CONTENTS OF EMPLOYMENT CONTRACTS AND NON-COMPETE CLAUSES
Topic 8:
CONTENTS OF EMPLOYMENT CONTRACTS AND NON-COMPETE CLAUSES
Dr. Đinh Thị Chiến
CASE SUMMARY AND DECISION OF THE ARBITRATION PANEL
[For confidentiality purposes, the Arbitration Decision number has not been provided. Only selected aspects of the non-compete agreement within the employment relationship, along with comments on the observations and decision of the Arbitration Panel, are discussed here.]
Case Summary:
On December 1, 2014, the Plaintiff (Company A) and the Defendant (Ms. Vũ) entered into an indefinite-term employment contract, numbered O14-7993/EC-A. On the same day, they also concluded a Non-Compete Agreement, with Clause 2 of Article 4 in the Agreement stating: “… Party B (Ms. Vũ) further agrees that, within 2 years after the termination of the employment contract, Party B shall not recruit, work for, act as a representative, contractor, or independent company for any person previously employed by Party A (Company A).”
On July 6, 2016, Ms. Vũ submitted her resignation letter to Company A. On July 13, 2016, the parties held a meeting to address her resignation. On July 21, 2016, Ms. Vũ handed over her tasks, and Company A issued a decision terminating her employment.
After her employment with Company A ended, Ms. Vũ joined Company M. Claiming that Ms. Vũ had breached the Non-Compete Agreement, Company A initiated arbitration proceedings against Ms. Vũ at the Vietnam International Arbitration Center (VIAC).
Decision of the Arbitration Panel (AP):
The AP determined that the Non-Compete Agreement was voluntarily executed between the parties as a separate arrangement and was not part of the employment contract. Therefore, it was considered a civil transaction, and the applicable provisions of civil law were applied.
The AP applied Clauses 1 of Articles 122, 123, and 409 of the 2005 Civil Code [the AP referenced the 2005 Civil Code since it was effective at the time the Non-Compete Agreement was executed. These provisions correspond to Articles 117, 118, and 404 of the 2015 Civil Code, with no substantive changes in content]. Based on this, the AP concluded that the Non-Compete Agreement did not meet statutory conditions (as the parties did not request the AP to declare the Agreement invalid, the AP did not make a determination on its validity).
Consequently, the AP ruled to deny the Plaintiff (Company A)’s claims against the Defendant (Ms. Vũ).
COMMENTARY
I. Introduction
Recently, non-disclosure and the enforceability of such agreements have garnered significant attention among legal practitioners and scholars. The primary aim of these agreements is to prevent employees from disclosing or utilizing technological or business secrets of employers when working for third parties. Based on their content, these agreements are categorized into the following types:
- Non-Compete Agreements;
- Non-Disclosure Agreements (Confidentiality Agreements);
- Non-Solicitation of/Non-Dealing with Customers, Clients, or Suppliers Agreements;
- Non-Solicitation of Fellow Employees Agreements.
The confidentiality agreement utilized in this dispute falls under the Non-Compete Agreement category, which seeks to limit employees and other business entities from engaging in competitive activities against the employer. This is achieved by restricting employees from participating in certain professional activities or engaging in competitive business on their own.
Such Non-Compete Agreements affect employees’ rights to work and their freedom of employment as recognized under the Constitution and laws. Thus, the legal recognition of these agreements and the balance of rights between employees and employers warrant thorough consideration.
II. Legal Issues
- Contents of Employment Contracts
The contents of an employment contract refer to the terms agreed upon by the parties within the contract. In principle, the parties have the freedom to negotiate the terms of the contract, provided that these terms comply with the law. Accordingly, the employment contract must contain all the items stipulated in Clause 1 of Article 21 of the 2019 Labor Code. In addition, both parties may agree on additional terms related to the rights and obligations of each party within the employment relationship.
Clause 2 of Article 21 of the 2019 Labor Code also specifies discretionary provisions related to the protection of business secrets of the employer, stating:
“When employees are directly involved with business secrets or technological secrets as prescribed by law, the employer has the right to enter into a written agreement with the employee regarding the content and duration of the protection of business secrets or technological secrets, benefits, and compensation in cases of violation.”
Thus, the non-compete agreement in the above-mentioned case serves as a discretionary provision aimed at protecting technological and business secrets of the employer. This is a discretionary provision regulated under Clause 2 of Article 21 of the 2019 Labor Code [this content is stipulated in Clause 2 of Article 23 of the 2012 Labor Code and remains unchanged under the 2019 Labor Code]. While the law allows the parties to negotiate such agreements in separate documents, these agreements should still be regarded as part of the employment contract’s content.
The case discussed above follows the 2012 Labor Code, though its provisions in this regard are consistent with the 2019 Labor Code. In this case, the Arbitration Panel held that the non-compete agreement was independently negotiated by the parties, separate from the employment contract, and was therefore considered a civil transaction governed by Vietnamese civil law.
According to the author, this perspective is unconvincing because the content of the employment contract encompasses agreements between the parties regarding the rights and obligations within the employment relationship, not just the terms stated in the written employment contract. The Labor Code defines an employment contract as follows:
“An employment contract is an agreement between the employee and the employer on paid work, working conditions, rights, and obligations within the employment relationship” [this definition is consistent in Article 15 of the 2012 Labor Code and Article 13 of the 2019 Labor Code].
In this case, although the non-compete agreement was not included within the written employment contract, it was clearly “an agreement between the employee and employer regarding the rights and obligations within the employment relationship.” The contents of this agreement stem from the fact that the employee worked for the employer. One can argue that if there were no employment relationship between the parties, the agreement—especially for the employee—would not exist.
