Prohibition of Competition in Labor Law and Validity Conditions

While competition has an extremely important place for economic foundations, it is also of great importance to examine the competitive environment for employees and employers, who are one of the significant figures of commercial life. Because it is quite possible for employees to access commercially esteemed information about the employer’s field of activity, customer environment, production stages or organizational structure during the employment contract. As a result, in line with this strict competitive environment, it is necessary to examine in detail the prohibition of competition and the validity conditions of the non-competition, which are conceptually stipulated in the legal sense.

First of all, it should be noted that the prohibition of the employee from competing with his employer within the scope of the Labor Law is a result of the duty of loyalty that comes to the fore with the establishment of the employment contract. On the other hand, the duty of loyalty disappears with the termination of the employment contract. Thus, in order to prevent the employee from competing with his employer in the period after the termination of the employment contract, the parties must clearly agree on this and clearly conclude a non-competition agreement.

1- Non-Compete Obligation

It has been explained above that the employee’s obligation not to compete with his employer exists during the period of the employment contract and that the obligation of non-competition actually comes to the fore as a result of the duty of loyalty. As a matter of fact, paragraphs 3 and 4 of Article 396 of the Turkish Code of Obligations,

“As long as the service relationship continues, the employee cannot serve the third party for a fee contrary to his loyalty debt and cannot compete with his employer in particular. The employee cannot use the information he learned while he was at work, especially production and business secrets, to his own benefit or to others during the continuation of the service relationship. To the extent necessary for the protection of the employer’s rightful interests, the employee is also obliged to keep a secret after the end of the service relationship.”

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The relevant article clearly stipulates that during the term of the employment contract, the employee must perform the work undertaken and cannot work in another job. It should also be noted that, during the term of the employment contract, the employee’s behaviour contrary to the prohibition of competition is grounds for the employer to terminate the employment contract for just cause.

As explained, during the period when the employment contract is in force, the employee’s prohibition of competing with his employer does not need to be decided by a separate contract. However, the employer may want to maintain the prohibition of competition even after the termination of the employment contract in order to protect the secrets of commercial value explained above and to protect its commercial interests. In this respect, in order for the prohibition of competition to be imposed on the employee after the termination of the employment contract, it must also be arranged in writing and this regulation must have certain conditions.

2- Non-Competition Agreement

In order for the employee to assume the prohibition of competing with his employer after the termination of the employment contract, this must be expressly agreed. As a matter of fact, in Article 444 of the Turkish Code of Obligations,

“The employee who has the capacity to act can undertake in writing against the employer to refrain from competing with him in any way after the termination of the contract, in particular opening a competitor business on his own account, working in another competitor business or otherwise engaging in any other kind of interest relationship with the competitor. The prohibition of competition registration is valid only if the service relationship provides the employee with the opportunity to obtain information about the customer environment or production secrets or work done by the employer, and at the same time, the use of this information will cause significant harm to the employer.”

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As a result, with the establishment of the non-competition agreement between the parties, it is aimed to prevent the employee from using the information obtained within the scope of the employment contract and thus to prevent possible damages to the employer. In general, with this non-competition agreement, it is stipulated that the employee should not compete with the employer on his own behalf, work in a rival enterprise or enter into a relationship of interest with other capacities.

In summary, the obligation not to compete after the termination of the employment contract must arise from a non-competition agreement expressly entered into by the parties, effective as of the termination of the employment contract.

3- Terms of Validity of the Non-Competition Agreement

In order for a non-compete agreement to be validly concluded, certain conditions regulated under the Turkish Code of Obligations must be met. In order to be able to talk about a valid non-compete agreement, all of the conditions explained below must be present together and the relevant agreement must not be contrary to the mandatory legal rules.

In order to be able to talk about a valid non-competition agreement, there must first be a service relationship between the parties and the parties must be competent to conclude this non-competition agreement. Apart from this, the Turkish Code of Obligations explained above 444. According to the article, there must be a possibility of competition between the employee and the employer for the work that is the subject of the employment contract. For example, in the presence of issues such as the essential recognition of the customer environment by the employee, the learning of manufacturing or business secrets, the existence of a business secret and the possibility of competition in this direction can be mentioned. In addition to all these, the possibility of damage to the employer is sought in case of using the learned information and business secrets at the same time. In summary, before the conditions to be explained below, there must be a causal link between the employee’s possession of business secrets and the knowledge of these business secrets and the possible damages to the employer.

