One of my friends was selected to a large software company to work as a web developer after a successful interview. He got the agreement letter and when he was reading it, he found an unfair term. It is "You can't join any company competing with us within 5 years when you resign from our company". It seems like this is totally unfair because 90% of the time he has to work in software/web development company even after resigning from new company. How to handle this situation?
He got the agreement letter and when he was reading it he has founded that unfair term. It is "You can't join any competitive company of us within 5 years when you resign from our company". It seems like this is totally unfair because 90% of the time he has to work in software/web development company even after resigning from new company. How to handle this situation?
Never sign any contract that has terms with which you don't agree.
(As @DonBoitnott so elegantly puts it in his comment "If it ain't right, don't put your name to it.")
Either strike out those terms, then sign the contract (in which case the company may drop you from consideration if they feel that the clause is important), or simply find a new job without such terms.
And as @BasilBourque wisely suggests in a comment, you should initial all changes to the contract and keep a copy for your files.
Most likely safe to ignore, but...
DISCLAIMER: I am not a lawyer. Your friend should seek advice from a professional about this. Worker unions or lawyers in your country can answer this with authority and accuracy.
This document describes non-competition clauses for various countries.
For Sri Lanka it says the following, and note especially point 12 (emphasis mine):
Are there classes of employees against whom restrictive covenants may not be enforced? Explain.
No, the employment laws in Sri Lanka do not differentiate between classes of workmen. Restrictive covenants on any type of employment are enforceable only on the circumstances of each case. For example unreasonable restrictions will not be enforceable.
Does a change in position, salary or responsibilities affect enforceability?
Not applicable/ as explained above the enforceability of non competition clauses/ agreements will depend on the circumstances of the case and the reasonableness of the restriction.
Are there any requirements for compensation payable in order for the non-competition clause to be enforceable?
What legal consideration is necessary for enforcement?
The same consideration necessary for any contract which is defined as a ‘right, interest, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given suffered or undertaken by the other’.
What employer interests (e.g. trade secrets, customer goodwill) will the court protect?
A trade secret that is so important so as to affect the business of the employer could be protected by the court. However such a restraint will only be valid in cases where the nature of employment is such that the customers will either learn to rely upon the skill or judgment of the employee or where the customer deals with him directly and personally.
What interests of the employee will balance the employer's interest?
None stipulated by law or case law.
Will the court limit enforcement to a "reasonable" geographic area and/or time frame?
Please comment on what is considered "reasonable".
Generally 3 to 6 months of a specific restriction are enforceable depending on the circumstances of each case. General restrictions are generally unenforceable. Accordingly the test of the validity of a condition in restraint of trade is whether the restraint in the particular employee is general or particular, is or is not reasonable.
Will the court more readily enforce a customer-specific restriction rather than a broader non-competition? Please explain.
Yes, the court will more readily enforce a custom specific restriction, this restriction too must be reasonable so as to permit freedom of trade, and the ability for the employee to use his skills.
Are there any limitations on enforcing the non-competition clause depending on the cause for termination of employment?
List the necessary language requirements.
12. List any other requirements of importance.
Courts will not enforce a clause that is so general that it prevents an employee from taking up employment with another employer.
Point 12 is very clear: if this clause prevents your friend from seeking new employment, it is not enforceable.
The only exception to this would be that your friend is in a highly specialised position, and doing things that only they can do and that is critical to the company they have signed up for (Point 5). If so, and they walk away with competence/knowledge that is critical to the employer, then 3-6 months is the most the company can demand someone to not take up a directly competing position (point 8).
Also — and this goes without saying — everyone is forbidden from taking company trade/business secrets when leaving and start using them at a competitor. That is a huge no-no. But simply working within your chosen trade cannot be prohibited by a clause such as this.
I agree with Joe Strazzere's answer: if your friend is not comfortable with this, they should not sign. And even if a court will never enforce it, it may provide unwanted stress if the company does want to make an issue of it and take it to court.
From a purely legal standpoint, this most likely safe to ignore, because the Sri Lankan courts will not enforce it since it is too generic and spans over much too long time (10 times too long). But there are "softer" reasons for not wanting to sign:
- Employer seems clueless that this is not valid
- Employer may take it to court anyway, even if they will lose, and that is not a fun experience
- Avoid signing things that gives bad gut feelings
Generally if you don't like something you don't agree to it. Sometimes these sorts of things can be safely ignored, but if you're in a small locale or industry then it's pretty easy to see who you work for.
So for example in my locale I not only know where most senior engineers work at the moment, but if any of them moved I'd soon find out where they moved to because it's a small country and there isn't a huge number of senior engineers.