Hence, the non-compete agreement in this case should be considered an annex to the employment contract and subjected to labor law. In practice, employers often move sensitive matters to annexes or separate agreements to avoid government scrutiny (e.g., agreements related to withholding employees’ diplomas and certificates). If we follow the Arbitration Panel’s reasoning that any agreement not stated in the employment contract but concluded separately would be considered a civil transaction governed by civil law, it would undermine the unique principles of labor law.
Based on the above analysis, agreements between employees and employers within the employment relationship—whether or not they are documented in the written employment contract—should still be regarded as part of the employment contract’s content. Consequently, they fall under the jurisdiction of labor law rather than civil law.
- On the Validity of Non-Compete Agreements
As analyzed above, while the non-compete agreement was not included in the written employment contract, it is still considered a component of the employment contract. This content is deemed discretionary, allowing the parties the freedom to negotiate, provided their agreement complies with the law.
To safeguard the weaker party in the employment relationship, Clause 3, Article 50 of the 2012 Labor Code stipulates:
“In cases where part or all of the content of an employment contract provides benefits for employees that are less favorable than the provisions of labor laws, internal labor regulations, collective bargaining agreements in force, or restricts other rights of employees, then such part or all of the content shall be considered invalid.”
In this case, Clause 2 of the Non-Compete Agreement limits the employee’s right to work during employment with the employer and for two years following the termination of the employment contract. Although the agreement was entered into freely and voluntarily, it restricts a fundamental right of the employee—the freedom to work. This right is codified in Clause 1, Article 5 of the 2012 Labor Code:
“Employees have the right to work, to freely choose their jobs, vocations, and training to improve professional skills, without discrimination.”
Furthermore, Article 21 of the 2012 Labor Code guarantees the right to work for multiple employers:
“Employees may enter into employment contracts with multiple employers, provided they fulfill all agreed obligations.”
Therefore, under Clause 3, Article 50 of the 2012 Labor Code, the agreement is deemed invalid.
In this case, the Arbitration Panel determined the agreement to be a civil transaction between the parties and thus evaluated it under civil law. The Panel concluded that, while the Non-Compete Agreement met the conditions for validity under Article 122 of the 2005 Civil Code, it failed to meet the requirement for a “transactional purpose” stipulated in Article 123 of the 2005 Civil Code.
The Panel argued that the content of the Non-Compete Agreement imposed obligations on the Defendant to benefit the Plaintiff after the termination of their employment relationship but did not impose reciprocal obligations on the Plaintiff to benefit the Defendant. Specifically, the Non-Compete Agreement under dispute contained no provision indicating that the Defendant would receive any specific benefit from the Plaintiff in exchange for refraining from performing the restricted activities. The agreement’s content primarily focused on protecting the Plaintiff’s interests while neglecting to safeguard the Defendant’s interests post-termination of the employment relationship.
In practice, the Non-Compete Agreement was drafted by the Plaintiff, who was the Defendant’s employer. As it was executed concurrently with the employment contract, Clause 8, Article 409 of the 2005 Civil Code (now Article 404 of the 2015 Civil Code) should apply:
“In cases where the dominant party incorporates provisions unfavorable to the weaker party in a contract, the contract must be interpreted in favor of the weaker party.”
Thus, the Arbitration Panel found insufficient grounds to confirm that the Non-Compete Agreement met the necessary conditions for validity.
Although civil law was applied to resolve this case, the Arbitration Panel highlighted the illegality and unreasonableness of the Non-Compete Agreement. Civil law principles governing civil transactions emphasize freedom, voluntariness, and equality. However, civil law also includes exceptional provisions to protect the weaker party in a transaction. In this case, it is clear that the employee is the weaker party in the employment relationship with the employer. Clause 3, Article 50 of the 2012 Labor Code establishes a safety net for employees when entering into employment contracts with employers, concretizing the principle of protecting the weaker party in contractual relationships.
In practice, the contents of employment contracts are often proposed by employers (employers pre-draft the contracts), and in most cases, employees accept these terms and sign the contracts. Accordingly, under the safety net stipulated in Clause 3, Article 50 of the 2012 Labor Code, any terms presented in the employment contract must ensure that employees’ benefits are not less favorable or their rights are not restricted compared to what is prescribed in labor law, collective bargaining agreements, or employer’s internal regulations.
The application of the 2012 Labor Code to assess the validity of the non-compete agreement reveals that the 2019 Labor Code introduces a change by removing Clause 3, Article 50 of the 2012 Labor Code. This clause served as an essential basis for determining the invalidity of non-compete provisions under the 2012 Labor Code. However, even if the 2019 Labor Code were applied, the Non-Compete Agreement would still infringe upon employees’ freedom to work, as stipulated in Articles 5 and 19 of the 2019 Labor Code. Nonetheless, without Clause 3, Article 50 of the 2012 Labor Code, there is insufficient legal grounding to definitively conclude that the agreement is invalid.
III. Conclusion
In certain cases where employees directly engage with technological and business secrets of employers, the current labor law provisions for confidentiality, such as those in Clause 2, Article 21 of the 2019 Labor Code, remain insufficient. The purpose of non-compete agreements, as seen in this case, is to ensure employees do not disclose or use the employer’s technological or business secrets while working for competitors. This need is legitimate for employers; however, the lack of benefits for employees in exchange for restricting their rights to work under these agreements is unreasonable.
To ensure the rights of both parties in the employment relationship, labor law should explicitly regulate non-compete agreements by setting specific limitations. Restrictions on employees’ rights to work should be permitted only in truly necessary circumstances to protect employers’ business secrets. These limitations should include scope, industry, duration, and geographical constraints. Additionally, employers should provide employees with compensation to offset potential income reductions or losses caused by these restrictions.
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