The Non-Compete Agreement in Central America

Our lawyers in Costa Rica, experts in the Labor Practice Area, share with us this article on: The Non-Compete Agreement in the employment relationship and its legality in the region. 

The non-compete clauses or agreements have become increasingly used in the business context, being considered as perfectly valid provisions in different types of contracts. However, it is necessary to emphasize the existence of some requirements that, if they do not exist, would cause the clause or agreement to be declared null, abusive or illegal. 

The purpose of the Non-Compete Agreement is to establish a commitment between the parties of an employment relationship (employer - employee), a compromise, which can arise at two different times. 

The "non-compete covenant" has been constituted as a means by which its objective is to prohibit employees from carrying out activities for other companies dedicated to the same activity as the contracting party during the term of their labor relations, which, despite being logical, it is necessary to establish it contractually.  

The obligation of non-competition during the course of an employment relationship constitutes an employee´s duty and/or obligation, which we could call a  fidelity duty, which would consist of the prohibition of competing with the employer.  

Although it is true that it is not prohibited for an employee to have several jobs at the same time, there is an impediment for that second job to directly affects his first employer and the interests of the latter, either because it is the same work that is provided or because they are competing companies. This second job can be both, self-employed and employed. 

Under the figure of contractual non-competition, the employee may not carry out any activity that involves competing with his employer or incur in a conflict of interest that may result in damage to the company, it being clear that, during the employment relationship, the employee has access to reserved or confidential information, trade secrets, knowledge of technical and administrative aspects,  customer lists, business strategies and other aspects of the activity of their employer, so it was validated to establish this limitation, thus avoiding the improper use of the knowledge that is acquired or the information to which they have access.  

In the event that the employee fails to comply with this obligation, this could lead to the termination of the employment relationship with just cause.  

When the relationship is definitively terminated, with post-contractual non-compete agreements, companies are looking to protect their intangible resources, such as knowledge, business practices, procedures, strategies, relationships with customers and suppliers, among others, to protect themselves from competition.  

In general, the non-compete agreement is agreed or executed at the discretion of the company until the termination of the employment relationship has occurred, this because it will be until that moment that there is certainty about the level of relevance that the employee can reach at the end of the contract.  The commercial or industrial information that the latter has accumulated, the company´s position in the market, the geographical expansion of its operations or other similar variables, the protection of which is the basis for the need for the non-compete agreement at that time. 

In Costa Rica, although there are no express regulation on the signing of a post-contractual non-compete clause or a separate agreement that regulates it, it has been through the Second Chamber of the Supreme Court of Justice that it has been possible to have legal certainty on the legality of the non-competition covenants or non-competition agreements entered into on the occasion of the termination of the relationship. The Court emphasizes that: "Confidentiality or non-competition agreements between employees and employers, with effects after the termination of the employment contract, are not contrary to the legal system, on the contrary, since they are intended to prevent a socially reproachable and legally prohibited activity, such as unfair competition, through the use of knowledge or information acquired during the extinct relationship. Therefore, it cannot be said that business organizations cannot protect themselves from an activity in this sense, through contracts in which the commitment of the employee is not to work after the end of his contract, for himself or for another employer, in activities similar to those he had been performing" (Res:  2003-00089, Second Chamber of the Supreme Court of Justice). 

This Court has also defined some of the elements that are strictly necessary for the post-contractual non-compete agreement to be legitimate, emphasizing the following:  

a) its validity can only be tolerated if it is agreed for a reasonable term, which has been considered not to exceed 2 years;  

b) the employee must be granted adequate economic compensation, based on the consensus between the parties, it is considered "appropriate" to pay an amount equivalent to between 30% and 50% of what the employee had earned as salary, based on the monthly salary received in the same company with which he signed the clause or agreement,  a percentage that could be determined according to the position performed by the employee. Likewise, as a relevant criterion for determining the compensation´s amount, the possibilities that the employee had to continue working in areas that the agreement did not prohibit must be taken into account;  

c) a territorial limit has to be established;  

d) because civil law is of supplementary application to labor legislation, the legality of the agreed obligation would be additionally associated with the fulfillment of the three essential elements for the validity of a contract: consent, object and cause, provided for in article 627 of the Civil Code. 

The absence of one of these elements may generate nullity of the agreement made and therefore, the employee will not be committed to the fulfillment of the obligations contracted. 

In legislations such as Guatemalan, article 20 of its Labor Code establishes as part of its regulations that the employment contract is binding not only on what is established therein, but also on the consequences that derive from the principle of good faith, within which labor doctrine has recognized that the employee's duty of loyalty to his employer is included.  As a consequence of this, it is considered that any act that implies that the employee competes with his employer is an act contrary to good faith and therefore violates the duty of loyalty.  

In Honduras, Nicaragua and Panama, there is a certain relationship on this topic, non-competition is conceived and can be established as an agreement or commitment in writing, which obligates the employee to maintain exclusivity with a single employer during the employment relationship, extending even to a certain period of time after the termination of the employment contract, with respect to competing employers in the market or in the same core business.  

Non-competition is normally established by means of a clause within the employment contract or a contractual labor agreement, thereby ensuring the exclusivity of the employee, committing him not to provide services in certain commercial sectors, competing companies or certain clients that may be configured in some type of conflict of interest during the employment relationship, being a common denominator in such legislation, that the non-compete clauses or agreements are designed to balance the protection of commercial interests, for a certain period of time, which once completed the employee may have the freedom to pursue a career. 

In the case of El Salvador, labor non-competition is not legally regulated, so there is no legal concept that can explain it, and that is why the concept of labor non-competition has been limited in local jurisprudence to the detriment of its recognition. 

In each of the countries mentioned above, it is interesting how, as in Costa Rica, there is no concrete or specific regulation of non-compete agreements to date, even in some of them there is no regulation in their labor jurisprudence. 

In Guatemala, the provisions of article 18 of the Labor Code are used as a reference, which regulates the issue of exclusivity for the provision of services or execution of a work. Based on this provision, it is determined that the exclusivity of the provision of the services contracted for employment can be established, as well as the activity of the employee can be limited when there is incompatibility between two or more labor relationships, for the reasons that according to the employer's criteria are applicable.  

Therefore, there is no prohibition on including this type of non-compete clause in employment contracts, but such an agreement would only be valid during the employment relationship, and it is not admissible for this obligation to extend to the termination of the employment contract, since it could be considered a violation of the right to work established in article 101 of its Political Constitution and article 6 of the Labor Code. If a non-compete agreement is reached, that is in force after the expiration of the employment contract, it will be considered null.