohibition of competition is a valid condition, four main tests were determined:

1. Protection of the "trade secret" of the employer - the existence of trade secrets that there is a concern that the employee will expose them to a competing business. The employer must prove that there is a real trade secret that exposure to the competitor may harm the former employer. A commercial secret has been defined in the Commercial Wrongs Law as "business information of any kind that is not public domain and which cannot be easily disclosed by others, whose secrecy gives its owners a business advantage over its competitors, provided that its owner takes reasonable steps to preserve its confidentiality."

2. The employee received special compensation for his commitment not to compete - that is, the employee received a higher salary than he would have received had he not signed the condition or that the employer undertook to pay him wages during the cooling-off period. The pay slip shall be separated between payment for work and non-competition payment.

 

3. Special training - the employee received special training in exchange for his obligation to work for a certain period with the employer and not to compete with him for a reasonable period after the end of his employment.

4. Good faith of the employee or the new employer - the employee has violated a serious breach of the duty of good faith and the relationship of trust towards the employer. For example, when the employee subverted the employer while he was employed by him, he labored to set up a competing business by appealing to substantial customers of the employer and encouraging them to leave their employment with the employer and start working with him in the new business.

A "naked" commitment to limit competition will not be enforced

In August 2000, the Supreme Court (CA 6601/96 IES et al. V. Sa'ar et al.) Accepted the path laid down by the National Labor Court in the Check Point case, ruling that the validity of obligations to restrict freedom of occupation should be determined According to the legitimate interests they protect. Therefore, a "naked commitment" to restrict competition, which does not protect the legitimate interests of the employer, will not be enforced.

In December 2003, a judgment was handed down (CA 189-03 Gurit Ltd. et al. V. Aviv et al.). It is important and significant that the said outline be implemented, in which the non-competition undertaking signed by the employees was approved in accordance with the fourth test mentioned above. In this case it was held that the employees who served in senior positions violated a serious and blatant breach of the duty of good faith towards the employer, since during the period of their employment they began to set up a new company that would distribute the products of one of the employer's customers. The court approved the undertaking and prevented the employees from working with the customer within the framework of the new company for 12 months.

Furthermore, in cases where it has been proven that the employee violated a non-competition stipulation that is valid and that he has suffered actual damage as a result of the worker's actions, the employer will be entitled to claim damages from the employee.

 

Recently, the Regional Labor Court in Haifa (SZ 48220-02-12 Sasson v. Bonsiak) awarded compensation to the owner of a kindergarten for NIS 160,000. Sheftra violated the non-competition stipulation and opened a competing kindergarten to which most of the kindergarten children passed. Eventually closing the old garden.

 

However, in spite of the above examples, the Labor Court will not be in a hurry to approve a stipulation of non-competition in the employment agreement, unless the employer proves that this condition was necessary to protect real interests such as trade secret, business stability and the prevention of theft of clients.

In addition, the employer must prove that in return for the obligation not to compete with him, the employee received a high salary which compensates him for restricting his employment after termination of the employment relationship.

In addition, the length of time the employee was restricted from engaging in or working in a competing business will be examined. In this context, the employer must prove that the restriction of employment was for a reasonable period of time. It can be said that in accordance with the Labor Courts' ruling, the reasonable period of time is not more than six months, and only in exceptional and rare cases will a longer restriction be imposed, which will usually not exceed 12 months.