And while this may not be enforceable legally, it can cause problems in other ways in a small industry.
Ignore that clause, but be careful about spreading intellectual property from one company to another.
The clause is seeking to prevent people from working at one company and transferring a competitive advantage to another company within a set period of time. No one is going to be tracking people throughout their career to make sure that they're not working for a competitor, but the clause may come into effect if company B is suddenly offering a service that's been invented by company A shortly after a particular employee has left.
So, I'll admit I don't know anything about Sri Lanka except that it is South of India.
But I hope this will help some people in general.
NOTE: What I'm about to say is for W-2 (regular) employees. If you're a 1099 (contract) employee the court assumes you know more about the law (or have consulted a lawyer), and have more bargaining power... meaning that for contract employees a clause is much less likely to be stricken from your contract (the area of law is more like contract law than employement law).
I consulted a lawyer regarding Employment Law (in the US) about this type of restriction a few years ago, and she explained that a restriction which is too broad can be stricken easily.
Here's the tricky question... what does "too broad" mean?
Well it is a combination of things, mostly determined by how much your future options are restricted.
You asked about this:
You can't join any competitive company of us within 5 years when you resign from our company
Term: 5 years
Restricted from: Almost all of them (in your field; ones with a web site)
Likely to be stricken: Yes Severly resticts employment options
If you tweak it to:
"You can't join any competitive company of us within 3 months of when you resign from our company"
Term: 3 months (very short)
Restricted from: Almost all of them (in your field; ones with a web site)
Likely to be stricken: No Annoying, but 3 months isn't a long time (remember that you agreed to this 3 month restriction and signed the contract)
If you tweak it to: "You can't join Google, Apple, or any competitive company whose home office is located within 25 miles of our main office for 5 years of when you resign from our company"
Term: 5 years
Geography: 25 mile radius of a fixed point
Restricted from: Almost none of them (most companies are more than 25 miles from any fixed point on Earth)
Likely to be stricken: No You might have to move, but there are still a lot of places you can work.
If you tweak it to: "You can't join Microsoft for 15 years of when you resign from our company"
Term: 15 years
Restricted from: Only one company
Likely to be stricken: No There are still a lot of places you can work.
I know it is the wrong area of the world for OP, but I hope the money I spent learning this can help someone else besides me.
Here's the problem with people who argue that it is not legally enforceable. When you sign a contract, and understand the terms, regardless if it is legal or enforceable is a moot point. You signed it under the assumption that you can beat it if the company decides to pursue it on the grounds that it is not enforceable within the courts. I know this because I had some tenants argue that I cannot enforce rules regarding items left on the property. They argue that it is not their responsibility to handle owner property but mine. That is correct except it was written in the contract. The court agreed with me on that point and thus I was able to recover my broken property. Otherwise I could not. While my example isn't a employment or laws in another country, I'm betting most courts and contract laws follow the same ideas.
My advice is to cross out that section and initial it. Say you agree with every other terms except that. See what they say. It looks much better in court if you signed a document with the section crossed off and initial.
"You can't join any company competing with us within 5 years when you resign from our company".
This generally means the domain in which the company is providing its services. If they are developing a banking related product, then it means that the employee cannot join their banking counterparts. If the company is into a online gaming domain, then the employee cannot join another company which is producing online games too.
It is always better to talk to the HR about the clause(s) which the potential employee does not understand. They would be more than willing to answer it. It also gives a good reflection that the candidate is very keen about reading the clauses and is very serious about it.
I was once working as a contractor with a company which was into a very good domain and also a rare one at it. It asked all of us, irrespective of the type of employment, employee or contractor, to sign a similar clause. It was a two year restriction for us; I signed it as the clause was clear to me and I respected their business decision. Later, when I was on a job hunt again, I didn't apply for its competitors. But, that didn't lower my prospects of getting a new job.
I'm not a lawyer, but I have had an employer enforce a noncompete against me, so I've talked to lawyers and read a lot about these contracts. I was in the United States, but the standard of enforceability in Sri Lanka is apparently based on the same common law framework.
Basically, there's a good chance the agreement won't be enforceable, but this won't necessarily help an employee. Under the common law standard, noncompetes are only enforceable to protect "legitimate business interests," like trade secrets and customer goodwill (relationships). That means the employer can't just stop you from going to another company because they happen to consider that company to be a competitor. They could only stop you if you had valuable trade secrets that would probably be used in your new role. To give a ridiculous example, going from being a software engineer at one company to a janitor at a competitor should be okay. You're not going to use your former employer's secret algorithms to mop the floor of the new office. Working on a different product as an engineer should also be okay (even if it happens to compete with one of your former employer's products) so long as it's different enough from what you were doing before that you aren't going to be using any trade secrets in your new work.
