When Employees Leave: Non-compete Agreements and Protecting Confidential Information
What companies in Indonesia should know about non-compete agreements and the protection of confidential information
By Richard D. Emmerson and Indrawan Dwi Yuriutomo
Wednesday, January 20, 2016
Indonesian labor and employment laws do not expressly impose or regulate non-competition obligations of employees, with the exception of the Chief Representative of the local representative office of an overseas principal.
However, Indonesian law recognizes the principle of freedom of contract. This principle is codified in Articles 1337 and 1338 of the Indonesian Civil Code (the Civil Code). The parties to a contract are free to include any provisions they wish, subject only to the mandatory provisions of Indonesian law, as well as the general principles that contract terms must be implemented in good faith and not contrary to public order.
With regard to non-competition during the period of employment, it is essential to include a provision in the employment agreement imposing a duty on the employee not to compete or otherwise act in conflict with the interests of the employer. The same provision may be set forth in the so-called Company Regulation, which sets forth the employer’s work rules registered with the Ministry of Labor and is updated every two years, or in the Collective Labor Agreement (CLA) if there is a union or unions representing a majority of employees. Violation of that contractual duty would be grounds for termination. Interestingly, the rules with regard to the appointment of a Chief Representative of a representative office expressly require the candidate to sign an undertaking to be solely devoted to the interests of the overseas principal and not to have any other employment whatsoever.
Non-competition following employment
With regard to non-competition following the period of employment, employers may wish to include non-competition and non-solicitation clauses in their employment contracts and Company Regulations. However, the enforceability of such post-employment constraints is less clear. There is no jurisprudence on the issue and thus no clear guidelines as to the requirements for such clauses to be enforceable. Depending on the circumstances, such constraints may violate Article 27(2) of the Indonesian Constitution, which vaguely guarantees every citizen the right to work and a decent livelihood.
We do not routinely include non-compete and non-solicitation clauses in the employment contracts of ordinary employees. However, for senior executives and other high-risk employees, such constraints may be commercially warranted. In that case, given the constitutional right to work and the lack of judicial guidance, we recommend that the clauses set reasonable geographic and time limitations, and for greater certainty, include some compensation during the restraint period.
The enforceability of non-competition and non-solicitation covenants would likely depend upon the particular factual context. In practice, at least for multinationals operating in Indonesia, it is common for the former employer to alert the new employer about the existence of such constraints as well as confidentiality obligations of the former employee, and address the concern amicably recognizing that all companies face the same challenge with regard to their former key employees from time to time.
Injunctive relief is not generally available in the Indonesian courts. In principle, an employer could sue its former employee in the District Court system – not the Labor Courts – for direct damages under Articles 1243 – 1252 of the Civil Code.
Confidentiality obligations and IP rights
The Indonesian Labor Law provides for summary termination due to serious misconduct, which includes disclosure of confidential information. However, the serious misconduct section of the law was struck down by the Constitutional Court given the lack of due process. As a result, all employers are advised to include a serious misconduct clause – including disclosure of confidential information and misuse of IPR - in their employment agreements and Company Regulations or CLAs; provided that such terminations are subject to Labor Court approval as per all other terminations. The employee would be entitled to untaken leave and a modest separation payment depending on the employment documentation but forfeits any other accrued severance, long service pay, and health and housing allowance entitlements.
Under Indonesian Law No. 30 of 2000 regarding Trade Secrets, employers also enjoy protection of their trade secrets for (a) methods of production, (b) methods of processing, (c) methods of sale, and (d) other information in the area of technology and/or business that has economic value and is not otherwise available to the general public.
Under the Trade Secrets Law, the employer can commence an action in the District Court for direct damages and injunctive relief in connection with any person’s unauthorized disclosure of trade secrets. In addition, anyone who deliberately and without entitlement uses a company’s trade secrets is also subject to criminal prosecution and sanctions of up to two years imprisonment and/or a fine of up to IDR 300 million.