Definition and Types of Restrictive Covenants
There is no specific regulation in Brazil on restrictive covenants or the enforceability thereof following termination of employment agreements. However, the Brazilian Federal Constitution establishes freedom of work, which means that the employer cannot force or oblige an employee to remain employed and/or impose other obligations not to hire its own employees. Also, Brazilian Industrial Property Law (Law 9.279/1996) prevents an employee from disclosing or using the employer’s confidential information, without its authorisation, at any time (during the employment or after its termination, for an indefinite period), under the penalty of characterisation of the crime of unfair competition.
Types of Restrictive Covenants
Non-compete clauses
The Brazilian Labour Code establishes that an employee cannot compete with his/her employer during the term of the employment agreement. In case of breach of such obligation, the employer may terminate the employee with cause, in addition to the possibility of filing a claim to receive an indemnification linked to the damages caused by the employee regarding such conduct.
Based on case law, Brazilian Labour Courts tend to consider a non-compete agreement valid and enforceable after termination provided the following elements are present in the agreement:
- Limitation in time – the period of restriction must be reasonable and expressly limited to 24 months maximum;
- Geographic limitation – a reasonable geographic limitation for the restriction must be established. This means that the former employee will not be allowed to work in a certain geographic area where the employer develops its business; it is possible to include that the restriction applies in a worldwide basis or in a specific region;
- Limitation of object – the obligation must be established in relation to a determined object. It must not exceed the limits of what is considered reasonable to protect the former employer’s interests;
- Fair compensation – the parties may negotiate what is reasonable on a case-by-case basis based on the extension of the non-compete obligation, non-compete period, object and geographic restriction. If it will be a broad restriction (i.e., the former employee cannot work for any company that is a competitor of the former employer) the recommendation is to pay, during the period of the non-compete obligation after termination, the amount the former employee would earn as his/ her ordinary compensation if he/she remained employed for such period. Law experts agree that a fair compensation must correspond to the last compensation multiplied by the number of months for the non-compete obligation.
Non-solicitation of customers / employees
There is no rule in Brazilian Labour Law about non-solicitation provisions. However, it is very common that Brazilian employers address this restriction in employment agreements of management employees.
This type of restriction is not usually executed before Labour Courts, which means there are few decisions about its enforceability. Scholars’ opinion, on the other hand, have already discussed this matter and currently it is understood that non-solicitation clauses are valid as long as the parties agree on: (a) limitation in time; (b) geographic limitation and (c) limitation of object. If these principles are followed, it is possible to enforce such a restriction through the labour courts, as well as a claim for payment of penalty from the employee who practiced the solicitation.