That's roughly how it's supposed to work under common law, but sometimes judges get the law wrong. In the US state of Florida, it's unfortunately common for judges to treat noncompete disputes as simple breach of contract cases, without looking for a legitimate business interest. I'm not familiar with Sri Lanka specifically, but the general point that judges don't apply the law correctly 100% of the time probably holds there too.
Another big question is, do you want to have to hire a lawyer and go to court the next time you change jobs? Because a company may choose to sue you even knowing that they don't stand much chance if they go to court. When companies do this, it's usually about sending a message to their other employees not to leave for competitors. If they don't have to compete for their employees, then they don't have to pay market wages or treat their workers fairly in other ways.
The other thing to watch out for -- what happened to me -- is that companies use these agreements to threaten employers. In many places, if you sign a noncompete and then go to a competitor, the old employer can sue the new employer for tortious interference, intentional interference with contractual relations. That case won't be any stronger than the case against the employee, but often the threat of litigation is enough to pressure the new company to fire the employee (or withdraw their offer of employment). Most employees simply aren't important enough for the new employer to bother with litigation.
The bottom line is that the agreement may well be unenforceable, but there is still the possibility that it will do serious harm down the road. I would recommend asking them to remove it. If they won't remove it, ask them to narrow the terms by clarifying the definition of a competitor and by limiting to roles where the company's trade secrets would actually be useful. If they refuse and you still want to take the job, ask them a lot of questions about the agreement by email. What business interests is the agreement is intended to protect? They may well say something like "That's just to stop people from leaving" that could hurt their case if a dispute were to go to court.
I strongly agree with @Joe response. But if your friend can't decline the offer, here is my two cents:
I worked for a company under a contract with the same "competitive clause", when i raised my concerns to a friend of mine who already worked there, he reassured me that they can't sue every one who left; The basicely could consider any company that have a WebSite to make money or sell IT goods and services on the Internet as a competitor.
I also worker for a consulting company that explicitely forbid employees to work for the client after resigning (and the clients to hire employees).
It turned out that the clients do hire key employees from the company for critical app/solutions if needed and the company says nothing in order to keep projects coming in and keeping the clients happy.
Your friend should contact the company to see if they can make HR change the ridiculous clause, or just flatly refuse the job offer due to the unfair non-compete terms.
Agreeing not to work in your field for 5 years after you leave a company is nonsense. You wouldn't even be able to keep up with the rate of change in the field of web development without a job for 5 years. This clause would punish your friend for leaving far too much, which means that he is very likely to lose money by staying at the company since most raises simply don't keep up with the market value for that same job.
Never ignore clauses you don't like in documents. That's going to lead to too much trouble.
After thinking about this some more I realized that something very important hasn't been brought up about this. None-compete clauses are generally industry specific so I don't think this stops your friend from working in web development. It's probably there to prevent your friend from building websites for another company in the same industry. If your friend was building a health care website they wouldn't be able to work on another health care website for 5 years for example. This is definitely something your friend would want to check on HR with before they sign. As David has pointed out, your friend should make sure that clarification is in writing too.
What the other answers seem to mistake is the agreement is for direct competitors not your field of work. Those agreements usually come with hefty compensation. For example if you work for McDonalds and learn all their trade secrets including vendor contacts / contracts, they don't want you to go to Burger King and use that knowledge. However going to work for a different type of restaurant chain might be fine.
I have heard of court cases where non-compete was not enforceable. In general though I believe it is reasonable as I have found it is typically only for high level positions with a great deal of compensation.
If you live in the US, the laws differ from state to state (of course). You'll want to look up the laws where the company is headquartered as well as the laws in the state where you will work. Five years seems very high; I believe most states limit it to two. California doesn't allow them at all, and if you get fired in California for refusing to sign one after being hired, your employer can be found liable for wrongful termination in a lawsuit.
Also, there's usually some kind of limitation as to what geographical area the clause can be applied to.
My general feeling is that attempting to enforce such a clause is more trouble than it's worth most of the time. Exceptions might be someone in sales who builds up a customer base on your nickel, and then goes to work for your sworn enemy down the road, taking your customer contacts with him; or someone who learns your secret fried chicken recipe and then opens a competing chicken franchise and uses your recipe.
But web developer? No, probably not. If it's a large company, though, they may find it easier to ask everyone to sign the NCA and then attempt to enforce it selectively.
For a bit more information, you can have a look at this article.