In early May of this year, the Federal Trade Commission (FTC) of the United States published a rule that prohibits the use of non-compete clauses throughout the country, except in certain specific situations. The FTC’s central argument is that the indiscriminate use of these clauses constitutes an unfair competitive practice, particularly when applied to workers who do not have access to confidential or strategic information, which account for about 18% of the American workforce, or approximately 30 million people.
The prohibitive rule, which spans over 500 pages, broadly covers any term or condition in a contract that prohibits, penalizes, or prevents a worker from seeking or accepting employment in the United States with a person or entity other than their employer.
The FTC made it clear that the rule does not apply to existing non-compete clauses signed with senior executives, specifically those with a total annual compensation above $151,000 and who hold positions “with authority to create policies.” It also does not apply to current or future cases of “business sales,” meaning that a restrictive clause would still be valid in the context of a business acquisition followed by employer succession.
However, there are significant arguments against the FTC’s general rule, including the claim that the agency lacks legislative authority unless overturned by a court ruling. Starting in September, American companies will have to make profound adjustments to their policies.
We estimate that the impact of the FTC’s rule in Brazil will be at most indirect, should a global policy be created that Brazilian subsidiaries would have to implement, similar to what has occurred with clawback clauses, which became required by the Securities and Exchange Commission (SEC) at the end of 2022.
In any case, the heated discussion about non-compete clauses in the United States, especially considering the strong political bias of the FTC, highlights the lack of specific regulation on the subject in our country, prompting pertinent reflections.
In Brazil, over the years, several bills have been proposed, such as Bill No. 4,030/19, which intends to add a specific article to the Consolidation of Labor Laws on the subject. However, as of now, there is no specific legislation regarding this matter.
Currently, civil and labor law are in charge of the subject. It is noted that jurisprudence is not binding, meaning there is no legal obligation to adhere to its non-qualified precedents, although they serve as strong indicators of trends. Thus, if the issue is brought before the courts, the prevailing position is virtually unavoidable.
For a non-compete clause to be valid before the Judiciary in Brazil, it must cumulatively meet the following criteria: it must have a reasonable territorial limit; a time limit, especially one less than five years; specify the competing activities; and offer fair compensation for the restriction imposed.
Fair Compensation
In Labor Court, there is no minimum amount or percentage defined for “fair compensation,” as it depends on the scope of the restriction: the broader the scope, the greater the compensation (i.e., closer to 100% of the last salary/remuneration received by the employee).
It is essential to emphasize that, in addition to non-compete clauses, there are other post-contractual restrictive obligations frequently included in employment contracts, such as confidentiality clauses, non-solicitation clauses, and non-defamation clauses.
Labor courts understand that these obligations do not require adherence to the same validity criteria as non-compete clauses. In particular, they do not require the presence of a counterparty from the employer, as they do not impose a direct restriction on the employee’s work.
For example, prohibiting an employee from soliciting clients or other employees of the employer does not prevent them from practicing their profession at another company. Likewise, the obligation not to defame the employer does not create a restriction on work but imposes an ethical and legal duty not to harm the company’s reputation after the termination of the employment contract.
The obligation of confidentiality is one of the most important in the employment relationship, being essential for the preservation of the company’s strategic and sensitive information. Its compliance is considered mandatory, even in the absence of an express contractual provision, due to the implicit nature of this duty, which imposes on the former employee the obligation not to act detrimentally to the company’s interests, either by disclosing confidential information or engaging in acts of unfair competition (Article 195 of Law No. 9,279/96).
The increasing presence of restrictive obligations in employment contracts demonstrates their necessity and utility as a tool for business protection. It is essential that both parties are fully aware of the criteria, rights, and duties related to restrictive clauses, thereby contributing to avoid excessive judicialization on the topic and allowing for greater fluidity within the job market.
The FTC’s initiative in the U.S. raises crucial questions about fair competition practices and worker protection, highlighting the need for Brazil to find a balance between business protection and worker rights. By observing and learning from international experiences, Brazil can find solutions that benefit all parties involved, ensuring competitiveness and fairness in the labor market.
