Labor: Post-contractual non-compete clauses

Post-contractual non-compete clauses or agreements aim to prevent employees from working for competing companies for a certain period after their employment relationship ends.

These clauses have been the subject of controversy among academics and in caselaw. One particularly contentious issue is whether employers can waive a non-compete clause upon termination of the contract and, in turn, avoid paying the agreed-upon compensation to the employee.

While these agreements aim to protect the employer’s overriding interests, they can limit employees’ freedom to work. That is why they are generally considered null unless they meet the following cumulative conditions:

• They must be in written form;
• They can only last for two years (or three years in exceptional cases);
• The company must pay compensation to the employee;
• The work in question must be capable of causing actual loss to the employer.

In the Lisbon Court of Appeal ruling of September 13, 2023, the employer argued that a post-contractual non-compete clause was ineffective due to a condition precedent. According to this condition precedent, the clause would only take effect if, at the end of the contract, the employer sent the employee a written communication confirming that the clause would apply.

Although the first instance court ruled in favor of the employer, the Lisbon Court of Appeal disagreed. Specifically, the Lisbon Court of Appeal argued that imposing this type of condition precedent allows the employer to withdraw a benefit without providing any compensation in return, which “is contrary to the principle of good faith and violates the legal requirement of onerousness in non-compete agreements.”

In its ruling, the Lisbon Court of Appeal did not find the non-compete clause to be null, but rather the condition precedent. As a result, the employer could no longer withdraw from the post-contractual non-compete agreement unilaterally. Therefore, the court upheld the validity of the non-compete clause and the associated monetary compensation to which the employee was entitled.

Portuguese caselaw supports the same interpretation as that of the Lisbon Court of Appeal. This is because this type of agreement jeopardizes employees not only after the employment contract has ended but also throughout the entire employment relationship, given that employees are apprehensive from the outset about the constraints on their profession. In contrast, the employer’s ability to unilaterally withdraw from these clauses would not cause it any loss or burden during the employment contract.

Considering the restrictive interpretation by Portuguese caselaw, all legal limitations must be considered when negotiating and drafting post-contractual non-compete clauses or agreements. It is also crucial to consider the nuances introduced and applied by Portuguese courts, which may ultimately render these clauses partially or entirely invalid, even if they are included in documents signed by both parties, such as employment contracts.