Know Your Rights | Valid Clauses in Your Contract of Employment
11 min read
Authors: Ann Bugeja & Christine Borg Millo
In principle, under Maltese law, the employer generally determines what terms are stipulated in the employee’s contract of employment. This is subject to the employee’s consent prior to signing, therefore the employee’s role of consultation during drafting is crucial. The law imposes a number of requirements on how certain clauses must be mentioned in the employment contract. These clauses normally refer the basic employment conditions such as regulating the employee’s hours of work, remuneration payable and leave entitlement, among others. However, there are other specific clauses which are either not clear in their terms, such as the notice period, following which the termination of employment of the employee ensues; or else are not regulated by the law, yet their validity is discussed through various case-law.
Two (2) types of commonly used clauses not typically regulated by law include:
- Non-compete clauses, which temporarily limit the freedom of an employee to work elsewhere in a particular manner after his employment has ended;
- Non-solicitation clauses, which temporarily prohibit the employee from attempting to gain clientele, and/or other employees/colleagues from their previous work.
The below information offers a better insight into whether such clauses may be inputted in the employment contract and if so, what they must include in order to be considered as valid and enforceable.
The Lawfulness of the 12-month Notice Period
Article 36 of the Employment and Industrial Relations Act (Chapter 425 of the Laws of Malta, and hereinafter referred to as “the Act”) deals with the notice of termination of employment provided by the employer to the employee or vice-versa. It clearly states that, notwithstanding any agreement to the contrary, the below list of notice periods must be abided by the parties. Failure to provide notice would result in a penalty.
“(5) Notwithstanding any agreement to the contrary, and without prejudice to what is stated in paragraph (f), notice of the termination of employment proposed either by the employer or by the employee under a contract of service for an indefinite time, shall be of the following respective duration, if the employee has been in the employment of the same employer continuously –
(a) for more than one month but not more than six months ……………….. one week;
(b) for more than six months but not more than two years …………………. two weeks;
(c) for more than two years but not more than four years ………………… four weeks;
(d) for more than four years but not more than seven years ………………. eight weeks;
(e) for more than seven years, an additional 1 week for every subsequent year of service or part thereof up toa maximum of twelve weeks;
(f) or such longer periods as may be agreed by the employer and employee in the case of technical, administrative, executive, or managerial posts:”
The only exception stipulated by the Act is in clause (f) which holds that a longer notice period may be established and agreed upon between the Parties only when the employee holds a technical, administrative, executive or managerial post. Hence, no longer notice period, such as of twelve (12) months, is permitted at law unless the employee in question holds a position of a higher rank at the place of employment. Any agreement which goes contrary to that stipulated in Article 36 (5) may not be enforceable, and the law overrides.
Penalty for Failure to Provide Notice
Article 36(10) of the Act tackles the penalty amount due by the employee who fails to give notice to the employer for termination of employment. It states;
“(10) If an employee under a contract of service for an indefinite time fails to give notice as aforesaid, he shall be liable to pay to the employer a sum, equal to half the wages that would be payable in respect of the period of notice. If the employer fails to give the said notice, he shall be liable to pay to such employee a sum equal to the wages that would be payable in respect of the period of notice.”
The Act does NOT allow for any additional sanctions when an employee terminates his contract of employment and fails to provide notice as per article 36 (5). In fact, in Justin Attard vs De La Rue Currency and Security Print Ltd et., decided on the 18th of March 2021, the Court confirmed that the only sanction which is stipulated in the Act is that of article 36 (10). The Court in this case reiterated that a clause stipulated in the employment contract between the parties, which introduced an additional sanction following the resignation of the employee, and which was other than that permitted by article 36(10) of the Act, is not allowed.
Non-compete clauses and Non-solicitation Clauses
What makes a non-compete clause valid?
Non-compete clauses are valid so long as they are generally reasonable and justified. The concept of generally reasonable clauses remains undefined at law and since it is a matter of public policy, one must refer to case law and jurisprudence to define the matter further.
In this regard, Selwyn states: “A restrictive covenant that prevents an employee from soliciting or accepting business from his former employer’s customers will be unenforceable if it extends to customers with whom the employee personally had no dealings.”
Therefore, the non-compete clause in an employee’s contract of employment must primarily be restricted to those clients which are directly and personally involved in the employer’s business.
Moreover, he continues: “An employer is entitled to have a limited protection against an ex-employee dealing with existing customers for this is part of the goodwill which has been built up over the years. A covenant can restrict the right to solicit or endeavour to entice away former customers, or to have post-employment dealing such customers, but it is likely that such clauses should be limited to customers with whom the ex-employee had some dealings for otherwise the restraint is likely to be regarded as to be designed to prevent competition.”
A matter of Public Policy
Furthermore, the case of Nordenfelt vs. Maxim Nordenfilt Guns and Ammunition Co. Ltd, decided by the House of Lords discusses the concept of restraints of trade being a public policy matter, and when they are justifiable, or otherwise.
