Protecting Business Interests Through Non-Compete Agreement in Vietnam. 7 Matters

  The Labour Code 2019 represents a significant evolution in Vietnam’s labor laws, bringing greater clarity and fairness to various employment matters.

Among these developments, the role of non-compete agreements has become particularly relevant, offering a mechanism to safeguard employers’ interests while respecting employees’ rights.

In the following, we will explore the concept of non-compete agreements in Vietnam, their legal framework under the updated Labour Code, and the balance they strive to achieve between business protection and labor mobility. Further information could be obtained through consultancy with labour lawyers in Vietnam for clarification.

Understanding Non-Compete Agreements

A non-compete agreement is a contractual arrangement between an employer and an employee that restricts the employee’s ability to engage in competing activities during or after their employment.

These agreements aim to protect sensitive business or technological information that could compromise a company’s competitive position if disclosed or misused.

While the principle of “freedom to work” is a cornerstone of labor law in Vietnam, non-compete agreements serve as an exception, designed to address the legitimate concerns of employers about confidentiality and fair competition.

The Labour Code 2019 does not explicitly define non-compete agreements but implicitly acknowledges their validity through provisions related to confidentiality and employee obligations.

Employers are allowed to impose restrictions on employees who have access to business or technological secrets, provided these agreements are reasonable and clearly documented.

The Importance of Non-Compete Agreements in Vietnam

In a rapidly growing economy like Vietnam’s, protecting intellectual property and proprietary knowledge is crucial for businesses. Non-compete agreements offer several advantages:

1. Preserving Confidentiality: They prevent employees from disclosing sensitive information to competitors or using it for personal gain.
2. Maintaining Competitive Advantage: By restricting former employees from joining rival firms, companies can safeguard their market position.
3. Encouraging Investment in Employees: Employers may feel more secure investing in employee training and skill development if they know these efforts won’t inadvertently benefit competitors.

However, the use of non-compete agreements must be carefully managed to avoid overly restrictive terms that could unfairly limit employees’ future job opportunities.

Key Features of Non-Compete Agreements

Non-compete agreements in Vietnam must meet specific requirements to ensure their enforceability and fairness. These include:

1. Written Form: The agreement must be documented in writing, providing clarity on the terms, obligations, and compensation for the employee.
2. Applicability: Such agreements typically apply only to employees with access to sensitive information, such as senior managers or specialized technicians.
3. Reasonable Restrictions: Non-compete clauses must include reasonable limits regarding time, geographic scope, and the type of restricted activities.

Reasonable Limits in Non-Compete Agreements

Time Restrictions

While the Labour Code 2019 does not prescribe specific durations for non-compete clauses, international norms provide useful guidance i.e. two years for specialized employee while less specialized employees are typically restricted for no more than six months.

Vietnamese employers are encouraged to adopt similarly reasonable durations, ensuring employees can re-enter the workforce that fit his or her skill set without undue delay.

Geographic Scope

The Labour Code does not regulate geographic restrictions, leaving the scope to be determined by the parties involved. In practice, the geographic reach of a non-compete clause should align with the employer’s operational footprint. For example, a national restriction may be justifiable for a business with country-wide operations, while smaller companies might limit the scope to specific regions.

Industry or Activity Restrictions

Non-compete agreements should focus on preventing employees from engaging in work that directly competes with their former employer. Courts typically assess whether the new job involves similar activities or overlaps with the employee’s previous role. The restrictions must be narrowly tailored to protect trade secrets and sensitive information without unfairly limiting employees’ career prospects.

Balancing Employer and Employee Interests

While non-compete agreements are valuable for protecting employers’ legitimate interests, they can also impose significant burdens on employees. To strike a fair balance, these agreements should include provisions that benefit employees, such as:

1. Compensation: Employees subject to post-employment restrictions are often entitled to compensation. This ensures that the financial impact of reduced job opportunities is mitigated.
2. Career Development: Employers can offer incentives such as promotions, salary increases, or specialized training during the employment period as part of the agreement.
3. Transparency: Clearly defined terms help employees understand their obligations and the benefits they receive in exchange for accepting restrictions.

Challenges in Enforcing Non-Compete Agreements

Despite their importance, non-compete agreements can be challenging to enforce in practice. Employers must demonstrate the following to establish a breach:

1. The employee violated the terms of the agreement.
2. The violation caused actual damage to the employer, such as lost revenue or diminished market share.
3. A direct link exists between the employee’s actions and the harm suffered.
4. The employee acted willfully or negligently in breaching the agreement.

Without clear evidence of these elements, enforcement can become difficult, leading to disputes and potential litigation.

Compensation and Remedies for Breach

When a non-compete agreement is violated, the Labour Code 2019 provides employers with certain remedies:

• Compensation for Losses: Employers can claim damages equivalent to the financial harm caused by the breach.
• Return of Proprietary Assets: Employees must return any proprietary information or assets used in violation of the agreement.
• Refund of Compensation: If the employee received monetary benefits under the non-compete agreement, they may be required to return these if they breach the terms.

However, the Labour Code does not specify fixed compensation amounts, leaving these decisions to negotiation or judicial determination.

Global Practices and Lessons for Vietnam

Vietnam can benefit from adopting best practices from other countries to enhance the effectiveness of non-compete agreements:

1. Standardizing Restriction Periods: Establishing clear guidelines on maximum durations would reduce ambiguity and promote fairness.
2. Defining Geographic Scope: Providing recommendations based on industry type and company size could ensure consistency in application.
3. Balancing Interests: Policies should strive to protect businesses without unduly limiting employees’ mobility or professional growth.

Non-compete agreements play a critical role in protecting business interests and maintaining fair competition, particularly in a dynamic economy like Vietnam’s. The Labour Code 2019 has provided a framework for these agreements, emphasizing the need for clarity, fairness, and balance between the rights of employers and employees.

When drafted and enforced properly, non-compete agreements can foster trust and mutual benefit. By adhering to reasonable limits and ensuring transparency, businesses can safeguard their interests without hindering employees’ career prospects, creating a labor environment that promotes both innovation and fairness.

About ANT Lawyers, a Law Firm in Vietnam

We help clients overcome cultural barriers and achieve their strategic and financial outcomes, while ensuring the best interest rate protection, risk mitigation and regulatory compliance. ANT lawyers has lawyers in Ho Chi Minh city, Hanoi,  and Danang, and will help customers in doing business in Vietnam.

Source: https://antlawyers.vn/library/non-compete-agreement-in-labor-contract.html