Non-competition Agreement as a Means to Protect Employer’s Legal Interests in Russian and Germany: Constitutional Aspects

Alexandra M. Braterskaya, School of Governance and Politics, MGIMO University

Abstract: the modern labor law is developing, changing and improving within the framework of globalization as well as the integration of social and economic processes. Therefore, the legal regulation of labor relations shall be based on objective reality subject to constant changes. Its most important component is the concept of legal interest. The principle of loyalty manifests the most valuable interest of employer in labor relations that may be protected by conclusion of the non-competition agreement.

Key words: labor law, legal interest, employer’s legal interest, balance of interests in labor law, non-competition agreement, Federal Republic of Germany.

Introduction. Labor law, as a separate and independent branch of law in Russia, formed as a set of standards designed first and foremost to protect employee from employer's abuse. Many experts believe that an employee shall always be seen as a weaker party in the employer-employee relationship – such standpoint is explained by the lack of legal sanctions for employers violating labor laws and inefficiency of trade unions, serious competitition of workers on the labor market, etc. [5]

The unequal position of the employee and the employer is often shown by the very structure of Russian labor legislation. Thus, among the nineteen principles of labor law listed in Art. 2 of the Russian Labour Code, only four are devoted to the legal status of the employer (the right to association to defend one's rights and interests, social partnership, participation of employers and their associations in the contractual regulation of labor relations, state guarantees ensuring the rights of employers, employer's right to demand from the employee performance of job duties and respect for the property of the employer) [12].

In practice, violation of labor laws can be committed not only by employers but also employees. Moreover, special attention of the Russian legislator paid to protection of the rights and interests of workers often leads to underestimation of the employer's interests, and as a result, to the material and non-material damage inflicted on the employer (1). In reality the mechanism of employers' rights and interests protection turns out to be weaker that one designated to protect the rights and interests of the employee [12].

The ineffectiveness of employer's interests protection and the necessity to balance the interests of the parties to the employment relationship are blocked at the present time by a number of factors.

Firstly, the liability before the competent state authorities for any decisions made in the framework of labor relations based on the dispositive provisions of labor law is born only by the employer [9].

Secondly, in accordance with the provisions of the Resolution of the Plenum of the Supreme Court of the Russian Federation of 17.03.2004 No 2, the employer has a legitimate interest to carry out activities effectively and efficiently manage their property and personnel [19]. However, the implementation of employer's interests, such as organizational, material, informational and competitive interests [8], is impeded by the absence of  the statutory definition of the employer’s interests.

 The most promising and feasible development for the legal system of every state (including the Russian Federation) are those provisions that may be included in the legislation in order to improve it without forcing radical legal reforms [11].

Thirdly, labor relations are the type of relationship that is distinguished by the community of interests of the parties. Russian legal consciousness is unfamiliar with the understanding that the development of labor relations is only possible when there is sufficient interaction and negotiation between the parties of labor relations to harmonize their interests [13]. Violations of the rights and interests of employees are often seen as a prerequisite for tightening labor laws, while the lack of legal protection of the employer’s interests does not contribute to the mechanisms of their mitigation or improvement by establishing a fair balance between the interests of the labor relations.

At present, Russian labor law needs to establish a balance of rights and interests of employees and employers, which should be supported not only by the parties themselves, but also by the labor legislation [7].

The Labor Code of the Russian Federation, which came into force on February 1, 2002, raised the issue of changing the previously existing balance of interests of the parties in labor relations.  While the old Labor Code set as its main goal comprehensive protection of labor rights of employees, the main idea of the modern Labor Code (Article 1) is to protect the rights and interests of both parties [14,15].

Theoretical background. This work is legitimate legal interest can be defined as “the desire to enjoy a certain social good and to address the competent authorities for its protection”. It seems that in order to balance the interests both parties to employment agreement, the Russian lawmaker may choose may either fix a general definition of the legitimate interest of the employer as a party to the employment relationship or supplement the existing principles of labor law with new ones.

Study. The balance of interests of the parties in the labor relations can be regained if the category of the employer’s interest and the instruments for protection of such interest are reflected in the Russian labor legislation.

In particular, the agreement on non-competition, which is aimed at preserving  loyalty in labor relations, is one of the most successful legal instruments for protecting the employer’s interests. The broad concept of loyalty is to create a employee-to-work attitude that prevents the latter from taking actions that would be detrimental to the interests of the employer (disclosure of corporate secrets, damaging information about the employer, disclosure of client lists, unjustified transfer to a competing organization) [1]. In addition, stricto sensu the principle of loyalty is a way of ensuring the competitive interest of the employer, since it allows the latter to exclude the possibility for an employee to apply his labor in a competing company in a contractual way [2].

The struggle of companies for qualified specialists in a certain field is not accidental. Often, employers provide employees with high-cost education, companies finance retraining and advanced training of employees, so that the latter keep pace with сonstantly changing professional requirements. Thus, an employee in whom the company invests materially and “morally” becomes a valuable asset not only for the company investing in the employee, but also  for all employers availiable on market. Consequently, loosing an employee can cause not only the inconvenience associated with the organization of the previous employer's workforce, but in most cases, economic damage incurred on the latter.

