Non-compete clauses and non-disclosure agreements: do they work in Ukraine?

Non-compete clauses

In a non-compete clause an employer and an employee agree that the employee will not be employed by companies engaged in similar activities or participate in projects similar to the company’s projects. Such restriction is usually set for a certain period of time.

However, entering into a NCC is not regulated by the labor legislation of Ukraine. At the same time, Ukraine guarantees the constitutional right to work, which includes free choice of profession, type of employment and work.

The Labor Code of Ukraine (hereinafter referred to as the “Labor Code”) further provides that terms and conditions of employment agreements worsening the situation of employees compared to the legislation of Ukraine on labor are invalid. Thus, there is a risk that the court can deem the non-compete clause as a restriction of the employee’s labor rights and deterioration of his/her position.

Given the foregoing, in addition to an employment agreement, employers sometimes enter into a separate civil-law agreement with employees determining the employee’s remuneration for non-employment with competitors. At the same time, the transaction restricting the option of an individual to have civil rights not prohibited by law is null and void. It means that entering into the NCC as a civil-law agreement also poses relevant risks.

Application of the NCCs has not yet become widespread in Ukraine, therefore, there is almost no judicial practice on this issue.

Thus, the Court of Appeal of Dnipropetrovsk Region considered case No. 191/215/14-ц, in which the employer attempted to collect a penalty from its former employee for setting up a competing company and becoming its director. In its ruling as of August 18, 2014, the court concluded that the terms and conditions of the employment agreement prohibiting the defendant from engaging in any activity similar to the activity carried out by the plaintiff violated the defendant’s rights and contradicted the current legislation.

In case No. 761/15245/18 the first-instance court established that the non-compete clause did not contradict the will of the parties and requirements of law and decided to recover funds under such an agreement in favor of the former employee. The specified decision was upheld by the resolution of the court of appeal as of October 6, 2020. The plaintiff substantiated his claims by the fact that in case of meeting certain conditions, for example, not to work for any competitor company, the defendants had to pay funds to the plaintiff.

It is interesting in this case that the NCC was signed by the individual owners of the enterprise without the indication of their positions and without affixing a seal of the enterprise. The clause contained no reservations that the payment of the disputed amount was to be made by the corporate employer. In this regard, the court established that payment of the disputed amount went beyond the employment relations and was a “bonus” to be recovered from owners of the enterprise.

On the other hand, in its decision as of July 10, 2017 in case No. 607/1440/17 the court of appeal agreed with the first-instance court, which dismissed the employee’s claim for partial invalidation of the employment agreement providing, inter alia, for the prohibition to carry out activity competitive to the enterprise. The court stated that these conditions of the agreements did not violate the plaintiff’s right to work. It should be noted that the case was not re-considered by the Supreme Court.

It means that today the practice regarding the application of NCCs is rather ambiguous, since courts apply different approaches to their legality. Undoubtedly, the final legal position on such legal relations must be expressed by the Supreme Court.

Non-disclosure agreements

While not directly regulated by the labor legislation of Ukraine, non-disclosure agreements are rather common among the parties to labor relations. Let us find out under which conditions such agreements can become an actually effective tool for protecting employer’s interests.

By entering into with the NDA with employees, an employer can protect confidential information, which in turn is classified as restricted information. As a rule, it includes customer database, business plans, agreements, documentation and correspondence, inventions, technologies, business proposals, marketing research, passwords and access codes, etc.

It should be noted that a list of information, which may not constitute confidential information and trade secrets, and therefore be subject to NDA, is determined by the Law of Ukraine “On Information” and Resolution of the Cabinet of Ministers of Ukraine No. 611 as of August 09, 1993. Such information includes, inter alia, information about the state of environment, food quality, violations of human rights and freedoms, as well as company’s articles of incorporation, permits, documents on payment of taxes and mandatory payments, etc.

The arrangement of parties to employment relations on non-disclosure of confidential information may be executed as a separate agreement or as part (separate section) of the employment agreement. There is also another common option, which provides for the adoption by an employer of a local act (policy/regulation on protecting confidential information) to be reviewed by employees against signature and followed by them.

Regardless of the method of executing a non-disclosure agreement, such a document must contain a detailed list of information access to which is restricted by an employer, as well as requirements for preserving the information, rules and conditions of working with it. It is also important to specify what actions and/or inaction of employees will be considered a violation of the agreement (for example, posting confidential information on social media), and what will be deemed appropriate confirmation of such a violation.

Significant penalties are usually stipulated for violations of the agreement. Furthermore, violation of the NDA may result in the application of disciplinary measures against an employee: reprimands, dismissal. However, the Labor Code of Ukraine contains no such grounds for dismissal as violation of the non-disclosure agreement. In such cases, an employer may apply clause 3 Art. 40 of the Labor Code of Ukraine as grounds for dismissal: systematic failure of the employee to perform obligations imposed on him/her by the employment agreement or internal labor rules and regulations without a valid reason, if the employee has previously been subject to disciplinary or public sanctions.

Let us consider a few examples from judicial practice. Thus, in its resolution in case No. 752/5775/16-ц, the Supreme Court supported the position of the first-instance court and court of appeal regarding the refusal to recover compensation from a former employee of the company in the amount of one hundred minimum wages for violating the non-disclosure agreement. The employer referred to the fact that the employee’s violation of the agreement has been established by the official investigation report. In turn, the Supreme Court pointed out that the information provided in the official investigation report was not confirmed by any proper and admissible evidence, hence no fact of both illegal receipt of information by the employee or its use thereof.

By its resolution in case No. 372/4550/19, Kyiv Court of Appeal upheld the decision of the first-instance court to dismiss the employer’s claim to recover from the former chief commercial officer the penalty for violating the NDA in the amount of UAH 150,000. The courts established that the agreement signed with the former employee contained no the date of conclusion, it also contained no list and scope of information being the trade secret and confidential information of the employer. The foregoing refutes the employer’s arguments that the employee disseminated confidential information.

Thus, it is the employer who bears the burden of proving the fact of disclosing of confidential information by the employee. Therefore, in order to effectively protect their rights and interests, employers must pay special attention to both the proper execution of non-disclosure agreements with employees and recording the violations of such agreements.

Conclusions

At first glance, by entering into with NCCs and NDAs with employees, employers reduce the risks of potential adverse consequences in case of dismissal of the employee. However, if the employee violates the terms and conditions of such agreements, it is the employer who will have to prove such violation and consequences thereof.

Moreover, it should be emphasized concerning the NCCs that restrictions on the constitutional right to work are prohibited, and labor legislation guarantees free choice of work. Therefore, as long as the possibility of entering into non-compete clauses is not directly enshrined at the legislative level, there is a risk that such clauses will be invalidated in court.