Detailed guidance is required on non-compete agreements between employees and employers

A non-compete agreement is a legal tool used by businesses to protect business interests, such as trade secrets, customer lists, or competitive advantages. However, if not properly designed, this agreement may infringe on the right to freedom of labor, leading to legal disputes. In Vietnam, disputes related to non-compete agreements are increasing, but the current legal framework does not have specific regulations, causing a lack of consistency in application and enforcement.

Two recent judgments, Judgment No. 420/2019/LD-PT of the People's Court of Ho Chi Minh City and Judgment No. 03/2023/LD-PT of the People's Court of Thanh Hoa Province, are outstanding "case studies" when applying non-compete agreements. These cases pose an urgent problem, should the competent authority issue detailed guidelines on non-compete agreements to balance the interests of enterprises and employees?

Non-competition agreements and the current situation in Vietnam

A non-compete agreement is a separate clause or contract in which the employee commits not to work for a competitor or to open a competitive business for a certain period of time and geographical area after the termination of the labor contract. The main goal is to protect the intellectual property and business interests of the enterprise.

In Vietnam, non-compete agreements are often included in separate employment contracts or confidentiality agreements. These provisions are specified in Article 35 of the 2013 Constitution and Article 5 of the Labor Code 2019. However, it has not been specified in detail in the Law on Intellectual Property 2005 (amended in 2022) or the Labor Code 2019. The lack of detailed guidance on how to apply a non-compete agreement has led to increasing and common legal disputes between workers and businesses. Below we will analyze two typical judgments that have recently been tried by the competent courts of Vietnam.

Judgment No. 420/2019/LD-PT between Company U and Mr. Phan Thanh B[1]

Company U sued Mr. Phan Thanh B, requesting that he not work for Company P, a company considered a direct competitor of Company U, based on a confidentiality and non-compete agreement signed in 2016.

Mr. B worked at Company U from 2012 to 2017 as a design officer, then moved to Company P as a supervisor of the Floorplan/3D Visuals department. Company U argued that Mr. B violated the agreement by working for a competitor.

Through two first-instance and appellate judgments by the People's Court of District G and the People's Court of Ho Chi Minh City, the request of Company U was not accepted on the following grounds: (1) Company U could not prove that Company P was a direct competitor;  because two companies have different business codes (Company U with business line code 6201 and Company P with business line code 6202); (2) Request to prohibit Mr. B from working for Company P in violation of the right to freedom of work under Article 35 of the 2013 Constitution and Article 5 of the Labor Code 2012. (3) The non-compete agreement is no longer valid after the labor contract is terminated.

The results of the trial show a lack of clarity in identifying "competitors" and the validity of non-compete agreements. If there is detailed legal guidance, businesses such as Company U can avoid errors in drafting and enforcing this agreement.

Judgment No. 03/2023/LD-PT between TT Company and Mr. Nguyen Dinh D[2]

TT Technology Joint Stock Company sued Mr. Nguyen Dinh D, claiming compensation of VND 251,800,000 for violating the non-compete agreement. Mr. D is a technician at TT Company, working at NS Refinery and Petrochemical Plant. After quitting his job on 01/03/2021, he signed a labor contract with NS Refining and Petrochemical Co., Ltd. from 15/06/2021, for a period of 12 months of prohibition from working at the factory according to the agreement.

The Court of first instance accepted TT Company's request, but at the appellate hearing, the People's Court of Thanh Hoa province amended the judgment and did not accept the lawsuit request on the grounds (1) The non-competition agreement violates the right to freedom of labor according to Article 35 of the 2013 Constitution and Article 5 of the Labor Code 2019; (2) TT Company did not prove that Mr. D disclosed confidential information or caused damage; (3) NS Refining and Petrochemical Co., Ltd. is a partner, not a competitor of TT Company.

This case once again demonstrates the need for legal guidance to determine the reasonable scope of a non-compete agreement and how to prove damages. Without guidance, businesses can impose unreasonable restrictions, leading to the unreasonable nullification of agreements between employees and businesses. This can cause material damage, reputation as well as human resource management activities of the company.

Why is it necessary to provide detailed guidance on non-compete agreements?

