For employers in Vietnam, the risk of losing valuable trade secrets or client relationships when employees leave is a growing concern. Non-compete agreements can serve as a critical safeguard against these risks, helping businesses protect their competitive edge in a dynamic marketplace. However, the enforceability of such agreements under Vietnamese labor law is complex and requires careful navigation. This article delves into the intricacies of non-compete agreements, their legal underpinnings, and actionable strategies for businesses to mitigate potential vulnerabilities.

What is a Non-Compete Agreement?

A non-compete agreement is a contractual clause designed to prevent employees from engaging in competitive activities against their former employer after their employment ends. Typically, these agreements aim to:

• Protect confidential business information and trade secrets.
• Prevent former employees from poaching clients or customers.
• Safeguard a company’s competitive edge.

Non-compete clauses are especially relevant in industries where intellectual property and proprietary information play a critical role, such as technology, manufacturing, and consulting. These agreements help employers protect their unique processes, innovations, and customer bases, which are often key to maintaining a competitive advantage in these fields.

Legal Framework Governing Non-Compete Agreements in Vietnam

Vietnamese labor law, primarily governed by the Labor Code 2019 and the Civil Code 2015, does not explicitly regulate non-compete agreements. Instead, these agreements are often inferred through broader legal principles. Key considerations include:

1. Freedom to Work: The Constitution and Labor Code emphasize an individual’s right to choose their occupation, which may limit the enforceability of restrictive covenants.
2. Civil Code Principles: Agreements must adhere to principles of fairness, voluntariness, and compliance with public policy.
3. Unfair Competition Laws: Employers can seek protection under Vietnam’s competition law to address concerns of unfair practices.

Key Elements of a Valid Non-Compete Agreement

To improve enforceability and ensure compliance with Vietnamese law, non-compete agreements should include the following elements:

• Reasonable Duration: The non-compete period must be limited, typically ranging from 6 months to 2 years.
• Geographic Scope: Restrictions should be clearly defined and not overly broad.
• Compensation: Employers are encouraged to provide reasonable compensation to employees during the non-compete period, as this demonstrates fairness.
• Defined Scope of Restrictions: Specify the activities, industries, or roles the employee is restricted from pursuing.
• Confidentiality Clauses: Reinforce protection of trade secrets and proprietary information.

Are Non-Competes Enforceable in Vietnam?

The enforceability of non-compete agreements in Vietnam is a nuanced issue influenced by various legal and practical factors. While these agreements are not explicitly prohibited, employers must overcome significant challenges to enforce them effectively.

Burden of Proof

Employers bear the responsibility of proving that the non-compete clause is essential to protect their legitimate business interests. This typically involves demonstrating how an employee’s actions could harm the company’s proprietary information, customer relationships, or competitive advantage. Without clear evidence, the courts may deem the restriction unnecessary.

Fairness and Reasonableness

Vietnamese courts are likely to assess whether the terms of the agreement are fair and reasonable. Restrictions that are overly broad in terms of duration, geography, or scope of prohibited activities may be invalidated. For instance, attempting to enforce a multi-year non-compete restriction across an entire country for a mid-level employee might be deemed excessive.

Judicial Precedents and Interpretation

The lack of extensive judicial precedents in Vietnam adds to the uncertainty surrounding non-compete agreements. Each case is often evaluated on its unique facts, making it difficult to predict how courts will rule. This highlights the importance of drafting agreements that are specific, justified, and defensible.

Compensation as a Factor

Providing fair compensation during the non-compete period significantly enhances enforceability. Compensation demonstrates that the agreement is not merely a one-sided imposition but a mutually beneficial arrangement. Courts may view the presence of compensation as an indicator of fairness, making it more likely that the agreement will be upheld.

By addressing these factors and adopting a strategic approach, businesses can improve their chances of successfully enforcing non-compete agreements in Vietnam.

How does a Company Increase the Chances that a Non-Compete Agreement will be Enforceable?

To strengthen the validity and decrease the possibility of the non-compete agreement being rejected by the Court, we would recommend that businesses take the following steps based on our experience with the Court:

Firstly, there should be a separation of the non-compete agreement from the labor contract between the employer and the employee. This means there should be a separate agreement created, and the contents of the non-compete agreement should not be added into the contents of the labor contract. The reason for this is that if the terms of the non-compete agreement are inserted into the labor contract, the Court would likely consider the provisions against labor limitations under the labor law instead of considering it as a civil agreement under the civil law.

Secondly, the period of validity and the scope of application of the non-compete agreement should be limited to a reasonable time and scope.

Thirdly, the contents of the non-compete agreement need to have a reasonable balance between rights and obligations of both parties. It is likely that the Court would more easily accept the provision if the non-compete agreement indicates an arms-length civil transaction. This means that there is an easily definable equitable balance between rights and obligations of both parties (the rights of one party are the obligations of the other party and vice versa). As for the employee, there should be a clear consent to forgo his/her rights for a reasonable time period. As for the employer, there should be reasonable compensation offered for the benefit of having the employee abstain from using his/her rights (this may be an amount of money or a share of profits depending on the agreement between both parties). It would be advisable to avoid the case where the Court would consider the non-compete agreement as a unilateral imposition of the employer’s will on the employee (who is always considered as a disadvantaged party in his/her relationship with the employer under Vietnamese law).

Finally, a note concerning the penalties contained in a non-compete agreement when an employee violates the terms: Instead of completely prohibiting the employee from freely working for a third party (and there should not be a complete permanent prohibition), the employer should consider a monetary penalty or a fine for a violation of the terms of the non-compete agreement in order to (i) give color to the non-compete agreement as a civil transaction between both parties to avoid having the case being considered as a violation of the regulations under the labor law (i.e. violating the employees’ freedom to work), (ii) establish a basis to request that the employee compensate the company when he/she violates the non-compete agreement which leads to a dispute (a fine for violation would be more effective than a request for compensation due to the requirement to prove the actual damage caused to the party requesting compensation), and (iii) the employee will be fully aware of the consequences if he/she violates the non-compete agreement.

Balancing Employer Protection and Employee Rights

Employers in Vietnam face the challenge of protecting their business interests while ensuring that employees retain their right to pursue their chosen careers. A carefully structured non-compete agreement can help strike this balance, but it requires thoughtful consideration. To avoid being overly restrictive, employers should limit the scope of non-compete clauses to areas that are truly critical, such as safeguarding proprietary information or customer relationships. Overly broad restrictions in terms of geography, duration, or industry scope may not only risk invalidation but could also harm the relationship between employer and employee.

Another essential component is fair compensation during the non-compete period. Providing monetary benefits or other forms of support reinforces the fairness of the agreement and helps demonstrate that it is a mutually beneficial arrangement. Additionally, employers might consider alternatives to non-compete clauses, such as confidentiality agreements or performance-based incentives, to achieve the same objectives without imposing undue restrictions. Such approaches ensure a balance that respects employee freedoms while protecting the employer’s critical interests.

Conclusion

Non-compete agreements can be a valuable tool for protecting business interests in Vietnam, but they must be carefully crafted to comply with local laws and respect employee rights. By understanding the legal framework, tailoring agreements to specific circumstances, and seeking professional legal guidance, businesses can enhance their ability to enforce non-compete clauses effectively. With a proven track record in employment law and dispute resolution, Le & Tran is recognized as a trusted advisor for businesses navigating complex labor issues. For expert assistance in drafting or reviewing non-compete agreements in Vietnam, contact our team at info@letranlaw.com.