Non-Compete Agreements in the Ukrainian IT Business
Hi! My name is Inna Budna, and I'm a lawyer at Rolique. Today we will discuss an essential part of employment contracts in the Ukrainian IT business: non-compete agreements.
A non-compete agreement is a combination of labor and civil law. It is concluded between:
- Business partners
- CEO and Supervisory Committee
- Employer and employee
- Business entities (including the non-solicitation of employees and clients), etc.
This type of contract came to Ukraine from the countries of the Anglo-Saxon law system. Due to increased economic competition, most Ukrainian companies have adopted the experience of foreign colleagues to protect their business.
The relationships between business entities within the framework of the non-compete agreement are more or less regulated by national legislation but not between the employer and the employee. It leads to different interpretations of the contract terms and diverse practices of protecting the parties' rights in national courts.
Until recently, a non-compete agreement between an employer and an employee was considered a limitation of the employee's rights. The subject was a direct restriction for the employee: not to work for a competitor during the validity of the contract and a long time after the ending of the cooperation.
But how does it work now? Let's discuss non-compete law cases in the Ukrainian IT market.
All Ukrainian IT specialists work with one of the following agreements:
- an employment contract (as a full-time employee)
- gig contract ("Diia City" mode)
- contract for the provision of services (as a sole proprietor)
An employment contract
An employment contract is concluded to perform specific, clearly defined duties and labor functions. In my opinion, there is no need to have a non-compete agreement if the employee:
- Doesn't have access to a trade secret
- Doesn't perform tasks that require unique skills and knowledge
- Doesn't create objects of intellectual property rights affecting the employer's business
- Doesn't require special training and the passing of relevant knowledge qualifications
Such an employee cannot threaten the employer's business by working for a competitor. In such cases, a non-compete agreement will restrict employees' labor freedom and violate their rights. A contract will be recognized as invalid by Article 9 of the Labor Code of Ukraine and unenforceable regarding the prohibition of working for a competitor.
At the same time, only some IT specialists fit the above conditions. That`s why such an agreement is concluded with most IT employees.
A non-compete agreement can be a part of the employment contract or the subject of a separate agreement. In the case of an employment contract, it is better to write a non-compete clause directly in the contract. In case of a job order or decree, a separate agreement must be concluded considering the specifics of the employee's functions and the uniqueness of the employer's field of activity (or, more precisely, the project on which the specialist works).
Keep in mind that the provisions of Article 9 of the Labor Code of Ukraine (regarding the invalidity of terms of employment contracts that worsen the position of employees) don't apply to the contractual form of the employment contract.
Decision No. 12-рп/98 dated 07/09/1998 by The Constitutional Court of Ukraine has noted that the contract terms that worsen the employee's position are considered invalid under Art. 9 of the Labor Code (as well as the employment contract). However, the Court has pointed out the difference in the legal nature of such a "deterioration of the situation."
In this decision, the Court has determined the following. Despite the provisions contained in the laws and regulations of labor legislation that protect citizens' rights while concluding employment contracts, the parties to the contract may provide unfavorable conditions for an employee. Since the parties reached an agreement, and the employee agrees not to enter into other labor relations either during the validity of the employment contract or after its termination, such a condition cannot worsen the employee's position.
Ternopil Oblast Court of Appeals, considerating civil case No. 607/1440/17-ts dated 07.10.2017, had taken as a basis the decision of the Constitutional Court of Ukraine. In this case, the Court has protected the employer's rights to restrict the employees' cooperation with competitors during the contract's validity and three years after its termination.
Regarding the employee registered by job order or decree, a separate agreement for additional compensation for compliance with the terms of a non-compete should be concluded. In this case, the parties enter into a deed according to the content corresponding to the norms of civil law. This agreement cannot be interpreted as deteriorating the employee's position.
Someone may say that such an agreement will be null and void by Art. 228 of the Civil Code of Ukraine; that is, the agreement violates a citizen's constitutional rights and freedom to choose a profession or work. In this regard, on July 2, 2020 (case No. 910/4932/19), the Supreme Court of Ukraine formed a legal opinion on transactions that may violate public order. Some agreements infringe on the state's public, economic, and social foundations; these are deeds concluded against communal, state, and private property.
Therefore, such an agreement can safely include provisions that the employee can't:
- Work for any competitor's company.