Does employees' resignation always violate the principle of loyalty? Not always, however, a valuable employee leaving the company and starting to work for a competing firm or supply the competitor with confidential business information about the previous employer can inflict serious damage on the latter [4]. Many companies, therefore, seek to vest their employees with an obligation not to compete and impose on them other restrictive conditions that would come into force after the end of the employee's work activity.

As a rule, the essence of the non-competition agreement is the voluntary acceptance by the employee of the obligation to refuse employment with any competing employer or even in any competing business activity for a certain time after the termination of employment [5].

 As for the legal status of the non-competition agreement, as a general rule, in accordance with Russian legislation, the non-competition agreement cannot be enforced in Russian courts.

The Constitution of the Russian Federation establishes in Art. 37 the principle of labor freedom [14]. The freedom of labor implies not only the very right to work, the right of an employee to dispose of his abilities to work, the right to choose the type of professional activity, but also the right to change his place of work. A similar provision is contained in the Labor Code of the Russian Federation [18].

Para. 3 of Art. 55 of the Constitution of the Russian Federation provides for the possibility of limiting the rights and freedoms of citizens by federal law, if this is necessary to protect the interests of other persons. The employee's interests coud be limited in order to protect the interests of the employer, however, no federal law permitting the application of an agreement on non-competition has been adopted [14].

Results. Consequently, the possibility of using this agreement in the Russian Federation is blocked not by the apparent existing obstacle in the form of the constitutional principle of freedom of labor, but rather by the lack of proper legal regulation of the status of the employer.

In view of the foregoing it follows that the employee can not be denied the opportunity to change the place of work. In practice, many employers (especially companies with foreign participation) notoriously include a non-competition clause in labor contracts and other legal documents executed with the employee (for example, job descriptions), hoping for the due care and good faith of the employee himself.

Since the concept of non-competition agreement is new to the law of the Russian Federation, it is necessary to take into account the advanced legal experience of foreign states when developing its statutory regulation.

The German experience can serve as a successful example of finding the necessary compromise between the freedom of labor and the need to protect companies from the threats to their current profitability due to the employee's sudden departure [3]. In Germany, the right to work serves as an absolute right and shall be construed as freedom of labor (2) (“Berufsfreiheit”- Article 12 of the Constitution of Germany [16]. Detailed legislative regulation of the non-competition agreement is contained in the German Civil Code [17]. Since the non-competition agreement undoubtedly limits the employee's right to choose professional activity freely, the prohibition of competition was first regarded as “an agreement between a principal and a trade agent that restricts the agent in his professional activities after the termination of service relations”. Afterwards the legal effect of the agreement was extended to labor relations in Germany. The non-competition agreement will be declared void by under German law if it does not provide for compensation (3). In accordance with clause 2 of article 74 of the Commercial Code, the non-competition agreement will have good standing if it provides for a compensation of 50% of the total earnings for the previous year (including all monetary and non-monetary benefits) for each year, during which the agreement is supposed to be valid [6].

Moreover, the maximum term of the non-competition agreement is two years after the date of employment termination. The law obliges the employer to negotiate a shorter period if it is sufficient to protect the legitimate interests of the employer or if a longer period will unreasonably hinder the professional career of the employee and his ability to earn a living [5]. However, the prohibition of competition may be held ineffective unless it serves to protect the legitimate business interests of the employer [5].

In case the employer breaches the agreement, the employer shall be granted the right to withhold compensation payable to the employee. In addition, the employer may claim damages for the breach of contractual obligations (Section 280 paragraph 1 of the German Civil Code) [17].

Discussion. The prerequisites for making the non-competition agreement in Russia enforceable have already been formed and are dictated both by the process of globalization and the intensification of competition on the labor markets, as well as by common-sense reasoning of the parties to employment contract: it is necessary to protect information, human and material resources of the employer by restricting the possibility for the employee to work by competitors.

Thus, it seems reasonable to introduce the concept of non-competition agreement into Russian labor law in order to protect the interests of the employer.

Conclusion. In conclusion, it should be noted that the statutory regulation of such concept in the Russian Federation implies paying attention to foreign experience: legal regulation of the non-competition agreement in Germany makes it possible to regard such an agreement as a legal concept whose essence is not the restriction of the employee's right to work, but the very transformation of this right at the expense of voluntary acceptance by the employee of the relevant restrictions provided that the non-competition agreement concluded sets forth appropriate compensation, liability for breach and the maximum period of its validity [8].

Notes:

1. While the material damage can easily be estimated and manifests itself the amount spent by the employer for training, development, restoration and organization of the workforce after the employee's departure, the non-pecuniary damage cannot be estimated accurately: potential disclosure of confidential information, client base and new technologies may be beyond all estimations.
2. Art. 12 of the Constitution of Germany: “All Germans shall have the right to choose their occupation or profession, their place of work and their place of training freely. The practice of an occupation or profession may be regulated by or subject to a law”.
3.  The world practice is familiar with two options of making compensations under the non-competition agreement - during employment and after its termination. According to German law, the first option is more preferable, as it creates an additional incentive for the employee to comply with the terms of the non-competition agreement. In case of breach, the employee will be obliged to return the amounts paid as compensation, which is a more serious implication than absence of payments in the future.

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