Non-compete Agreement

What is a non-compete agreement?

A non-compete agreement (NCA) is a contractual agreement between an employer and an employee that prohibits the employee from competing with the employer in a similar business activity for a specified period and within a specified geographic area after leaving employment. The purpose is to protect the company’s commercial interests, trade secrets, sensitive information, and relationships that may affect the company’s competitiveness, such as marketing strategies, innovations, or client lists. In addition, the agreement protects the business relationships established by the employee during their employment and prevents these relationships from being disclosed to competitors.

What are the terms of a non-compete clause under Saudi labor law?

Depending on the nature of the employee’s role at the establishment where they work, the extent to which they may interact with the establishment’s clients, and other job-specific factors, the employer has the right to require the employee not to compete with the employer for a specified period after the termination of their contractual relationship. Article 83 of the Labor Law stipulates that: “If the work assigned to the employee allows him or her to become acquainted with the employer’s clients, the employer may, in order to protect his or her legitimate interests, require the employee not to compete with the employer after the contract ends. For this clause to be valid, it must be in writing and specify the time, place, and type of work, and its duration must not exceed two years from the date of termination of the relationship between the parties.”

Why are non-compete agreements important for companies and employers?

A non-compete agreement plays a crucial role in protecting the commercial interests of employers and companies, as it helps ensure continued success and mitigates risks that may arise from the leakage of customer information or the exploitation of relationships the employee established during their employment. Among the key points highlighting the importance of a non-compete clause are:

Protection of Business Relationships

Relationships with customers and suppliers are an essential part of any company’s success. Through a non-compete agreement, employers can protect these relationships from being transferred to competing companies when an employee leaves, as it is very difficult to compensate for such losses if the employee attempts to compete with the employer after the contract ends.

Maintaining business continuity

A non-compete agreement prevents an employee from harming the interests of the business and the employer after the employment contract ends, given that the employee possesses information that gives the company a competitive advantage or enables them to target the company’s current customers or exploit the relationships they have built with them.

Reducing Unnecessary Competition

By signing a non-compete agreement with an employee, companies ensure that they minimize competition that might arise from the employee moving to a competitor or starting their own business that competes with the company in its industry and geographic area. This allows employers to focus on improving their business performance rather than dealing with challenges resulting from information leaks or the poaching of talent.

Promoting Organizational Stability

An employee’s commitment not to compete with their employer fosters loyalty and stability within the company, as employees know that leaving could be costly in terms of limiting their future options, which encourages them to stay longer and invest in their professional growth within the company.

What is the difference between a non-disclosure agreement and a non-compete agreement under Saudi labor law?

Both non-disclosure agreements and non-compete agreements relate to protecting the employer’s interests, but each covers different aspects and serves distinct purposes. Among the most notable of these differences, as set forth in Article 83 of the Saudi Labor Law, are:

• A non-disclosure agreement (NDA) is a contract or clause under which an employee agrees not to disclose any confidential or sensitive information related to the company or the employer. such information includes trade secrets, financial data, technical innovations, customer lists, and any other information the employee may obtain during the course of their employment, the disclosure of which would be detrimental to the employer. In contrast, a non-compete agreement aims to prevent an employee who has access to customer information from working for competitors in a similar business or from starting a business that competes with the employer after the contract ends.
• The non-disclosure agreement focuses on maintaining the confidentiality of information and preventing its leakage, whereas the non-competition clause focuses on preventing direct competition in the market and harming the employer’s interests within a specific temporal and geographical scope.
• A non-disclosure agreement applies solely to the information itself without preventing the employee from working in the same field after the contract ends, whereas a non-compete agreement under the Saudi labor system applies to the employee themselves by restricting their employment—whether with competitors or by starting their own business—after the contractual relationship ends.
• A non-disclosure agreement remains in effect for a period that may be longer or shorter depending on the clause specifying the duration, as long as the information remains confidential, whereas a non-competition agreement is limited to a specific period not exceeding two years.