“(i) All restraints of trade, in the absence of justifying circumstances, are contrary to public policy and therefore void;
(ii) It is a question of law for the decision of the Court whether the special circumstances adduced do or do not justify the restraint; and if a restraint is not justified, the Court will, if necessary, take the point, since it relates to a matter of public policy, and the Court does not enforce agreements which are contrary to public policy;
(iii) A restraint can only be justified if it is reasonable
(a) in the interests of the contracting parties, and
(b) in the interests of the public;
(iv) The onus of showing that a restraint is reasonable between the parties rests upon the person alleging that it is so, that is to say, upon the covenantee.
The onus of showing that, notwithstanding that a covenant is reasonable between the parties, it is nevertheless injurious to the public interest and therefore void, rests upon the party alleging it to be so usually upon the covenantor. But once the agreement is before the Court it is open to scrutiny in all its surrounding circumstances as a question of law.”
As stated also in Eurosupplies Limited vs Paul Tihn on the 30th of June 2021, the non-compete clause must be limited in scope, geography and duration/time for it to be considered valid.
The Court recognises that non-compete clauses or clauses in restraint of trade are not to be considered automatically invalid. Indeed, the purpose of such clause serves the legitimate protection [of] an employer’s business interest by preventing an employer to become the victim of a trusted employee. However, such clauses may also breach competition policy both by their object and their effect, and thus they need to be tempered to ensure that the public interest in general is protected from the effects of anti-competitive practices.
Reasonability in Restraint of Trade clauses
In Vassallo Cesareo Attilio et noe vs Cilia Pisani Anthony, decided on the 31st of January 2003, the Court held that any restraint of trade must be reasonable however, it did not provide what shall exactly constitute as reasonable. According to this judgement, the employee should have been offered compensation for complying with a non-compete/non-solicitation clause as according to Italian Law, the non-compete clause must be mutually beneficial to both the employee and employer.
In Cutrico Services Limited vs Joseph Penza, decided on the 4th of May 2022, the Court stated that the non-compete clause is only accepted when it is reasonably limited to that which is strictly necessary to safeguard the interests of the principal party. The Court stated as follows: “As accepted in our jurisprudence and as dictated by the teachings of the Court, these types of clauses are not prohibited in the Maltese legal system, so long as the clause is a reasonable one, with its terms being limited to that which is strictly necessary so that the interests of the principal are safeguarded.”
Moreover, the Court recited that: “It is generally clear that clause number 7 [of the employment contract] is relatively limited and reasonable. This is since it is limited for a period of two (2) years following the termination of employment of the defendant, it is limited to the interference with the plaintiff’s clients or solicitation of the same clients so that they do not continue doing business with the plaintiff and it is limited to those individuals and/or entities who were clients, or generally did business with the defendant in the last two (2) years of the defendant’s employment”.
In this case, the defendant tried to argue that their non-solicitation clause was too restricting and that it should be declared null, however, the Court did not accept this plea, and they considered that the two (2) year non-solicitation clause was indeed valid.
The Court has also stated that those clauses which are:
- Prohibited by law;
- Contrary to morality or contrary to public policy;
cannot be included in the contract, and if they are, they are deemed invalid and unenforceable. This was confirmed in Antonio Camilleri pro et noe Vs Salvatore Sicurella, decided on the 26th of May 2021, which also highlighted that all clauses which restrain any form of trade must be seen on a case-by-case basis, and that the onus of proof falls on the employer to show that the restriction to trade is reasonable.
According to jurisprudence on the matter, the restrictions imposed on the employee after their termination are generally valid and enforceable by the Courts only when the employer proves that he has the same legitimate interest that the restriction imposes on the employee, and that the restriction is reasonable, legal and founded on employment law, and can only be considered on the particular facts of the case. In the situation where the restriction goes beyond what is considered reasonably necessary to protect the legitimate interest of the employer’s business, then the clause in question in the contract of employment is neither applicable nor enforceable.
The Court must consider various factors when determining whether the clause in question is reasonable or otherwise. It considers, among other factors, the nature of the business in question, the role, position and salary of the employee, his effective period of service with that company, as well as the reason, time, and scope for the restriction. Moreover, the Court of Appeal in Camilleri vs Sicurella, confirmed that the clause in question has to be beneficial for both parties, and should not favour one party over the other, as this results in unfairness and unreasonableness, since this could restrict an employee’s right to work – a fundamental human right enshrined in the Maltese Constitution.
Following this analysis, the below is a list which includes some of the reasonable grounds for a non-compete and non-solicitation clause to be valid, which points are important to keep in mind when drafting any employment contract;
- The restraint of trade clause must be reasonable.
- The Clause must be in the interests of BOTH contracting parties.
- Clause must be established in the interest of the public as it cannot go against public policy.
- A clause which does not allow the employee from soliciting clients from their previous employer is deemed to be reasonable. However, such clause must cover only clients which the ex-employee had direct dealings with or else the clause would be hindering competition.
- A clause which applies for a reasonable period of time is considered valid.
- A clause which limits the employee’s freedom to work to a point where they would have to move to another country, shall be valid if monetary compensation is offered.
- A clause has to be specific as generic and vague clauses are not reasonable.