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Restrictive Covenants in Argentina

1. Definition of Restrictive Covenants

Restrictive covenants are not specifically regulated by law, but they are regulated by case law. Thus, there is no specific definition.

It is worth mentioning that employee’s obligations with regard to the employer’s intellectual property, and noncompetition and nonsolicitation are for an indefinite term during the employment relationship.

2. Types of Restrictive Covenants

a. Non-Compete Clauses

Non-compete restraints are capable of enforcement in Argentina provided that they go no further than is reasonably necessary to protect the employer’s legitimate business interests – e.g. confidential information and trade secrets, customer connections and goodwill etc. The courts look at the scope of the non-compete restraint, in particular the elements relating to duration, restrained activities and geographical coverage. These need to be assessed by reference to the degree of risk that the employee poses to the business after he leaves, and this requires assessing the nature of the employee’s role with the employer. Each case has to be assessed on an individual basis.

b. Non-solicitation of customers

Non-solicitation of customer restraints is capable of enforcement provided they are reasonably necessary to protect the employer’s customer connections or customer goodwill. Since it is sometimes difficult for an ex-employer to prove actual solicitation, it is not unusual for the clause to extend to preventing the employee form having dealings with the restricted customers.

c. Non-solicitation of Employees

A non-enticement away of employees’ covenant is generally unenforceable in Argentina due to the constitutional principle of freedom of work. Employees are free to choose which employer they want to work for and therefore nothing prevents an employee from enticing former colleagues to leave the ex-employer and join the new employer. Therefore, unless the enticement away of employees is quantitatively and qualitatively significant, it is unlikely that the employer will have any cause of action against the ex-employee.

3. Enforcement of Restrictive Covenants—process and remedies

Since Argentine Labor Courts tend to be reluctant to enforce restrictive covenants, it is critical that they are drafted clearly, narrowly and with specificity. Any ambiguity or lack of clarity will be interpreted in favour of the employee. If the courts consider the scope of the restraints to be unreasonable (e.g. because they are wider than is necessary), they will strike out the entire clause.

It is also important to point out that if the employee has signed a restrictive covenant, for it to be enforceable some specific requirements must be met:

  1. The prohibition must be established for a reasonable period of time, not exceeding two (2) years.
  2. If it limits the employee`s right to work, an amount of money must be paid as a compensation for the salaries that he may be deprived of as a consequence of the compliance of such duty once the employment relationship is terminated.

Parties usually agree to include a penalty clause in the agreement, which will be activated if the employee breaches the restrictive covenant. The advantages of a penalty clause is that the employer will not have to prove that it suffered a loss as a result of the employee’s breach, as the breach itself will suffice to activate the clause (the amount of the penalty is usually limited to the amount of compensation paid by the employer in exchange for the restrictive covenant.

4. Use and Limitations of Garden Leave

Employees have a constitutional right to work and the concept of garden leave has no legal status under Argentine employment law. If notice period is given (instead of pay in lieu of notice), the employee must work until the effective date of termination. Employers cannot unilaterally require employees not to come to work or perform any duties during their notice period, without their consent. However, the employee can consent to the application of garden leave. Where the employee consents to garden leave, the employee must be paid his full remuneration and benefits for the garden leave period.

For more information, please contact L&E Global.
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