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Post Termination Covenants in Saudi Labor law

2021/06/21 20:37 (GMT)

Post Termination Covenants and Confidentiality KSA (2021)

Overview

Saudi Arabia Royal Decree No. M51/1426 Approving the Labor Law (Saudi Arabia Cabinet Decision No. 219/1426 on the Approval of the Labor Law) has addressed post-employment termination restrictive covenants in article 83 of Saudi Arabia Royal Decree No. M51/1426 (article 83 of Saudi Arabia Cabinet Decision No. 219/1426) which was subsequently amended by the provisions of Saudi Arabia Royal Decree No. M46/1436.

Restrictive covenants are provisions typically found in an employee’s employment contract but may also be the subject of a separate agreement between the employer and the employee upon or following termination of the employment relationship. They are often imposed by the employer on the employee in an attempt by the employer to protect his professional secrets by preventing their disclosure to their competitors by the employee and preclude the latter from unlawfully competing with the employer.

Although other types of restrictive covenants (such as non-solicitation or non-dealing) may be imposed by an employer on their employee and would be enforceable subject to meeting certain conditions relating to their reasonableness, it is worth noting that Saudi Arabia Royal Decree No. M51/1426 (Saudi Arabia Cabinet Decision No. 219/1426) is solely concerned with non-disclosure and non-compete covenants.

We note, as a preliminary remark, that the Saudi legislator, by amending the provisions of article 83 of Saudi Arabia Royal Decree No. M51/1426 (article 83 of Saudi Arabia Cabinet Decision No. 219/1426), has attempted to strike a balance between the following conflicting considerations:·preserve the freedom of the employee to practice their trade; and protect the lawful interests of the employer by preventing the employee’s unlawful competition and/or disclosure of the employer’s professional secrets. We will now consider the provisions of article 83 of Saudi Arabia Royal Decree No. M51/1426 (article 83 of Saudi Arabia Cabinet Decision No. 219/1426) (as amended) in relation to the covenant not to disclose the professional secrets of the employer and the covenant not to compete with the latter. 

The employee is under an obligation to protect all professional secrets (including commercial, operational, industrial and technical) belonging to the employer, which were entrusted to them or to which they were exposed by reason or during the course of their employment. This obligation which exists during the course of the employment and is deemed by article 65 of Saudi Arabia Royal Decree No. M51/1426 (article 65 of Saudi Arabia Cabinet Decision No. 219/1426) to be one of the key obligations of the employee, may extend beyond the termination of the employment relationship, if the parties have agreed that following termination of the employment contract, the employee will remain under an obligation to preserve the professional secrets of their employer. 

Article 83(2) of Saudi Arabia Royal Decree No. M51/1426 (article 83(2) of Saudi Arabia Cabinet Decision No. 219/1426) provides that “if the work entrusted to the employee enables him to gain knowledge of their employer’s professional secrets, the latter may - in order to protect their lawful interest - impose upon their employee an obligation not to disclose their professional secrets following the termination of their employment, provided such prohibition is in writing, is limited in time and as to its geographic scope and as to the nature of the employee’s work.”

Definition of professional secrets

The Saudi legislator has not provided a definition of the professional secrets that ought to be protected. Scholars have filled the gap by defining these secrets as those data and information that the employee gets to know by reason of or during the course of their employment which, if disclosed, would cause damages to the employer, their employees or the business concern and would generally qualify as industrial, commercial or technical secrets but would not encompass the personal secrets of the employer. Those secrets ought to be protected irrespective of whether the employee got to know them through fulfilling their duties, benefiting of their practical skills and experience or through what they understood, heard or deduced in the course of performing his duties.

In drafting a non-disclosure or confidentiality covenant, a Saudi employer would be well advised to provide a detailed definition of what would constitute a professional secret but at the same time keep that definition within reasonable limits as to the types of information the employee would be exposed to during the course of his employment. 

Scope of the non-disclosure covenant

The employee is under an obligation not to disclose their employer’s professional secrets to third parties. The question this begs is whether the employee could use these secrets for their own benefit. Article 65(6) of Saudi Arabia Royal Decree No. M51/1426 (article 65(6) of Saudi Arabia Cabinet Decision No. 219/1426) prohibits the disclosure of professional secrets to third parties but does not explicitly stipulate that the employee from using them to their own benefit. If the employer wishes to prevent their employee from using their professional secrets for their own benefit following termination of their employment, they would be well advised to expressly provide for such a prohibition in the employment contract.

Conditions for the validity of non-disclosure covenants 

For a non-disclosure covenant to be valid and enforceable, it should meet the following requirements:

-be warranted by a serious interest of the employer;·be in writing; and

-be limited to the extent necessary to protect the lawful interests of the employer. 

The employer would have a serious interest in incorporating such a covenant in an employment contract if the work entrusted to the employee enables the latter to get to know the employer’s client or their professional secrets. There would be no point in inserting a non-disclosure covenant in an employee’s contract if the employee is in a position that does not expose them to either the employer’s clients or professional secrets (e.g., janitor in a factory) as it would most likely be deemed abusive and thus invalid. The covenant must be in writing. This requirement is set forth for validity rather than evidentiary purposes as the employer may not simply infer such a covenant from the nature of the work of their employee. The covenant may not be absolute as it would be deemed to be too restrictive of the employee’s freedom. Consequently, in order to be valid, the non-disclosure covenant must be limited in time, as to its geographic scope and the nature of the employee’s work, to the extent necessary to protect the lawful interests of the employer. 

The non-disclosure covenant will expire whenever the confidential information and professional secrets of the employer are no longer confidential (e.g., become public knowledge through no fault of the employee) or the prohibition on disclosure no longer serves any financial or moral interests of the employer.

