NON-COMPETE AGREEMENTS AND INVOLUNTARY SERVITUDE: A CASE OF CAUSE AND EFFECT? BY: ATTY. MANUEL A. QUIAMBAO, Bar Reviewer in Labor Law

 

         ATTY. MANUEL A. QUIAMBAO

          Assistant Dean, College of Law

          Jose Rizal University (JRU)

          and

          Bar Reviewer in Labor Law

          C.P.R.S. Bar Review Center

Is asking an employee to sign a non-competition agreement, which effectively closes his chances of getting employed elsewhere (at least for some time after he ceases to be employed by his company), a form of involuntary servitude?

To the extent that a person who is covered by such restrictive covenant tends to be knowledgeable or skilled only in the usual work he is engaged in, the effect is really practical bondage (if you are a banker, where else can you use your banking skill except in a bank?).Well, not perhaps exactly a case of involuntary servitude, as the employee can of course seek other work provided it is not related to his old job (the trained banker can always apply as a messenger). But if one has been working all his life doing the same thing over and over, to what other decent kind of employment would he still qualify in the event he decide to leave his employer (if he is covered by a restrictive covenant)?

As a strategy to ensure retention (a truly ingenious anti-piracy tool), the method has effectively addressed transfers and external employee movement. Most non-compete agreements have at least two years prohibition against joining competitors from the date of the employee’s last engagement. Others have more, hidden in some form of restraint like fixed employment term in consideration of training undertaken at company’s expense or for being given the chance to go abroad whatever the reason may be for such trip.

But even as transfers are held in check by this legal maneuver, resentment builds up on the part of those who see this system as an undue restraint on their right to live.

Non-competition agreement, or non-compete clauses in employment contracts, have increasingly become a serious concern, but especially so to those whose expertise, kind of work, or job exposure is currently in high demand and who naturally want to take advantage of the favorable labor market to upgrade their income. What easily come to mind are employees in certain types of industries where the competition for workers with impeccable communication skills (and readiness to work in the graveyard shift) has become so acute that promotional advertisements for applicants have now included payment of pre-employment bonuses, a genuine phenomenon in a country that has over 20 percent unemployment and under-employment rates (combined).

Because of the competition, some companies have gone berserk in imposing restrictive covenants. It would have been understandable if non-compete agreements are made to apply only to certain types of employees whose responsibility involves access to trade secrets, or to confidential business or professional information (not otherwise

a trade secret),  or  if the these employees have substantial relationships with prospective or existing customers or clients, or given specialized training.

But in an effort to restrict all possible exits toward its rivals by any of its employees, some companies have extended the non-compete requirement to the level of the absurd, by imposing it even to job holders whose tasks are far from being critical or strategic. When even clerks are covered by such impositions, then it is time to examine this process and determine its legal basis.

To begin with, non-compete agreements must be based on some essential consideration to make it binding upon the parties. Some authorities claim that the mere job opportunity itself suffices as a consideration. I disagree. If this is going to be the premise for justifying a company from prohibiting an employee from joining a competitor, then it can impose such restrictive condition even to the most trivial employment prospect.

Think of janitor, utility men, and yes, clerks.

Of course, the lawyer would argue that a contract is consensual, and if the employee is not comfortable with a restrictive clause/non-compete agreement, then it is his choice to refuse the job. If he signs and subsequently enters the employment relationship, then he must suffer its consequences.

But like most legal arguments not based on reason, this is an over-simplification of the issue.

It is also inane, because a person not otherwise engaged would sign any kind of condition to be able to get the job given the scarcity of opportunities in the country. In a sense, we can call his signing vitiated consent, or consent given under duress.

The purpose of enforcing a non-compete agreement is to protect an employer from unfair competition by a former employee without imposing unreasonable restraint on the latter. But this agreement must be intended as a protection of the employer, not as a punishment of the employee. An employer cannot extract a restrictive covenant from an employee merely to protect himself from competition because it would restrain commerce and limit the employee’s freedom to pursue his trade.

To be fair, the employer has  legitimate interests to protect but this normally pertain, in the context of his relationship with an employee, to (1) trade secrets or information material to the business which could come to the knowledge of the employee in the course of his employment and which, if he discloses to competitors, will substantially threaten the employer’s viability, and (2) customer contacts, which are important for the same reason as above.

Therefore, if a job does not customarily involve getting access to critical information that is material to the business, a restrictive covenant cannot apply. Likewise, if the job does not involve having to deal with customers as to present any possibility of business solicitation in the future, a restrictive covenant must not apply.

Courts in the US have traditionally frowned upon restrictions placed by employers on their employees’ right to find and make a living. In fact, the two most populous states in that country (California and New York) have considered non-compete agreements as essentially illegal.

But even in those areas where this agreement has been recognized as valid, the courts have imposed certain restrictions. First, the period during which the employee is prevented from joining competitors must not be too long as to practically deprive the employee of his right to a lawful occupation. It must not include a broad range of prohibitions as to what the employee can or cannot do once he is no longer engaged. Most important, the damages to be paid in case of breach (if agreed upon in the contract as liquidated damages) must not be too big as to be unconscionable.

In the Philippines, the jurisprudence on the matter of non-compete issue have not yet fully developed obviously because this type of covenants is relatively new, and there is general reluctance on the part of employees to challenge restrictive covenants on the belief that, since this is part of a contract they signed, that they cannot easily dispute its legality.

But there are certain loopholes in the system, and the employee would be wise to study these if they feel that they have been wrongly inveigled to enter a condition which they did not consent to.

First of all, if an employee is asked to sign a non-compete agreement when he is already employed (which is becoming prevalent as employers come to know of the value of restrictive covenants), he has the right to refuse since it is not part of his original employment contract. And even if he signs, he can later challenge its legality if such agreement is not accompanied by a valuable consideration.

On the other hand, even assuming that the non-compete agreement is legitimate, if the employee is terminated without cause, or his work conditions have become intolerable as to constitute constructive dismissal, he could have a fairly good chance of overriding the restriction in court.

Also, if the employer did not apply such restrictive covenants to other employees or even if applied but did so unevenly, it could constitute a waiver in respect to the others. At the very least, the employer would be on the defensive if an employee being made to account under a non-compete clause decide to question the employer’s past actions on the matter.

Is non-compete agreement a case of involuntary servitude? This was actually a question raised to me in a forum by an ordinary employee about a year ago. My answer: it is likely to be so, but only if we allow it.

Atty. Manuel A. Quiambao is the Corporate Secretary and Associate Dean for the Law School of Jose Rizal University. He is a Bar Reviewer in Labor Law, and the general counsel of a score of multi-national corporations, including Fujitsu Phils,, Yokogawa Phils, Affinity Phils , Inc., Fil-Pacific Apparel, Authentic American Apparel, AS Dee, Inc., Atlanta Industries, among others.

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