The US is on its way to banning the inclusion of non-compete clauses in employment contracts. The Federal Trade Commission (FTC) recently proposed a new regulation that would prevent employers from requiring their employees to agree to such clauses, which could put them at risk of legal action if they violate them.
This means that employees would be free to work for competitors of their former employer without restriction. The idea behind the FTC’s proposal is to promote competition and give workers more freedom in their career choices. If it is successful, the US will join countries like France and Germany, which have already instituted such laws. Additionally, California, a US state, also restricts the use of non-compete clauses.
Understanding non-compete clauses
A non-compete clause, also known as a restrictive covenant, is a legal provision included in employment contracts that restricts an employee from working with a direct competitor or starting a competing business after the end of their employment period. In most cases, this restriction is time-based, such as six months, a year, or more.
When an employee signs an employment contract with this clause, they are promising not to work for a competing company for a specified period of time after leaving their job. This clause is usually included to protect the employer’s business by securing trade secrets or confidential information and, particularly, preserving customer relationships.
It also helps ensure that an employer’s investment in the employee is not lost. However, studies have shown that non-compete agreements can be a hindrance to low-skilled and low-income workers as they may have fewer job opportunities available to them. While it may help smaller companies to compete well within an industry, it can also inadvertently limit employees’ ability to negotiate higher pay. Historically, non-compete clauses were primarily used in the master-apprentice relationship.
What does the Nigerian law say about non-compete clauses?
Unlike California’s law, which clearly prohibits the use of non-compete agreements and imposes stringent penalties, it can be argued that non-compete clauses are not in violation of any Nigerian law.
Section 17, Subsection 3(a) and (e) of the Nigerian 1999 Constitution (as amended) states that citizens should not be discriminated against in terms of work opportunities and pay on any grounds.
However, non-compete agreements are not always discriminatory, especially if the period impacted by the clause is considered reasonable. This means that non-compete clauses can be enforced in Nigeria on the basis of reasonableness. This is also the case in other African countries, including Ghana, South Africa, and Kenya.
Experts comment about non-compete clauses in Africa
The idea of a non-compete clause has been questioned and criticised by labour rights activists for how it can be abused to keep employees in toxic work situations and punish those who want to start similar businesses. Additionally, the fact that non-compete clauses are frowned upon by many speaks to their limitations.
According to Bolaji Shote, a Global HR specialist and experienced recruiter who has worked across different industries, if any clause is to be included in an employment contract, it should be reasonable, voluntary, and protect the interests of both employers and employees. However, non-compete clauses often fail to meet these criteria.
Parties that support non-compete clauses argue that they encourage employers to invest heavily in their employees by ensuring that the benefits or trade secrets will not be taken to a competitor. Shote, however, argues that regardless of how long an individual is prohibited from going to a competitor, whatever was gained from the former employer remains with them, including trade secrets.
Shote proposes an alternative approach.
“A better way around it is when employers create an enabling workplace for their employees, you manage them well, and you treat them with respect even after their exits. They will go into another organisation with a fresh mindset. I think non-compete clauses are not necessary because they are limiting.”
Shote points out how detrimental non-compete clauses can be for specialised roles, such as an underwriter who works with an insurance firm. Underwriters typically work in the insurance space, but their expertise may also be required in banking and investment. Compelling such a professional to sign a non-compete clause may limit their options for finding another opportunity or even starting their own consulting business and ultimately hold them back from contributing to the labour market.
She also addresses the question of why bank staff are often seen moving across competing firms without repercussions despite signing non-compete clauses. Shote explains that in many cases, employers ultimately conclude that such employee movement is not causing significant harm to the company and therefore do not bother to legally enforce the clause.
“When it comes to things like this, the enforceability is very low. In the case of banks, where many people leave at the same time for a new bank that’s hiring, how many people would the employer sue? At the end of the day, you just end up having so many litigation issues, and that will also be distracting for you as a business.”
The enforceability of non-compete clauses in case of violation is subject to discussion. Employers sometimes make internal considerations for employees based on trust and years of loyalty. In other cases, a business might be aware that the clause could be considered unreasonable and predatory in court and choose not to pursue legal action.
Shote advises that employees should involve the services of a lawyer to understand the possible implications of a non-compete clause on their career growth.
“The non-compete is not for the employee’s benefit. Most people don’t read contracts. They only look for what they’ll be paid and their benefits, and then they move on. But there are so many things that are hidden in employment contracts. It is advisable for you to get a lawyer to look at the contract because you might just find out that there are things in the contract that can implicate you or that can put you into trouble.”
Ordinarily, non-compete agreements are meant to bolster a country’s labour market by promoting innovation, as companies are more likely to invest in research, knowing that their ideas will not be shared with competitors. Additionally, they may promote job security and reduce employee churn rate by preventing employers from laying off indiscriminately and making it harder for employees to leave the company and work for competitors.
However, Shote does not believe that these benefits can only be achieved through the use of non-compete clauses, particularly in Africa. Hence, a possible consideration of discouraging it on the continent.