- Conduct personally or through relatives/acquaintances a business similar to the current employer's business.
- Lure company employees to another company or another business.
- Disseminate confidential information, and so on.
In such a contract, the parties' agreement determines the amount of remuneration to the employee and the term of payment.
The Kyiv Court of Appeals adopted a resolution on August 17, 2022, in case No. 761/15245/18, establishing the legality of the non-compete agreement concluded between the employer and the employee. So, the judicial practice for non-compete clauses in Ukraine is beginning to expand, and such contracts are increasingly becoming the subject of disputes in the Ukrainian courts.
Regarding gig contractors, the essential terms of a non-compete agreement are stipulated in the particular Law "On Stimulating the Development of Digital Economy in Ukraine" in Article 27.
The specified article states that a non-compete agreement between a Diya City resident and a specialist must be in writing and with determined compensation. Here are four crucial points.
First. Who is a specialist? According to the term defined by the same Law in Article 1, a specialist is:
- an employee
- gig-specialist of a resident of Diya City
- sole proprietor engaged by a resident of Diya City
As a result, Art. 27 of the Law "On Stimulating the Development of Digital Economy in Ukraine" gives the opportunity and the right to conclude a non-compete agreement with any IT specialist, regardless of the status in which they perform the work (employee, gig-specialist or sole proprietor).
Second. The above article provides a non-competitive agreement only against residents of Dia City. The Law is aimed at establishing relations in the Diya City mode. However, the Law specifies employer's loss of Diya City resident status doesn't lead to the termination of employment relations under the employment contract and doesn't affect the validity of the employment contract, including its provisions (Article 16). Instead, the gig contract is terminated in three months (Article 18).
Therefore, the employer's loss of Diya City resident status only affects a gig contract, not any other agreements with IT specialists. But even then, it is possible to continue cooperation with a gig contractor as a full-time employee or sole proprietor. Accordingly, the non-compete agreement will remain valid.
Third. During the non-compete period, the employer shall pay compensation. Otherwise, it will be null and void (Part 4 of Article 27).
Until recently, an employer didn't pay such remuneration and, in most cases, only fined employees for non-compliance with the terms of the agreement. But with the reward, such a contract cannot worsen the employee's condition and, accordingly, cannot be declared invalid. According to the clearly defined norm of the special Law, the agreement on non-compete with the resident of Diya City must be retaliatory. So, for a non-compete requirement, the employee must be paid. But how much and when?
Everything will depend on the parties` agreements. These agreements should be recorded in a contract or contract clauses with the employee. Suppose an employee agreed to receive payment for the work, considering non-compete obligations during cooperation with the employer and a specific time after its termination. In that case, this amount can be either symbolic (if it's an essential condition of the contract with a gig contractor, for example) or absent. Still, a non-compete agreement must be connected with the main cooperation agreement as proof that such an employee's obligation is paid together with the remuneration for work (deal with the sole proprietor, for example). In this case, an employee cannot demand any additional payments, preferences, etc., from an employer in the future. Instead, non-compete obligations will remain.
My advice to employers and employees is not to manipulate the situation. Furthermore, to prescribe these conditions in agreements not as an obligation but as an additional incentive for a reward. After all, any non-compete agreement is closely related to performing duties in a particular position in the company. The compensation amount must be reasonable regarding the work's importance. Considering any case, the court determines the fairness of the amount for such an additional obligation and the fines in case of breach of contract. The best option is to stipulate the amount in advance and spell it out in a separate non-compete contract. It will show the parties' will to conclude the agreement.
The term of the non-compete obligation cannot be lifelong or even long-term. Everything depends on the employer's business (project) uniqueness and the specifics of the employee's work, abilities, skills, or knowledge. This term of obligation cannot be applied equally to all employees.
Regarding the payment term, the compensation can be paid periodically or in installments at the beginning of the agreement in advance, at the end of the cooperation, or even at another stipulated time (after three years, for example).
Fourth. A non-compete agreement must be in writing. In no case at a verbal agreement. Electronic ones are equated to written ones.