Firstly, ensuring transparency and consistency

Currently, courts in Vietnam apply inconsistent non-compete agreements, depending on the judge's interpretation and the circumstances of the case. For example, in Judgment No. 420/2019/LD-PT mentioned above, the court emphasizes the right to freedom of labor, but does not provide clear criteria to identify "competitors". A detailed guide will provide specific standards on:

1. The reasonable time and geographic scope of the non-compete agreement;
2. The way to identify competitors will be based on the code of the business line or actual operation. Even another criterion to identify competitors;
3. What factors and regulations will be based on the requirement to prove damage or legitimate interests of the enterprise? Has the damage occurred or could it have occurred? These are very important things for businesses to comply appropriately and effectively.

Secondly, protect the interests of enterprises

Businesses need to protect trade secrets and competitive advantages, especially in the technology, real estate, or manufacturing industries. Non-compete agreements are an effective tool, but if not clearly guided, businesses can draft illegal terms, leading to costly disputes. In Judgment No. 03/2023/LD-PT stated, TT Company failed because the agreement to prohibit Mr. D from working at the partner's factory was considered excessive and illegal (according to the interpretation and trial results of the competent Court).

Having a detailed guide will help businesses:

• Design agreements with a reasonable scope, avoiding violations of the law.
• Identify the information to be protected (e.g., trade secrets, customer lists).
• Provide legal financial compensation sanctions to increase the cooperation and compliance of employees in signing and implementing agreements with employers.

Third, protect the right to freedom of work

Non-competitive agreements, if left unchecked, can restrict the right to freedom of labor, violating Article 35 of the 2013 Constitution. In both judgments, the court prioritized protecting the employee's right to choose their profession when the non-compete agreement lacked a solid legal basis for enforcement and compliance by the parties involved. We believe that having a detailed guideline will help employees to: (1) Ensure that the agreement does not impose unreasonable restrictions on time, geography, or occupation that the employee is restricted from during the validity period of the agreement; (2) Require voluntariness and transparency when signing agreements; (3) Protect employees from coercive or ambiguous terms that are detrimental to employees when disputes arise.

Fourth, minimizing legal disputes

Disputes over non-compete agreements, such as the above two cases, are costly and time-consuming for both businesses and employees. A legal guide will minimize disputes by creating an effective and fair legal framework between the parties involved as well as in accordance with the provisions of Vietnamese law. In addition, detailed guidance also helps the parties resolve disputes quickly because the legal basis has been transparent and clear in practice. In addition, a detailed guide will also help increase the awareness of businesses and employees about their rights and obligations once entering into an agreement. At that time, potential disputes or a party that wants to break the commitment will fear the consequences of this violation. This, in turn, helps to reduce disputes related to this issue in Vietnam.

Some proposals for guidelines for signing non-compete agreements in Vietnam

In order to overcome the challenges and ensure effective implementation in practice, we believe that a detailed guide on non-compete agreements should have both comprehensive regulations and detailed regulations to ensure an overview of current issues and anticipate possible future problems.

Duration: Guidelines should limit the duration of non-compete agreements to 6 to 12 months, except in exceptional cases such as senior personnel who are managers who can extend the term up to 2 years.

Geographical area: Only applicable in the area where the enterprise has actual business activities, avoiding the national or international ban. In case the enterprise only does business in a certain scope or has a specific plan (promulgated) to do business in a geographical area, the agreement of the parties should be limited to the business activities of the enterprise.

Scope of competition: Identify competitors based on business line codes (VSIC) or actual operations. In case of actual operation, the enterprise must prove that when a dispute occurs, the enterprise has this activity at the effective time of the agreement.

Compensation: There are specific regulations on requiring enterprises to provide financial support or other benefits in exchange for a commitment to non-competition. At the same time, it also stipulates the maximum fine for employees in case they have received financial support but violate. Specifying this issue not only helps employees enjoy material benefits, avoiding signing unfavorable penalty commitments, leading to restrictions on people's labor rights. This is also how many countries around the world agree to restrict the freedom of workers in some special cases.

The issuance of detailed guidelines on non-compete agreements in Vietnam is necessary to ensure transparency, consistency, and balance of interests between businesses and employees. The two judgments cited in this article point to gaps in the current legal framework, particularly the lack of clarity in identifying competitors, proving damages, and protecting labor freedoms. Detailed instructions will help businesses design legal agreements, protect business interests without violating the law. At the same time, it protects workers from unreasonable restrictions, promoting a fair working environment. To achieve this, Vietnam needs to promulgate specific regulations on scope, compensation, and dispute resolution, and learn from international experience and raise awareness among stakeholders in labor relations.