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Non-compete Clauses and Contractual Penalties Leave Jordanian Workers with a Dilemma

Abdalmahdi Al Awajeen

Issam worked at a jewelry store for eight years as a sales representative, but after a falling out with the owner, he left for a new job at another store in the same line of business. He later found himself being sued for 50,000 Jordanian dinars (JOD) – the value of the penalty clause stipulated in his contract which denies him the right to work at a similar position for a period of 10 years upon its termination.

Issam worked at a jewelry store for eight years as a sales representative, but after a falling out with the owner, he left for a new job at another store in the same line of business. He later found himself being sued for 50,000 Jordanian dinars (JOD) – the value of the penalty clause stipulated in his contract which denies him the right to work at a similar position for a period of 10 years upon its termination.

When Issam quit his job at the jewelry store and took up another job he had no intention of violating the penalty clause. He was compelled to take another job to survive; with the lack of work opportunities and the difficult economic conditions, he had no other way of putting food on the table. Issam says: “maintenance, restoration, and selling silver is the only profession I know and master.”

Due to this lawsuit, Issam spent over a year dealing with litigation procedures. Luckily for him, the court deemed the penalty clause to be exaggerated and unfair compared to the damage. The court eventually ordered him to pay 2,372JOD as compensation for the duration of the remainder of the fixed-term work contract, in accordance with Article 26 of the Labor Law.

Issam is not the only one to have dealt with this. Many Jordanian companies violate the constitution and the labor law by forcing their employees to sign contracts that prevent them, after quitting, from working for other competitors for an extended period. These contracts clearly violate workers’ rights and are enforced due to weak oversight from the Ministry of Labor, contradictory laws and a lack of appropriate legislation.

Attorney Faisal al-Serhan, who defended Issam’s case, relied in his defense on Article 4 of the Jordanian Labor Law, which nullifies the effect of any clause in the contract in which the worker waives his rights, and Article 819 of the Civil Law, which considers any exaggerated clause meant to keep the worker employed for the same business owner to be inapplicable.

Al-Serhan says that the penalty clause mentioned in Issam’s contract is legally invalid, despite the fact that the worker willingly signed it. He continues, that it is not a matter of will in the presence of the law, because workers agree to such unfair conditions under the pressure of needing work to make ends meet.

The non-compete clause and contractual penalty in Issam’s contract:

For a period of 10 years from the termination of the second party’s employment (whether such termination be with or without cause or by voluntary quit), the second party shall not either for himself or on behalf of any person, firm or corporation, directly or indirectly, own, manage, engage in, operate joint control, be employed by, participate in the ownership, management, operation or control of, or be connected in any manner whatsoever with any business which is competitive with the business of the first party in Al-Mafraq governorate. This covenant on the part of the second party shall be construed as an agreement independent of any other provision in this Employment Agreement, in case of breach of the non-compete clause, the contractual penalty obliges the second party to pay the fixed amount of 50,000JOD to the first party, regardless of the amount of damage caused.

With the unemployment crisis approaching 20% of the workforce, and according to the figures published by the Department of Statistics, accepting unfair terms in return for a good job opportunity is the only available option. In light of this, Rami* also accepted the penalty clause in his contract with a cellular phone distribution company for the amount of 10,000JOD. He says, "It’s a catch-22 but the opportunity to be employed was well worth accepting this clause."

Rami's contract prevents him from working for competing companies for a period of two years starting from the date of contract termination, which made him reluctant to accept a good job offer from a competing company. This led him to start a journey of inquiries between several parties to ensure the legality of the clause in his contract, arriving at the Directorate of Labor in the Karak governorate where he resides. However, even there, he could not find a satisfactory answer.

He says: "My question confused them. They spent two hours searching the computers in front of them, then they consulted the office of the capital, and responded to me by saying ‘unfortunately, we do not know’.”

The employers legally use the non-compete clause in contracts based on Article 818 of the Civil Law, which protects the secrets of the trade from being disclosed to competitors. The non-compete clause is binding if it is limited by time, place and nature of work. The Labor Law, however, is completely devoid of any article by which the non-compete clause is regulated in labor contracts.

Hamada Abu Najma, former Secretary General of the Ministry of Labor and head of the “Workers' House Center for Studies”, asserts that most contracts that use this clause violate the law, as there is a misconception of the importance of the non-compete clause and the legality of its application. Abu Najma notes that the use of the clause in the present form only prevents the worker from moving to another job, but it does not protect the interests of the business owner and their trade secrets.

Article 818

“If the worker is performing tasks that give him access to business secrets and clients, both parties may agree that the worker may not compete with the employer or participate in any work that competes with the employer upon termination of the contract.”

Companies that use this clause in their contracts refused to respond to us, but a lawyer who specialises in filing lawsuits for companies related to this clause, spoke to us on the condition of anonymity, and summarised the whole issue as follows: “contracts are binding for both parties, and it is an optional clause. The courts have jurisdiction over any lawsuit filed by the employer against the worker regarding the non-compete clause, while the Ministry of Labor is not mandated to decide on this matter.”

Abu Najma acknowledges that, in light of the nature of the current Labor Law’s legal texts, the government, and particularly the Ministry of Labor, do not have the right to interfere in any dispute within the judiciary’s jurisdiction. This means that all disputes between the worker and the employer, especially after the end of service, are within the jurisdiction and discretion of the judiciary, and neither the labor inspector nor any department at the Ministry of Labor can interfere in resolving the dispute.

