Restrictive Covenants under Turkish Law
The success of a business resides in its employees. Even the biggest corporate structures depend on its employees to conduct its business. That is why, during the course of employment employer’s valuable information that is integral to its activities such as its business models, client profiles and marketing strategies are exposed to the use of its employees and once such become known by the employees they cannot be unknown. Therefore, the employers become vulnerable to misuse of such insight by the ex-employees after the termination of the employment relationship. While in most of the legal systems, the employee is under the duty of confidentiality and non-compete during the term of the employment, these issues may be at stake following the cease of employment. Hence, there is a growing trend in the business world to provide some level of legal protection to the employer against its ex-employees. The instruments to achieve such protection are called the “restrictive covenants” with which the employer restricts certain behavior of its former employees for a period following the termination.
There are different types of restrictive covenants common in employment contracts of the senior or high skilled employees with access to sensitive information of the employer designed for preventing the employee from entering into direct competition against the employer (non-compete); preventing him/her from accepting business from clients and/or contracting the clients with/without them approaching to the employee first (non-dealing); and preventing an employee from soliciting other employees to join him/her in the supposedly new business (non-solicitation). While such requirements are beneficial for the protection of business, they are in fact restrictions on the employee’s freedom to work, thus legal systems have evolved to adjust such encroaching interests.
The abovementioned needs of the employees have also played its part in Turkey. Including such provisions in employment contracts are becoming more and more popular. From a legal point of view, non-compete, non-solicitation and confidentiality obligations are the types of restrictive covenants recognised under Turkish law. While only non-compete covenant is regulated in detail under the Turkish Code of Obligations (“TCO”), the High Court accepts that non-solicitation and confidentiality covenants shall also be interpreted within the scope of the regulations on non-compete covenants. Other clauses of non-employment and non-dealing are not defined under Turkish law and are not commonly used in Turkey. Still, as long as the limitations set forth under the Turkish Code of Obligations are fulfilled, the covenants shall be enforceable due to the principle of freedom of contract.
In light of the abovementioned, our examination will be limited to non-compete obligations of an employee within the context of Turkish Employment Law.
2. Establishment of the contract
Under Turkish law, the employee is under a duty of loyalty, which includes a prohibition on competing with his/her employers, for the term of the employment as per Article 396 of TCO. Moreover, Article 25(II)(e) of Turkish Code of Labour designates behaviours in breach of such duty as a ground for termination of the employment contract with justified reasons and immediate effect. However, once the employment contract is terminated, such duty dissolves. That is why, for an employer to best protect its business interests post-employment, (s)he should impose a specific non-compete obligation on the employees. The usual way to draft such an obligation is to include a non-compete provision in the employment contract. However, if preferred, a separate agreement setting forth such duties may also be drafted. In any case, the agreement shall be in writing.
3. Enforceability and essential terms
In line with the universal principles, Turkish law also aims to balance the opposing interests of the employee and the employer while allowing the employer to impose a restriction over the employee’s freedom of work. That is why, Articles 444 and 445 of the TCO set forth some mandatory limitations as to the scope of restriction so that it shall not be far-reaching than what is suitable for preserving the justified business interests of the employer. According to such provisions:
• The employer must have legitimate business interests to request such a restriction,
• Restrictive covenants should not include unfair restrictions on location, time and type of activities which put the economic future of the employee in jeopardy,
• Except under special circumstances, time restriction should not be longer than two years.
In essence, restrictive covenants should go no further than is necessary to protect the legitimate business interests of the employer and at the same time should not unreasonably jeopardise the economic future of the employee. Therefore, a narrower scope would increase the possibility of enforcement. If the scope of the restrictive covenant is too broad, the employer would need to prove that such restrictions are reasonable and justifiable. While a judge can limit the scope of the covenant if, considering all relevant conditions, (s)he deems such as excessive, (s)he may also declare the covenant null and void if the employer does not have a legitimate business interest at stake.
a) Legitimate business interests of the employer
Legitimate business interests of the employer may be summarised as the employee's access to information on the production, business secrets and client portfolio of the employer, and the effect on the employer's profits of the use of such information.
For a restrictive covenant to be valid, the employee must have access to information related to business and production, which must qualify as confidential information and a business secret, and the employee must be able to use the information for the employee's economic benefits. Whether particular production technologies, processes, inventions, software and hardware, financial records, business plans and strategies are business secrets will be examined by the court on a case by case basis. On the other hand, if the employee gains customers because of the employee’s skills and knowledge (as might be the case for lawyers and doctors), restrictive covenants will be void.
b) Limitations as to location
Restrictive covenants must be geographically limited to the areas where the employer is actually conducting business activities and it must not exceed the boundaries of the employer's actual sphere of activity.
The relevant geographical area may be a city, a region or any place where the employer is conducting business. According to the precedents of the High Court, defining the geographical scope as “Turkey” is too broad.
c) Limitations as to term
Restrictive covenants must be limited to a specific period of time in order to be enforceable against the employee and in any case, TCO does not allow the non-compete obligations, unless there are special circumstances, to exceed two years following the termination of the contract. Moreover, even if the duration is designated for less than two years, the judge may always amend the duration of the restriction if it would jeopardise the economic future of the employee.
d) Limitation as to type of activities
Restrictive covenants should not unreasonably put the economic future of the employee in jeopardy. Therefore, except for in special circumstances, restricted activities should be directly related to the employee's job and should be limited to the job's subject matter.
As a general comment, please be noted that the employer is under no duty to provide consideration to the employee in return for covenants under Turkish law. However, in evaluating the reasonableness of the non-compete obligation, thus its enforceability, a judge may consider whether the employee has received any compensation in return for it.
4. Transfer of business
Moreover, under Turkish law, restrictive covenants are not regarded as personal obligations, but rather as having an economic value to the business of the employer. Therefore, upon acquisition of the business, even without a separate agreement, the restrictive covenants shall continue to be applicable. Thus, the acquirer shall be entitled to be protected in the same manner as the new employer, as long as it continues to be active in the same field of business following the transaction.
5. Termination and expiry of the contract
According to Article 447 of TCO, an employer terminates the employment contract without any justified cause, or if the employee terminates the employment contract due to a cause attributable to the employer, the non-compete obligation applying to the employee shall also be terminated.
In conclusion, as in many other jurisdictions, Turkish law also recognizes the employer’s right to impose restrictive covenants for its employees regarding their post-termination period as long as the employer has legitimate business interests at stake because of the business intelligence the employee has gained in relation to the employer’s business. While such covenants are deemed integral to the employee’s duty of loyalty during the course of the employment, it shall be explicitly agreed for the term following the cease of employment. In doing that there are certain limitations (as to form, term, geographic scope and field of activity) to be included in the covenant.