Illegal Contract Clauses (Part IV) – The Five Year Non-Compete Ban

3月 14, 2016

Just the mere suggestion that a manager “might” be “thinking about” about abusing their power to “dismiss” you for your “insubordination” is often enough to quell all thoughts of doing something like fighting back against unfair labor practices (or getting those pesky “unions” and their inconvenient “laws” involved).

In a foreign country, that menace tends to bite twice as deep: not only does an employee risk losing their job should they incur the wrath of middle-management, they stand to lose their homes, and perhaps even their right to remain in the country, too.

When the option seems to be limited to “do the illegal things we tell you to do, or get out of Japan”, the choice seems to be pretty clear-cut.
To that end, due to the fear of reprisal, this tale of illegal contract woes came to the General Union anonymously, with neither a company name nor a copy of the offending clause given.

The situation sent to us is as follows:

I work for a very small English conversation school (one which employs about ten people in total). When I first started working at this school, I signed a contract which had a non-compete clause stating that, should I resign, I am prohibited from starting my own school in the same city for a period of five years from the date that the contract was signed.

The General Union has seen quite a few variations of “non-compete” clauses over the years (which, as you know, are mostly always illegal), but this one was something of a rarity.

Banned from opening a school within the same city for five whole years? One would imagine that such a prohibition would include private students, too. Could that have any legal basis?
To find the answer to that question, we asked a lawyer, and here’s what they told us:

“A person’s freedom to choose their own occupational is a constitutional right, and employers cannot violate it. Courts will hold validity of such non-compete agreements ONLY IF a worker really voluntary and duly signed it.”

That “constitutional right” is Article 22 of the Japanese Constitution, which reads:

“Every person shall have freedom to choose and change his residence and to choose his occupation to the extent that it does not interfere with the public welfare.”

In addition, Article 6 (Elimination of Intermediate Exploitation) of the Labor Standards Act states:

“Unless permitted by law, no person shall obtain profit by intervening, as a business, in the employment of others.”

Therefore, once again, a company cannot prohibit someone from opening their own company (be it a school or an eikaiwa or anything else) just by writing a few words in a paragraph that essentially amount to an “or else!” threat.

As we mentioned in part three of this series, just because you write something into a contract, it doesn’t mean that what you wrote will come true.
For the sake of argument, though, (and to explore the other side of the coin in a little more detail), let’s say that a company decides to pursue a “non-compete” agreement the correct way, independent of contracts and clauses.

Here’s the scenario:

You’ve given your company your resignation notice (which, if you remember, is two weeks from the moment you gave notification of your intent to leave to your company).

You’re called into the office and presented with a document.

The document is a non-compete / non-disclosure agreement.

It states that, for X period of time, you are not permitted to open another school / business in the city. In addition, you are not permitted to use any of the resources, materials, or teaching methods that you encountered, while working for the company from which you are now resigning.

Is this form of non-compete agreement legally binding?
Naturally, the first thing you could do is just not sign it.

The company can’t stop you from resigning if you decide that the document that is now sat in front of you isn’t worth the paper that it’s printed on, and it’s unlikely that your soon-to-be-former company is going to go through the trouble of legal action that would ultimately be fruitless.

In addition, while the company has the right to prevent you from stealing their materials and using any “special” or “unique” methods that only THAT company uses, they can’t prevent you from using other tried-and-true methods of teaching like using flashcards.

After all, a company would have to be pretty ballsy to try and claim that they invented reading from flash cards.

So, there’s that to consider…
What about the other parts, though?

What about the ban on opening a rival company within X duration of time from signing a contract / ending a contract?

What about opening a rival company within the same city as the you-are-so-glad-you-quit-this-awful-place-and-their-stupid-rules company you’re resigning from?

Here’s what our lawyer had to say:

“The legality of the agreement would depend on: (1) how much of the (former) employer’s interest would be protected by the arrangement, (2) how big the (former) employee’s damages/disadvantage would be as a result of the arrangement, and (3) how much of the “damage” would be compensated as part of the arrangement (e.g. will a retirement package cover the perceived damage?).

If the company is offering no compensation for the disadvantage that the employee has to suffer, a “no-competition for X years” agreement is illegal and invalid.”

It seems that, should a company wish to make a “non-compete agreement” hold up in court, the company would have to sufficiently demonstrate that the former-employee had been sufficiently compensated for the damage that such a “non-compete agreement” would cause them (in relation to their constitution rights).

In a nutshell: IF you (the employee) agree not to open a rival company, we (the employer) will give you THIS form of compensation for your trouble.

It’s the old “you scratch my back, and I’ll scratch yours” idiom: if the agreement is entirely stacked in the employer’s favor, it is null and void; if the agreement gives something in exchange for taking something, it might be upheld in court.
Finally, let’s take a look at one other detail: does the “for a period of five years” hold any legal clout?

According to the lawyer:

“I can find no known cases of non-compete clauses that have had a limit of five years. Pro-labor scholars say it should be up to one year at maximum.”

As in all things, context matters.

If you voluntarily sat down and signed a non-compete agreement with your company before you resigned, and they offered you a rather generous severance package in exchange for you not opening a rival school in the local area, then you can expect to run into legal trouble if you go ahead and use that severance package to open a new school as soon as you’re out of the door.

If, however, the company put that non-compete clause in your contract (complete with an arbitrary time limit), that non-compete clause is probably mostly toothless, and there is very little the company can do to enforce it, should you decide to ignore it.