It is because the consensus on non-compete has many points to be agreed upon by the parties, such as:
- The definition of the concept of non-compete
- The validity period of the agreement
- The amount of compensation, type, and terms of payment
- Geographical distribution of non-compete clauses
- Responsibility in case of violation of the terms of the agreement
- Preservation of obligations to the new owner of the company (employer)
- The possibility of reviewing the contract and/or making changes to it
- Grounds for termination or early termination
- Methods of resolving disputes in case of their occurrence, and so on
Non-compete agreement with sole proprietor (FOP)
It is the most common type of contract in Ukraine, which also caused the most discussions and interpretations in the past. One time it was equated with an employment contract (instead of an economic one), which led to the impossibility of limiting labor rights.
Now the trend of interpretations has changed. Even in the Diya City mode, entrepreneurs can be involved in working on the project and conclude a non-compete agreement in the IT field. Lawyers prove that such relations with the employer are based primarily on the freedom to enter into a contract, the fairness of the contract terms, and the obligation to fulfill the obligations assumed of one's own free will.
Therefore, there is no significant difference in how the non-compete agreement will be concluded: as a separate document or as the included clauses in the cooperation agreement. The main thing is that all-important conditions should be fixed in the contract.
A sole proprietor is an independent business entity and a participant in market relations, therefore, party to economic competition like other business entities. A non-compete agreement restricts the performance of a specific type of activity within a certain period. In this case, parties to such a contract agree on specific actions that affect economic competition.
Concerted actions are the conclusion of agreements in any form, as well as any other agreed competitive behavior (activity, inaction) of business entities (Part 1, Article 5 of the Law "On Protection of Economic Competition").
Persons who commit or intend to commit concerted actions are participants in concerted actions. According to Art. 6 of the same Law, anti-competitive concerted actions are concerted actions that have led or may lead to the prevention, elimination, or restriction of competition. Such actions, in particular, include:
- Removal from the market or limitation of access to the need of other business entities
- Application of different conditions to equivalent agreements with other business entities, which put them at a competitive disadvantage
- Significantly limit the competitiveness of other economic entities on the market without objectively justified reasons, etc.
The Law lists concerted actions that may and may not be permitted by the Antimonopoly Committee of Ukraine.
For now, applying for a permit for concerted actions while entering into agreements with an entrepreneur is rare. The Law "On the Protection of Economic Competition" doesn't contain a direct rule on obtaining such consent for concerted efforts when concluding a non-compete agreement.
However, a reform of antimonopoly legislation to strengthen the protection of economic competition is undergoing in Ukraine. Law No. 5431 of April 27, 2021, is formally introduced into the Verkhovna Rada of Ukraine. It is going to be adopted in 2023. Possibly some changes will be made, which will significantly expand the functions and powers of the antimonopoly committee and significantly change the legislation on economic competition, the Economic and Procedural Code of Ukraine, etc.
It may mean entering into a non-compete agreement will require prior authorization, which is obtained for a fee and takes considerable time. On the other hand, the permission for such concerted actions will give more protection to the customer of IT services against competitive actions on the part of the executor, which means it will form the practice of proper protection of the parties to such an agreement.
As we can see, it cannot be said that there is no legal regulation of non-compete agreements in Ukraine. The Paris Convention for the Protection of Industrial Property is in force in Ukraine, which is subject to the Agreement on non-compete (Article 10 bis). According to Art. 9 of the Constitution of Ukraine, international treaties that are in force, agreed to be binding by the Verkhovna Rada of Ukraine, are part of the national legislation of Ukraine.
The Constitution has the highest legal force. Next are international treaties and conventions; only after them are codes and laws. The outdated Art. 9 of the Labor Code cannot limit the non-compete relations between the employee and the employer (the customer and the service provider) when these relations are adequately agreed upon and recorded in the relevant Agreement.
A foreign customer of IT services should not be anxious about a Ukrainian executor/employee as such, who will not be held responsible if the non-compete agreement is violated. Although the legislation is imperfect and needs to be improved, your rights can be protected if the non-compete agreement is drawn up correctly.
The employee/service provider should request appropriate compensation for compliance with non-compete conditions, especially if such conditions are maintained long after the termination of cooperation. Suppose your abilities and unique coding skills (for example) are in high demand. Why not receive proper compensation under a non-compete agreement? It is an opportunity to receive a decent reward.
Last but not least: do not abuse your rights or neglect your duties. Then, the Law will work in your favor.