Non-compete clauses in labor relations in Brazil: competition and labor law perspectives
On April 24, the Federal Trade Commission (FTC) issued a rule banning non-compete clauses in employment contracts in the United States. The initiative had already been invoked by President Joe Biden since the publication of the Executive Order on promoting competition in the American economy on July 9, 2021. In a nutshell, the rule aims to bring more dynamism to the American economy, as well as fostering innovation and better pay conditions for workers, who stand for consumers in the country, as well as a source of new business.
The issue has brought up relevant considerations in the United States and elsewhere. This article reflects on how the institute is treated in Brazil.
In the antitrust sphere, the impacts of non-competition clauses on workers in the labor market have not yet been dealt yet with by law or in case law of the Administrative Council for Economic Defense (“CADE” in the Portuguese acronym), the Brazilian antitrust authority. The discussions so far are incidental, and involve the impact of mergers on workers, as is the case with non-solicitation clauses, which have a different scope from non-competition clauses.
CADE has ruled on the application of non-solicitation clauses in two operations involving acquisitions of control by Empresa de Serviços Hospitalares Ltda. (Edson Bueno Group): of Hospital Pró-Cardíaco (Merger Act No. 08012.004902/2010-78) and Hospital Samaritano (Merger Act No. 08012.013200/2010-85).
The cases were ruled jointly, and, on that occasion, CADE held that restricting the entry of qualified employees into businesses run by competitors creates asymmetry in the conditions for recruitment and entrepreneurship. In addition, the restriction on employees’ freedom to re-enter the market was based on the mistaken understanding that their qualifications constituted goodwill. As a result, CADE restricted the no-poaching clauses only to employees who had access to the company’s intangible assets (business secrets and confidential information).
Regarding non-competition clauses in employment contracts, CADE made a rather timid statement in its contribution to the OECD in the preparation of the document “Competition Issues in Labor Markets – Note by Brazil“. In the document, CADE pointed out that “the non-compete clauses, though generally allowed, should be analyzed upon their potential to restrict the mobility in the relevant labor market. In Brazil, cases involving wage-fixing or non-soliciting agreements (also known as ‘no-poach agreements’), can be held as antitrust offenses under the Brazilian antitrust legislation.”
CADE’s 2018 antitrust remedies guide, in turn, states that “if applicants attract the key personnel part of the business to be divested, an essential part of the business is undermined since the competitive potential of the divestiture can be transferred back to the applicants. The Guide states that “it is required that, in some cases, the applicants waive rights through non-compete clauses established in employment contracts regarding their key personnel.”
In Brazil, the debate on non-compete clauses in employment contracts applicable to former employees has been building over the years, gaining greater prominence in the labor sphere. The topic has been shaped by both the doctrine and the case law of the Superior Labor Court and the Superior Court of Justice (TST and STJ, respectively, in the Portuguese acronym).
Over time, Brazilian Courts have come to the understanding that non-compete clauses are enforceable provided that they meet four specific criteria:
(i) a reasonable time limit;
(ii) a geographical limit only to the market in which the employee has worked at or was involved in projects related to;
(iii) specific post-termination financial compensation for the worker (although the need for compensation is undisputed, there is disagreement as to its amount: whether the salary received for the position held until then is maintained, or whether it is proportional to the limitation imposed on the former employee); and
(iv) specification of the restricted activity (it is limited to the activities carried out by the former employee at the employer, and does not cover activities that the employer intends, in the future, to carry out).
On the other hand, there is no regulatory provision governing non-compete clauses. The CLT only states that during the term of the employment contract it is not allowed for the employee to compete with the company, under penalty of dismissal for just cause (article 482).
As one can see, non-compete clauses in employment contracts in Brazil are enforceable, but subject to criteria determined by labor case law. From an antitrust perspective, CADE has not yet conducted a systemic analysis of the impact of this type of clause on the labor market, although the subject is not unfamiliar to it, and the interests of the worker have already prevailed vis-à-vis those of the company, when analyzing non-solicitation clauses.
Although there have been no specific cases in which CADE has identified concrete damages to the Brazilian labor market caused by non-competition clauses, the agency seems to be prepared and receptive to conduct this type of analysis in the future.