Post-employment non-competition agreements: are they valid? The situation in Argentina. The new U.S. federal rule

by 23 May 2024Companies, Doing business in Argentina, Labor and social security, Labor and Social Security

1) The validity of post-employment non-competition agreements

It is common that in the employment contract or in the implementation of the termination of an employment relationship, post-employment non-competition agreements are included. But are they valid?

Non-competition, both during the employment relationship and after its termination, is crucial in certain industries, such as those belonging to the so-called knowledge economy, and especially concerning particular positions within the company, such as senior management positions or those occupied by key employees who have special technical knowledge and could be tempted by competitors.

Next, we will review the situation in Argentina, and briefly comment on the recent federal regulation of the United States of America.

2) Post-employment non-competition agreements in Argentina

The Employment Contract Law No. 20744 establishes that, during the term of the employment relationship, the employee must be loyal to the interests of his employer, including the prohibition to perform tasks in competition with the employer. This obligation arises from Articles 63 (Principle of good faith), 85 (Duty of fidelity) and 88 (Duty of non-competition), and it is not necessary to enter into a specific contract or grant any economic consideration for this obligation to be valid.

However, the situation changes at the end of the employment relationship. The law does not prohibit the employee from performing tasks in competition with his former employer. Moreover, any such restriction could conflict with the right to work guaranteed by Article 14 of the National Constitution.

Therefore, any restriction on post-employment competition must be expressly instrumented in writing in post-employment non-competition agreements.

Labor case law, in the renowned case “Leguizamon Eduardo Martin Luis v. Nidera S.A. y Otros s/ Accion Ord. de Nulidad” (Cámara Nacional de Apelaciones del Trabajo, Sala I. 10/11/2006. elDial.com – AA4785) has subjected the validity of post-employment non-competition agreements to certain requirements[1]:

  • Time limitation: they must have a definite term;
  • Territorial limitation: must be restricted to the territory where the employee rendered services for his former employer;
  • Activity limitation: must specify the activities subject to the restriction, without completely prohibiting the employee’s professional performance, specifying the interest sought to be protected and the justification for seeking such protection; and
  • Consideration: It must include adequate economic compensation for the employee, which is related to the remuneration that the employee collected during the employment relationship and the term of the restriction.

Naturally, the shorter the time limitation, the less extensive the territorial limitation, the more restricted the activity limitation, and the greater the consideration granted in post-employment non-competition agreements, the less likely it is that a challenge to their validity could succeed.

In short, non-competition during the term of the employment contract is a legal obligation, whereas, after its termination, the obligation not to compete is only valid if a post-employment non-competition agreement that respects the above-mentioned requirements is in place.

 3) The recent rule of the Federal and Trade Commission of the United States of America

The law of the United States of America lacked a federal rule on post-employment non-competition clauses. Therefore, state legislation had to be researched for rules on their validity or invalidity, with great variations among the states.

This situation has just changed.

On April 23, 2024, the U.S. Federal Trade Commission approved the so-called “Final Rule,” which will largely prohibit labor non-compete agreements. The Final Rule was published on May 7, 2024[2], and will become effective one hundred and twenty days after its publication[3].

Substantively, the Final Rule provides that:

  • Companies are prohibited from entering into new post-employment non-competition agreements with any type of worker after the rule becomes effective;
  • Concerning post-employment non-competition agreements in effect on the effective date:

o Existing non-compete agreements with “senior executives” may be maintained.

o Non-compete agreements in force will be immediately null and void for any other employee. Employers are required to notify employees that the covenants are unenforceable.

The Final Rule defines non-compete clauses as:

“(1) A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

(i) Seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or

(ii) Operating a business in the United States after the conclusion of the employment that includes the term or condition.

(2) For the purposes of this part, term or condition of employment includes, but is not limited to, a contractual term or workplace policy, whether written or oral” (§ 910.1 Definitions).

Senior executive means a worker who was in a policy-making position and received a total annual compensation of at least $ 151,164 (§ 910.1 Definitions).

4) Conclusions

Respecting the above requirements, post-employment non-competition agreements in Argentina should withstand potential legal challenges.

In addition, taking into account the new U.S. federal Final Rule, we add that post-employment non-competition agreements would be reasonable for employees in positions that may justify this type of restriction (such as a seasoned engineer), and not a clerical or professional employee with very little experience.

Post-employment non-competition agreements are of crucial importance for the evaluation of R&D investment decisions of multinational companies. However, it is not possible to simply apply the model agreements that come in formats used in other jurisdictions, but they must be carefully analyzed and adapted to the particularities of our legal environment.

Mario E. Castro Sammartino

[1] In a previous precedent, the validity of non-competition agreements was also admitted, provided that the employee was not required to make a commitment that was too prolonged in time that would result in an unjustified restriction of the freedom to work (“Ducilo SA v. Barcia”, CNCiv (A), 1971, ED 38:407).

[2] Available here: https://www.govinfo.gov/content/pkg/FR-2024-05-07/pdf/2024-09171.pdf

[3] The Republican minority of the committee opposed the issuance of the Final Rule, arguing that it exceeds its competence, and that a rule of this scope should be determined by Congress and not by an administrative agency. A possible judicial challenge to its validity is now on the horizon..

 

For additional information on these or any other issues related to doing business in Argentina, please, sign up for our Legal Blog or contact us at any time. Our publications exclusively express the author´s opinion and do not purport to be legal counsel on any case. Should you need it, you must consult with your trusted lawyer.​

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