In order for the non-compete clause to be valid and legal, it must include the following:

01.
It is necessary that the worker’s nature of work must require access to work secrets, and that disclosing these secrets constitute harm to the employer if a competitor becomes aware of them.
02.
The clause must be limited by time, where the time period of the non-compete clause is determined and not infinite.
03.
The clause must be limited by place, where the area in which the worker is prohibited from working is determined and is not a wide geographical area.
04.
The nature of work in which the worker is prohibited from working must be determined, so that if the worker moves to a competing company with a job title different from that mentioned in the clause, it is not considered a violation of the non-compete clause.

Number of Violations

The Ministry of Labor does not have a statistic for the number of non-compete clause violations, as it records under “non-compliance violations” within the framework of contracts and human resources, which amounts to 494 violations. The number of violations that were not classified and were recorded as "other" amounted to 3,132. For the purposes of preparing its 2019 annual report, the Ministry of Labor started the process of classifying violations to determine those of employers' non-compliance with the legal requirements of the non-compete clause, according to what is stipulated in the Labor Law and Civil Law. However, the report has not been issued yet due to the disruption of official departments as a result of the COVID-19 pandemic.

ARIJ documented 20 legal violations of the non-compete clause which were addressed by the judiciary and were examined before Jordanian courts between 2009-2019. These lawsuits were filed by companies to claim the value of the non-compete clause from their employees who left work to establish their own business or moved to competing companies.

icon book
20
lawsuits
Judicial ruling
05 in favor of the company
15 in favor of the employee
Legal attribution
19 lawsuits to Article 818
03 lawsuits to the Labor Law and the constitution
Court
06 Court of First Instance
08 Court of Appeal
06 Court of Cassation
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Access to Secrets Element
13
Unmet
06
Met
01 Unknown
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Time Element
02
Unmet
07
Met
01 Unknown
icon pin
Location Element
09
Unmet
02
Met
09 indefinites
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Nature of Work Element
20
Unmet
00
Met
00 Unknown

By comparing the litigation procedures in the 20 documented cases, we found a clear discrepancy in the assessment of the legality of the non-compete clause by the Courts of First Instance and the Courts of Second Instance (Appeal). In some cases, the Court of First Instance approved the clause in the contract, before being rejected by the Court of Appeal, which determined that the clause violates Article 818 of the Civil Law, deprives the employee of work and assaults work freedom as guaranteed by the constitution.

A case file of a woman working for a recruitment company shows that she signed a clause that prohibits her from working for another recruitment company for a period of one year from the date of her leaving work for any reason. If she were to break this, she would have to pay 5,000JOD as a penalty clause. By following the litigation procedures, it became evident that the Court of First Instance considered the condition in the contract to be valid and issued its decision to compel the employee to the value of the penalty clause. The case reached the Court of Appeal, which decided to annul the verdict and retry the case again because the Court of First Instance did not discuss the nature of the employee’s work in the company and did not demonstrate the harm done to the company.

The trial was repeated, and the court demonstrated that the nature of the employee’s work in the new company differs from the nature of her previous work, and that no damage or disclosure of secrets had been proven to the court. The court thus issued a new decision dismissing the case, rejecting the original verdict and ruling in favor of the employee.

Attorney and human rights activist Hala Ahed, comments on this case by pointing out that the legal texts are general and unspecific, as not all professions are subject to the non-compete clause. She notes that this clause raises many questions due to the conflict of legal texts regarding it, as well as conflicts of interests. Further, because of the absence of the unbalanced relationship between the employer and the worker, the Civil Law takes precedence over the interest of the employer at the expense of the worker, while Article 4 of the Labor Law stipulates that the conditions in the work contract that detract from the employee's right are illegal.

Mohammad Abu Bakr, Dean of the Faculty of Law at the Al-Zaytoonah University, seconds attorney Hala Ahed’s comment, and blames the Jordanian legislator, who has not yet addressed the non-compete clause in the labor law, and has not addressed the reasons for setting these conditions, which he considers invalid because they are inconsistent with the principles of the Universal Declaration for Human Rights, the Jordanian constitution, and with the provisions of Article 4 of the Labor Law.

The Ministry of Labor is mandated to provide legal advice to individuals and institutions, and to conduct a periodic evaluation of the extent of consistency of labor policies and legislation with the needs of economic and social development and their compliance with international and Arab labor standards. The Ministry of Labor is still unable to address these problems, and its officials do not know how to provide a satisfactory answer to those who turn to it in this regard. Its official response to our questions was that "The worker has three options when filing a grievance. The first is a complaint to his affiliated union, which has no legal authority; the second is through the Inspection Department at the Ministry of Labor, which compels the employer to amend the clause if it turns out to be in violation; and the third, is to resort to litigation at the courts."

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"In light of the current laws, it is not possible to agree on a text that strikes a balance between the interest of the worker and the interest of the employer except in one case; that is only in the form of a pledge of nondisclosure of work secrets, and not a condition that restricts the worker’s freedom to work."

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Attorney Tariq al-Hewaiti
Material and moral compensation expert Arbitrator and international negotiator

It is thus no surprise that companies continue to place the non-compete clause, which was established by law, in their employees’ contracts in an illegal manner; where there are no specific details of the nature of the work, or specification of the secrets feared to leak; the time period binding the worker; or where exactly he is not allowed to work. All of this places the employee who willingly signs the contract that includes this clause before two difficult options; either he leaves his job and finds himself legally required to pay the value of a penalty clause that exceeds the value of his salary multiple times, or he is forced to accept that he must continue at his workplace and see his contract through.