Our article addresses post-employment non-compete undertakings under Turkish law, explaining the validity conditions, the limits as to territory, duration and scope, the judge's power to narrow an excessive clause, liquidated damages and excess loss, and the grounds of termination.
An employee moving to a competitor is, for an undertaking, not merely a human resources matter. The departing individual may carry with it the customer base, the pricing structure, supplier terms and knowledge of production processes. The principal instrument used against this risk is the non-compete undertaking. That instrument, however, lies in one of the fields where freedom of contract is most tightly restricted, since the undertaking interferes directly with a person's ability to practise its profession and earn a living. The Turkish Code of Obligations has accordingly subjected post-employment non-compete undertakings to a mandatory framework balancing the employer's protectable interest against the employee's economic future. A common situation in practice is that broadly drawn clauses inserted into standard employment contracts prove, once a dispute arises, either entirely unenforceable for failing the statutory conditions or substantially narrowed by the court. This article examines the validity conditions of the non-compete undertaking, the limits as to territory, duration and scope, the judge's power to narrow, the consequences of breach, the function of liquidated damages, the grounds of termination, and the different regime applying to shareholders and directors.
1. The Concept and Legal Framework
A non-compete undertaking is an agreement by which the employee undertakes to refrain, for a certain period after the employment relationship ends, from competing with the employer. Under the relevant article of the Turkish Code of Obligations, an employee having capacity to act may undertake in writing to refrain, after the contract ends, from competing with the employer in any manner, and in particular from opening a competing business on its own account, from working in another competing business, or from entering into any other kind of interest relationship with a competing business. This definition fixes the scope of the undertaking through three typical manifestations; establishing a competing business on one's own account, working for a competing business, and entering into an interest relationship with a competing business. The third manifestation is particularly broad and may cover relationships such as shareholding, consultancy, board membership or the provision of finance. That the provisions on non-compete undertakings sit within the rules governing the employment contract is not accidental; this placement requires the rules to be interpreted in light of the principle of protecting the employee.
2. Written Form and Capacity
The validity of a non-compete undertaking depends first on two formal conditions. The first is written form; the law requires the undertaking to be assumed in writing, and this is a condition of validity rather than of proof. A non-compete undertaking not made in writing produces no effect. In practice the writing requirement is generally satisfied, but the document in which the undertaking appears matters; a clause inserted into the employment contract suffices, as does a separate agreement. The second condition is that the employee have capacity to act. This condition matters particularly as regards employees under the age of eighteen; an undertaking given by a person with limited capacity depends on the consent of its legal representative. Whether the non-compete was agreed at the formation of the employment relationship or afterwards is not decisive for validity; it may validly be agreed while the relationship continues. As regards undertakings given after the relationship has ended, however, the freedom of the will must be assessed separately.
3. The Employer's Protectable Interest
Beyond the formal conditions, the substantive condition is what actually determines validity. Under the law a non-compete clause is valid only if the employment relationship affords the employee the opportunity to obtain information about the customer base or production secrets or the employer's business, and at the same time the use of that information is of such a nature as to cause the employer significant harm. This provision requires two elements, both of which must be present. The first is that the employee, by reason of its position, has access to qualified information; the customer base, production secrets or information concerning the employer's business fall within this scope. The second is that the use of that information is capable of causing significant harm to the employer. This standard is the point at which non-compete clauses are most frequently held invalid in practice. Imposing a non-compete on an employee without access to qualified information, without customer relationships or without knowledge of production processes produces no effect, since this element is not satisfied. A non-compete should therefore be applied not to every employee but only to those whose position meets this standard.
4. The Territorial Limit
The law provides that a non-compete undertaking may not contain limitations as to territory, time and the type of work that are inappropriate so as to endanger the employee's economic future contrary to equity. The first of these three dimensions is the territorial limit. For the undertaking to be valid, the geographical area in which it applies must be determinate and proportionate to the employer's actual field of activity. Clauses containing no territorial limit at all, extending the undertaking across the whole country or worldwide, are problematic by this standard. In judicial practice, contractual clauses containing no territorial limitation have been found contrary to the law and claims based on such clauses have been dismissed. The criterion in setting the territorial limit should be the area in which the employer genuinely operates and where its customer base is located. It is disproportionate for an undertaking operating only in a single province to impose a nationwide non-compete. For businesses providing digital services without geographical boundaries, defining the limit by reference to customer segment or market may be considered.