What are the restrictions on the validity of a non-compete agreement under the Saudi Labor Law?

Article 83 of the Saudi Labor Law regulates non-competition clauses in accordance with specific guidelines that ensure a balance between protecting the employer’s rights, on the one hand, and protecting the employee’s freedom to work, on the other. All of the following elements must be fully present in a non-competition agreement for the clause to be valid and legally enforceable:

• Legitimate Justification for a Non-Competition Clause: There must be a legitimate reason for including a non-compete clause in an employment contract, namely to protect the employer’s legitimate business interests; this clause cannot be imposed arbitrarily for the sole purpose of restricting the employee’s freedom. The article states that relationships with clients and the employee’s knowledge of them by virtue of their position constitute grounds for a non-compete clause.
• Clear and Explicit Wording of the Clause: It is essential that the non-compete clause be clearly written, whether within the employment contract or in any subsequent agreement, and that the employee be fully aware of the clause and its terms without any ambiguity or lack of clarity in the wording. Additionally, the employee’s consent to this clause must be documented and signed to ensure their legal commitment to it.
• Specifying the Duration: The non-compete clause must be limited to a reasonable and logical period of time, not exceeding two years from the date the contractual relationship between the employee and the employer ends.
• Specifying the Geographical Area: In accordance with Saudi law, the non-compete clause must specify the geographical area within which the employee is prohibited from competing with the employer, ensuring that it is reasonable and proportionate to the nature of the work and the scope of the company. If the company operates in a specific region or provides services in a specific geographic market, it is reasonable to restrict the employee to that region; a clause covering the entire Kingdom of Saudi Arabia or imposing a global ban without a legitimate justification cannot be enforced.
• Precise Description of the Prohibited Activity: The non-competition clause must precisely specify the types of activities the employee is prohibited from engaging in. The clause may not extend to cover all commercial activities or jobs; rather, it must be limited to activities that constitute direct competition with the employer and are related to the employee’s work at the company, so as to be restricted to activities that could lead to unfair competition.

Under what circumstances does a non-compete clause become void?

A non-compete clause is void in the following cases; consequently, the employer is not entitled to require the employee to comply with the signed non-compete agreement, compel the employee to refrain from competing with the employer, or seek compensation for such a breach. These cases include:

• The expiration of the agreed-upon term, which is explicitly stated in the agreement; the calculation of this term begins on the date the contractual relationship between the parties ends.
• A defect in the elements required for the validity of the clause, such as its invalidity or failure to be in writing, or failure to explicitly specify the time, place, and type of work, or stipulating a duration exceeding two years.
• Termination of the employment contract by the employer without just cause; provided that the employee has not committed any act that would justify the employer’s lawful termination of the contractual relationship in accordance with the law, the non-competition clause shall not be enforced.
• If the employer engages in conduct that justifies the employee’s termination of the contract—such as failing to fulfill financial obligations to the employee, committing a wrongful act against the employee, or any other legitimate reason upon which the employee may rely to terminate the contract and be released from the non-compete clause.
• Express Waiver of the Non-Competition Clause Since it is a contractual provision, the employer may waive it, provided that the waiver is explicit and clear and occurs during the term of the employment contract or during the period of the non-competition obligation.

What actions must an employer take if an employee violates the non-compete agreement? 

Paragraph 3 of Article 83 of the Saudi Labor Law states: “Notwithstanding the provisions of this Law, the employer may file a lawsuit within one year from the date of discovering the employee’s breach of any of the obligations set forth in this Article.”

Accordingly, upon discovering an employee’s breach of a non-compete clause, the employer must take the following steps:

• A lawsuit must be filed within one year of the date the employer becomes aware of the breach.
• The employer must present clear evidence proving that the employee violated the non-compete clause by working for a competitor or by starting their own business in the same prohibited line of work.
• Proving the actual harm suffered by the employer, such as loss of customers or a decrease in revenue.