 Validity and enforceability of non-compete covenants 

As indicated in the introductory part of this article, the non-compete covenant aims at reconciling two conflicting considerations, namely the freedom of the employee to practice their trade with the legitimate interest of the employer in protecting their business against any unlawful competition from the employee. Article 83 of Saudi Arabia Royal Decree No. M51/1426 (article 83 of Saudi Arabia Cabinet Decision No. 219/1426) stipulates the following:

“1 - if the work entrusted to the employee enables him to know the employer’s clients, the latter may-in order to protect his lawful interests- require his employee, following the termination of the employment contract, not to compete with him. For this non-compete covenant to be valid and enforceable, it must be in writing and must be limited in time and as to its geographic scope and the nature of the employee’s work. The non-compete covenant should be limited to a period of two years following the end of the employment relationship;

2 - if the work entrusted to the employee enables the latter to gain knowledge of his employer’s professional secrets, the employer may-in order to protect his lawful interests- require his employee not to disclose his secrets. In order for this covenant to be valid, it must be in writing and limited in time and as to its geographic scope and the nature of the employee’s work; and

 3 - by way of exception to the provisions of the Law, the employer may bring a lawsuit (for breach of the aforementioned covenants) within one year from the date on which he became aware of the breach by the employee (of these covenants).”In order for this covenant to be valid, the following conditions must be met. 

A legitimate interest for the employer to stipulate the non-compete covenant 

The work entrusted to the employee must enable them to get in touch with the employer’s customers and/or to gain knowledge of their professional secrets, making it legitimate for the employer to stipulate the non-compete covenant. Accordingly, the more likely the employee is to be exposed to the employer’s clients and customers and to their professional secrets, the more likely the covenant is to be held valid and enforceable. This will often be the case when the employee in question is entrusted with highly specialized commercial, technical, operational and/or industrial tasks/data and much less likely in the case of an employee tasked with minor assignments (e.g., janitor in a factory) that do not expose them to the clients or secrets of the employer.The employer would be well advised to assess whether or not the employee’s position is likely to expose the latter to their clients/secrets before deciding whether or not to incorporate a non-compete covenant in his employment contract.

The non-compete covenant must be in writing

The requirement that the covenant be in writing is a condition of its validity and not only a means of evidencing its existence. Accordingly, if the covenant is not incorporated in writing in the employment contract, it will be deemed null and void (non-existent). The covenant must be stipulated at the time of the execution by the parties of the employment contract so that the employer may not add it unilaterally after the parties have entered into the employment contract.

 The non-compete covenant must be limited to the extent necessary to protect the lawful interests of the employer 

The covenant may not be so broad as to suppress the employee’s freedom to practice their trade. Accordingly, in order to be valid, the covenant must be limited in time as to its geographic scope and the nature of the work in such a way as to protect the lawful interests of the employer. Article 83(1) of Saudi Arabia Royal Decree No. M51/1426 (article 83(1) of Saudi Arabia Cabinet Decision No. 219/1426) provides that “the non-compete covenant may not be stipulated for more than two years from the end of the employment relationship.” 

The employer would be well advised to comply with the maximum time frame provided for in article 83 of Saudi Arabia Royal Decree No. M51/1426 (article 83 of Saudi Arabia Cabinet Decision No. 219/1426) or else have the covenant held by the Labor Court to be invalid rather than have its length reduced to the maximum limit (an open-ended covenant woulda fortiori be held to be null and void as violating the public policy). 

A Labor Court (undated judgment) considered that the covenant whereby the employer prohibited the employee from working in the Eastern Province of the Kingdom for a period of three years following the end of the employment relationship, was invalid as its length exceeded the maximum limitation stipulated in article 83 of Saudi Arabia Royal Decree No. M51/1426 (article 83 of Saudi Arabia Cabinet Decision No. 219/1426).The non-compete covenant must be limited as to its geographic scope which will be greater or lesser depending on the area covered by the employer’s business (e.g. Kingdom wide, city wide, province wide).

The non-compete covenant must be limited as regards the nature of the employee’s work

This means that the covenant must not prohibit the employee from practicing their trade and therefore when assessing the validity of the covenant, a court will have regard to whether the covenant preserves the ability of the employee to work in their field of expertise consistent with their skills and qualifications or conversely is likely to deprive them of their freedom to work in a similar field of activity. Given the scarce number of employment cases published in the Kingdom of Saudi Arabia, it is very difficult to assess how labor courts interpret the provisions of article 83 of Saudi Arabia Royal Decree No. M51/1426 (article 83 of Saudi Arabia Cabinet Decision No. 219/1426)(e.g. how the “lawful interests” of an employer are determined). Suffice it here to say that whenever the non-disclosure and non-compete covenants are drafted in ambiguous terms, they will be construed in favor of the employee who is the weaker party in the employment relationship.

Related Content

Legislation: Saudi Arabia Royal Decree No. M51/1426 Approving the Labour Law· Saudi Arabia Cabinet Decision No. 219/1426 on the Approval of the Labour Law

Other sources· 

Dr. Mohammad Ali Omran, Al Waseet Fi Sharh Ahkam Qanoun Al Aamal Al Jadid·

Dr. Hamdi Abdelrahman, Dr. Khaled Hamdi, Sharh Ahkam Qanoun Al Aamal Al Jadid·

Dr. Alsayyed Ali Nayel, Al Waseet Fi Sharh Nizamay Al Aamal Wal Taminat Al Ijtimai’yya Fil Mamlaka Al Arabiyya Al Saoudiyya, Vol. I, Nizam Al Aamal Al Saoudi

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