5. The Temporal Limit
The second limit concerns duration, and here the law sets a concrete ceiling. The duration of a non-compete undertaking may not exceed two years, save in special circumstances and conditions. The period begins to run upon the termination of the employment contract. The two-year ceiling is not absolute; the law permits it to be exceeded in special circumstances, but it should be noted that this exception is construed narrowly and is rarely accepted in practice. Clauses providing for periods exceeding two years are found contrary to the law in judicial practice. The criterion in setting the duration should be how long the information held by the employee will retain its currency. A two-year undertaking is disproportionate for information that will lose its value within six months in a fast-moving sector, whereas a longer period may be defensible in sectors with long product development cycles. Making an assessment according to the nature of the interest protected, rather than defaulting automatically to the statutory maximum, improves the prospects of the clause surviving.
6. The Scope Limit
The third limit concerns the type of work and activity covered. A non-compete may not be drawn so broadly as to prevent the employee from practising its profession altogether. The criterion is the field of activity the employer actually carries on; the undertaking must be confined to that field. A frequent error in practice is drafting the undertaking so as to cover the whole of the employee's profession. It is disproportionate for an undertaking operating in a particular product group to prohibit its employee from working across the entire sector. Likewise, undertakings covering fields of activity unconnected with the role the employee performed do not meet this standard. In setting the scope limit, regard should be had to the product or service group, the customer segment and the function in which the employee worked. Defining the scope concretely both improves the prospects of validity and makes it easier to establish later whether a breach has occurred. Scope definitions drafted in open-ended terms may be construed against the employer when a dispute arises.
7. The Judge's Power to Narrow
The most important feature of the regime concerns the fate of excessive clauses. Under the law the judge may limit an excessive undertaking as to its scope or duration, having equitable regard also to any counter-performance the employer may have assumed. The meaning of this provision is that an excessive clause is not automatically and wholly invalid but may be narrowed by the court and thereby kept alive. This is a solution departing from the general approach of contract law and affords the employer a measure of security as regards the non-compete clause. It is nonetheless unwise to rely on that security and draft excessively broad clauses, since narrowing presupposes that the conditions of validity are satisfied. Where the employer has no protectable interest at all, or where the written form requirement is not met, the clause cannot be narrowed and kept alive; it is wholly invalid. The reference in the provision to counter-performance is also notable; that the employer has undertaken to pay the employee consideration during the period of the undertaking is a factor weighing in its favour in the equitable assessment.
8. The Consequences of Breach
The liability of an employee breaching a non-compete undertaking is regulated in graduated form. The basic sanction is damages; the employee must make good all loss suffered by the employer by reason of the breach. Where the contract provides for liquidated damages, the employee may as a rule discharge its obligation under the non-compete by paying the stipulated sum. This gives the liquidated damages clause a function akin to a withdrawal penalty. However, the employee must also make good loss exceeding that sum; payment of the liquidated damages does not extinguish liability for excess loss. The most critical point in practice is the condition for the employer to be able to require that the conduct in breach cease. Apart from payment of the liquidated damages and any additional loss, the employer may require the cessation of conduct in breach only where this right has been expressly reserved in writing in the contract. Where that reservation has not been inserted, the employer is left with monetary claims alone and cannot seek to have the employment with the competing business actually stopped.
9. The Function and Limits of Liquidated Damages
Proof of loss is exceedingly difficult in non-compete breaches; it is often impossible to establish in figures how much of the customer loss arising from an employee's move to a competitor is attributable to that move. Liquidated damages resolve this problem of proof and make non-compete clauses functional in practice. In the non-compete context, that the liquidated damages are stipulated only against the employee does not render them invalid. The clause has two limits, however. The first is the accessory principle; if the non-compete is not valid, the liquidated damages attached to it are likewise invalid. Setting a high figure therefore does not keep an invalid undertaking alive. The second is the power of reduction; the judge reduces of its own motion liquidated damages it considers excessive, and that power is mandatory. Reduction arises where there is a prospect of the employee's economic position being seriously affected. Fixing the amount in reasonable proportion to the employee's level of remuneration and to the interest protected is therefore sound both as regards validity and as regards the risk of reduction.
10. Grounds of Termination
A non-compete undertaking ends automatically upon the expiry of the agreed period. Beyond that, the law provides for two specific grounds of termination. The first is where it is established that the employer has no genuine interest in maintaining the undertaking. Where the employer ceases its activity, withdraws from the line of business covered by the undertaking, or the protected information loses its value, no genuine interest in maintaining the undertaking remains and it comes to an end. The second ground, which arises far more often in practice, concerns the source of the termination of employment. Where the contract is terminated by the employer without just cause, or by the employee for a reason attributable to the employer, the non-compete undertaking ends. The logic is plain; it would not be equitable for an employee without fault in the ending of the employment relationship to be restricted by a non-compete. By contrast, where the employer terminates for just cause or the employee resigns without justification, the undertaking survives. Conducting the termination process in due form and documenting the just cause therefore directly affects the fate of the undertaking.
