Definition and Types of Restrictive Covenants
Although Mexican legislation does not provide for a specific concept of restrictive covenants, they may be defined as any contract, covenant, or agreement having as scope the restriction, loss or irrevocable sacrifice of the personal freedom. Mexican law does not expressly prohibit clauses or covenants of this nature during the employment relationship. In fact, if a worker engages in activities that result in competition against the employer’s business during the course of employment, that conduct would constitute just cause for termination of the work relationship, even in the absence of a non-compete covenant.
Types of Restrictive Covenants
Non-competes, non-solicitation of customers and non-solicitation of employees are clear examples of restrictive covenants. Execution of restrictive covenants has become more common in Mexico as a means to protect the employer’s confidential information and trade secrets, as well as to ensure the companies’ right to loyal competition.
Covenants not to compete may be incorporated as one among various clauses in an individual work contract, or may take the form of an altogether separate or standalone agreement between the employer and the worker.
On the other hand, both the validity and enforceability of covenants not to compete that seek to survive an individual’s work relationship are more difficult to ascertain. Mexico’s Constitution protects its citizens’ freedom to engage in lawful work. Moreover, the FLL expressly provides that work constitutes a “social right and duty” and, as such, to “preclude any person from carrying out work, or from engaging in a profession, industry or trade of choice, so long as it is lawful,” is not permitted in principle.
As a general rule, other than the self-evident requirement that the work, profession, industry, or trade be considered lawful, the right to freely choose work may only be limited or denied “by resolution of competent authority when the rights of a third party are infringed, or when those of society are offended.” Notwithstanding the foregoing, pursuant to an opinion issued by a Circuit Court on Civil Matters in Mexico City, Covenants not to compete are fully enforceable provided they are limited in time, geographical scope, clients and activity, products and services, and consideration is paid in exchange.
By virtue of the above, Mexican employers that require certain workers to enter into non-compete covenants must narrow down the scope of the worker’s post-employment restrictions by (a) setting limits to the duration of the covenant, such as a maximum of one year after the conclusion of the work relationship; (b) defining the type of competitive activities from which the former employee is to refrain; and (c) specifying the competitors and the geographic area or market segment in which the former worker cannot accept employment.
In addition, employers must make a payment to the former worker in exchange for the commitment not to engage in direct competition with its business.
Another alternative for the parties is to agree on dividing an overall payment into periodic “instalments” after pre-defined periods have elapsed in which the former worker has opted not to accept employment with a competitor or to engage in direct competition. Ultimately, however, the absence of express regulation on this subject can always lead to legitimate questions regarding the validity or enforceability of covenants not to compete.
- Non-solicitation of customers: the general rules described above apply.
- Non-solicitation of employees: the general rules described above apply.