In addition to the above conditions, it is aimed that the economic future of the employee will not be harmed in order to be able to talk about a valid non-competition agreement, and it is emphasized that an open-ended and unrestricted competition agreement will be invalid. In this sense, it should be noted as another condition that this non-competition agreement must carry certain limitations. As a matter of fact, Article 445 of the Turkish Code of Obligations clearly states,

“ The prohibition of competition cannot include unsuitable limitations in terms of place, time and type of work in a way that will jeopardize the economic future of the employee unfairly, and the duration cannot exceed two years, except for special circumstances and conditions. The judge may limit the prohibition of excessive competition in terms of scope or duration, by freely evaluating all situations and conditions and by considering the counter-action that the employer may have undertaken in an equitable manner.”

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In the relevant article, it is aimed that the employee is not put into economic difficulties and that the economic future of the employee is not unfairly endangered. Especially in terms of place, time and type of business subject to competition; It is a condition of validity that the relevant non-competition agreement has been concluded in accordance with equity.

Finally, it should be noted that the non-competition agreement must be made in writing. As a result of this written condition, there can be no verbal claim of the existence of a non-competition agreement. Even if the employment contract is not made in writing, it is essential that the non-competition agreement is made in writing.

4- Consequences of Violation of the Non-Competition Agreement

If all the conditions described above are met together, a valid non-competition agreement can be mentioned. Thus, as explained above, although the employee is required to comply with the non-competition agreement in terms of the place, time and type of work stipulated in the contract, he undertakes the obligation not to see that job and not to share his professional secrets with others. Because Article 446 of the Turkish Code of Obligations,

“The employee who acts contrary to the prohibition of competition is obliged to compensate all the damages incurred by the employer as a result of this. If the illegal behavior is bound by a penalty condition and there is no contrary provision in the contract, the employee can get rid of his debt regarding the prohibition of competition by paying the prescribed amount; however, the employee must compensate for the damage exceeding this amount. The employer may also demand an end to the unlawful behavior if the employee justifies the importance of his / her violation or threatened interests and the behavior of the employee, provided that he explicitly reserves it in writing in the contract, apart from the penalty condition and payment of any additional damages that may arise.”

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It contains the provision. Pursuant to the relevant article, the employee who violates the prohibition of competition will be obliged to compensate all damages incurred by the employer as a result. On the other hand, it should be noted that it is possible to agree on a penalty clause in non-competition agreements. In the event of a violation of a non-competition agreement, the employee will be obliged to pay the price stipulated as a penalty condition arising from this violation and to compensate for this damage if there is excessive damage.

5- Termination of the Non-Competition Agreement

Although the non-competition agreement, the validity conditions of which are explained above, should be limited in time, it can sometimes be terminated in the presence of situations stipulated in the law. As a matter of fact, Article 447 of the Turkish Code of Obligations regarding the termination of the prohibition of competition between the employee and the employer,

“The prohibition of competition ends if it is determined that the employer has no real benefit in maintaining this prohibition. If the contract is terminated by the employer without any justified reason or by the employee for a reason that can be imposed on the employer, the prohibition of competition ends.”

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Thus, the termination of the commercial activity of the employer; In cases where the employee no longer operates in that line of business and the employee pays the penalty, the non-competition agreement will end. It should also be noted that it is extremely important that if the employment relationship is terminated by the employer without the justified reasons specified in Article 25 of the Labor Law or if the employment contract is terminated by the employee for the justified reasons listed in Article 24 of the Labor Law, the prohibition of competition will disappear.

6- Conclusion

As a result, a non-competition agreement is a contract that aims not to compete with the employer after the termination of the employment contract, provided that it is limited in terms of place, time and line of business, as a result of the employee being in contact with the employer’s customers during the continuation of the employment contract or learning the business secret. In order for the non-competition agreement to be valid, it must combine the economic interests of the employee and the employer with a balanced observance of the conditions sought by the law. As a result of this, it is important to examine the non-competition agreement as a whole, taking into account that the economic freedom of the employee is not endangered.