11. Non-Competition During the Employment Relationship
The regime addressed so far concerns the period after the employment relationship ends. While the relationship continues a separate obligation applies, and that obligation arises from the law even where it is not agreed by contract. By reason of the duty of loyalty, the employee must refrain throughout the employment relationship from conduct harmful to the employer and, in particular, from engaging in activity competing with the employer. The source of this obligation is the employment contract itself; it is therefore not subject to the conditions of limitation as to territory, time and scope. Breach may give rise to termination of the employment contract for just cause and to a claim in damages. The practical importance of this distinction is considerable; an employee taking a role in a competing business while employed, or carrying on competing activity on its own account, is subject to sanction even where the contract contains no non-compete clause at all. A post-employment non-compete, by contrast, produces effect only where the conditions required by the law are satisfied.
12. The Different Regime for Shareholders and Directors
The statutory framework on non-competition is built for the employment relationship. Different regimes apply to persons who are not employees, and failure to observe this distinction leads to serious errors in practice. For members of the board of directors of a joint stock company, the duty not to compete with the company arises from commercial law provisions and is subject to specific mechanisms such as the authorisation of the general assembly. Similar provisions exist for managers of limited liability companies. Non-compete undertakings agreed between company shareholders, by contrast, do not rest on an employment relationship and are therefore not subject to employee-specific protective provisions such as the two-year ceiling; such undertakings are assessed within general freedom of contract, and their limit is drawn by the review for breach of personality rights and for contrariety to morality. Non-compete obligations imposed on a seller in share transfer transactions fall within the same framework; these obligations are additionally assessed as a matter of competition law, provided they do not exceed what the transaction requires. In construing a non-compete clause, the first step must be to determine whether the party is an employee, a director or a shareholder.
13. The Relationship with Trade Secret Protection
A non-compete undertaking and a confidentiality obligation perform different functions and neither substitutes for the other. A non-compete prohibits a person from operating in a given field and territory; since it interferes directly with economic freedom it is subject to strict limits and may not exceed two years. A confidentiality obligation prohibits the disclosure and use of specified information; since it does not prevent a person from practising its profession it is not subject to such strict limits and may be provided for much longer periods. This difference directly affects an undertaking's protective strategy. Strengthening confidentiality protection, rather than overloading the non-compete, constitutes the sounder course; an employee's move to a competitor cannot always be prevented, but preventing the use of the concrete information taken there rests on firmer legal ground. Moreover, even after the non-compete period expires, protection continues in respect of information retaining the character of a trade secret. The two instruments must be structured together and in accordance with their respective functions.
14. Mistakes Frequently Made in Practice
Certain mistakes are frequently repeated in non-compete clauses. The first is applying the undertaking to all employees without distinction; the clause is invalid as regards an employee without access to qualified information. The second is failing to set a territorial limit at all, or setting it disproportionately broadly relative to the employer's field of activity. The third is defaulting automatically to the two-year maximum without assessing the nature of the interest protected. The fourth is drafting the scope so as to cover the whole of the employee's profession. The fifth, and the one causing most lost rights in practice, is failing to reserve expressly in the contract the right to require cessation of conduct in breach; without that reservation the employer is left with monetary claims alone. The sixth is fixing liquidated damages disproportionately to the employee's level of remuneration. The seventh is conducting the termination process carelessly; where just cause is not documented the undertaking may come to an end. The eighth is assuming that undertakings given by shareholders and directors are subject to the employee-specific regime.
15. Conclusion and Practical Recommendations
Non-compete undertakings are subject to a delicate balance struck between the employer's interest and the employee's economic future. The basic considerations may be summarised as follows. Written form and capacity are not sufficient for validity; it is required that the employee have access to the customer base or production secrets and that the use of that information be capable of causing the employer significant harm. The undertaking must be limited as to territory, time and type of work; the geographical area must be proportionate to the employer's actual activity, the duration must as a rule not exceed two years, and the scope must not prevent the employee from practising its profession. An excessive clause is not automatically invalid and may be narrowed by the court, but only where the conditions of validity are satisfied. On breach, damages may be claimed, liquidated damages remove the burden of proof, and the employee may discharge its obligation by paying them while remaining liable for excess loss. The ability to require cessation of conduct in breach depends on that right being expressly reserved in the contract. The undertaking ends where the employer's interest has gone or where the termination rests on a ground attributable to the employer. Finally, a non-compete is not by itself adequate protection; it must be structured together with a confidentiality obligation.
Non-compete undertakings are closely connected with the protection of commercial information and the other fields of contract law. Our article on protecting trade secrets and know-how under Turkish law, which addresses confidentiality protection serving a different function from the non-compete, and our analysis of penalty clauses under Turkish law, which form the enforcement limb of non-compete clauses, address the matters connected with non-compete undertakings.
For advisory services on the drafting of non-compete clauses, the assessment of their validity, the routes available upon breach and the management of employee exit processes, you may contact us at info@guzeloglu.legal.