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08. Restrictive Covenants

Definition and Types of Restrictive Covenants

The Portuguese Labour Code has a subsection on clauses that limit the freedom of work. These include, among others, provisions on non-competition covenants and minimum permanence duration agreement.

Agreements to restrict the activity of employees during employment or after contract termination are allowed under certain terms and conditions.

Exclusivity clauses during employment are allowed as are non-compete agreement to produce effects after the termination of the contract.

Types of Restrictive Covenants

Non-Compete Clauses

Non-compete agreements (after termination) are only legal if the activity of the employee is likely to cause harm to the employer and payment of a non-competition compensation amount is agreed and complied with.

As a general rule, the non-competition covenants are subject to a maximum duration period of 2 years. However, if the employee in question was allocated a role involving special trust nature that entails a special relationship with the company or a role that granted the employee access to particularly sensitive information that is relevant for competitors, the duration of the agreement may be increased to up to 3 years.

It is also possible for the employee to agree to a non-termination covenant, by which the employee undertakes not to terminate the contract, subject to a maximum period of 3 years, as a way to compensate the employer for high expenses incurred with the employee’s professional training. The employee may in any case anticipate the end of this period by reimbursing the employer for the relevant expenses incurred.

Non-solicitation covenants

Although it is common to find companies including non-solicitation covenants in their outsourcing, service provision and joint venture agreements, among others, these restrictive covenants are actually not enforceable under Portuguese labour laws.

Enforcement of Restrictive Covenants – Process and Remedies

To enforce restrictive covenants after termination of employment, the agreement must state either the amount of the compensation due to the employee or the criteria for its determination. This compensation can be paid in fractions during the term of the agreement or it can be paid all at once. The parties may agree on contractual penalties that may be claimed in case of breach of agreed restrictive covenants. Damages caused by breach of such covenants may be claimed from the party at fault.

Use and Limitations of Garden Leave

When resigning or when having been served a prior notice for dismissal (e.g. collective dismissal) employers frequently choose to grant the affected employee a paid leave. Employers cannot actually instruct the employee to stay away if he/she choses to continue performing his/her work role until the prior notice period is completed. The only possibility given to the employer is to instruct the employees to use any unused holiday period during the final part of the prior notice being served and, therefore, in practical terms, to actually leave before the end of the prior notice period. Garden leaves in the context of pending disciplinary proceedings are allowed particularly after the accusation note has been served to the employee.

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