Dhimas Haris Anggara Mukti

Non-compete clauses are commonly used to protect business interests, particularly when employees move on to new roles. Its enforceability however is not always clear-cut—and depends heavily on how they are structured and applied.

Understanding Non-Compete Clause

The Black’s Law Dictionary defines a non-competition clause as a promise usually in a sale-of-business, partnership, or employment contract, not to engage in the same type of business for a stated time in the same market as the buyer, partner, or employer (Garner, 2009). This definition covers non-competition clauses in various types of contracts, not limited to employment.

While Cambridge Dictionary defines the non-competition clause specifically in the flavour of an employment contract, where a non-competition clause is a clause of an agreement preventing an employee who leaves a company for working for another company involved in the same activity for a particular period (Combley, 2011).

 

“A non-competition clause is a clause of an agreement preventing an employee who leaves a company for working for another company involved in the same activity for a particular period”

Therefore, it can be concluded that in the field of employment law, a non-competition clause is a clause under an employment contract where one party of the agreement [the employee] promises not to work for or involved in another company engaging in the same field or in the same type of business in the same market as the other party to the agreement [the employer] for a certain period of time.

A non-competition clause is often found in an employment agreement or a confidentiality agreement, which governs an employment relationship between an employer with its employee. The clause remains to be seen as necessary especially for employees who have access to the confidential information of the employer, moreover its trade secrets, i.e. information regarding clients, suppliers, finance data, among others, to prevent or at least minimize the risk of an ex-employee divulging the employer’s confidential and proprietary information to a competitor (Alizia, 2023).

non-compete clauses

Non-Competes in Indonesia from the Perspective of Employment Agreements

The Indonesian laws do not provide any legal definition of a non-competition clause let alone regulate whether such a clause is permissible or prohibited (Alizia, 2023). Article 1601x of the Indonesian Civil Code (“ICC”) (R. Subekti, 2012) however, provides a provision which becomes a basis for a non-competition clause, as the following:

“A promise between an employer and an employee, by which the latter is restricted in his authority to perform work in a certain manner after the termination of the employment relationship, is only valid if the promise is made in a written agreement or in a regulation with an adult employee.”

In the ICC translated by R. Subekti, wordings on Article 1601x are not very clear. In another translation version retrieved from HukumOnline however, Article 1601x is translated as follows:

“An agreement that reduces the rights of workers, that after ending the employment relationship, they are not allowed to do certain work, is only valid if it is made in a written agreement or regulation with adult workers.”

Based on the other translation version, it can be interpreted that a company is permitted to reduce the rights of the employees [by prohibiting them from performing certain work after the termination of employment relationship]. In principle, the translation by R. Subekti can also be interpreted in such manner. This provision can become the basis of a non-competition clause in Indonesia.

Hence, based on the above provision, non-competition clauses are valid and enforceable if it is made in written agreement [included in the employment contract] or in a regulation.

Nevertheless, the validity of a non-competition clause and, therefore, its binding force are limited by the article. These limitations are as follows:

  • The judge may nullify it if the employee has been unfairly disadvantaged by such clause;
  • The employer cannot assume any rights, if: (i) the employer has terminated the employment unlawfully, (ii) the employee intentionally or due to the employer’s own fault has submitted an urgent reason to terminate the employment and has exercised this authority, or (iii) the judge at the request or pursuant to a claim by the employee has declared the employment agreement to be terminated based upon urgent reasons which were submitted by the employee and caused intentionally by or due to the actions of the employer; and
  • If any compensation is applicable for the violation of the clause, the judge shall be authorized to reduce the compensation to a smaller sum, if the agreed sum appears to be excessive.
 

“Article 1601x of the Indonesian Civil Code could be the basis for a non-competition clause”

Article 1601x of the ICC itself is still valid and enforceable because no similar (apple to apple) provision has been found that directly contradict with the provisions of Law No. 13 of 2003 on Employment as amended by Law No. 6 of 2023 on Stipulation of Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation into Law (“Employment Law”).

Provided that the non-competition clauses have fulfilled the above conditions mentioned in the Article 1601x of the ICC, namely made in written agreement, then there would be no violation of the law from the perspective of ICC.

As long as the employment agreement is legally made based on Article 1338 of the ICC, the employment agreement shall be binding to the parties. Hence, the non-competition clause shall bind the individuals who have concluded them by law [the employer and the employee], it cannot be revoked otherwise by mutual agreement or pursuant to reasons which are legally declared to be sufficient, and it shall be executed in good faith.

Read Also: Analysis of Constitutional Court Decision Number 168/PUU-XXI/2023: Judicial Review of the Job Creation Law and Its Implications for Labor Protection

Non-Competes in Indonesia from the Perspective of Human Rights

Even though the ICC provided a provision which becomes the basis of a non-competition clause, some scholars and lawyers do not believe that a non-competition clause is applicable in Indonesia because it is seen as having the potential to ‘eliminate’ opportunities for ex-employees to do business or work elsewhere (Alizia, 2023). In addition, non-competition clauses are often thought to violate several provisions under the 1945 Constitution and Law No. 39 of 1999 on Human Rights (“Human Rights Law”), as the following:

  • 27 of the 1945 Constitution: Every Indonesian citizen has the right to work and have a life that is worthy of humanity;
  • 38 paragraph (2) of the Human Rights Law: Everyone have the right to freely choose the job they like and is also entitled to fair employment conditions; and

Based on the above provisions, everyone holds the rights to freely choose their job, to obtain fair employment conditions, and to earn a decent income. Whilst in principle, a non-competition clause would restrict such rights and opportunities. Therefore, if seen through the perspective of the Human Rights Law, a potential violation of the law abides if the non-competition clause is implemented in an agreement.

Such violation of the law would lead to the non-fulfilment of the fourth legal requirement of an agreement under Article 1320 of the ICC (R. Subekti, 2012), which requires an agreement to have a valid cause.

Furthermore, even though there is the freedom of contract principle where the parties can determine the contents of the agreement themselves, this freedom is still limited. In freedom of contract, people can in principle make agreements with any content, as long as it does not conflict with the law, morality and public order (J. Satrio, 1999). Based on the prior reason where a non-competition clause violates the law [Human Rights Law], hence it should be deemed as null and void, and unenforceable.

Nevertheless, it should be noted that Article 73 of the Human Rights Law stipulates that the rights and freedoms regulated in the Human Rights Law may be limited, but only by and based on the law to guarantee the recognition and respect of human rights and basic freedoms of others, morality, public order, and the interests of the nation. Therefore, even fundamental rights can be limited by other laws to guarantee the recognition of the human rights of others.

Indonesia employment agreement

Jurisprudences Concerning Non-Competes in Indonesia

In practice, the differing perspectives towards the enforceability of non-competes in Indonesia remains visible which creates legal uncertainty to both the employers and the employees. This article will be discussing 3 (three) cases that each emphasizes different perspectives in deciding regarding the enforceability of non-competes in Indonesia.

Suresh G. Vaswani v. Ram Prakash Pandey and Global Jaya International School, Jurisprudence No. 3046 K/Pdt/2017 jo. 118/Pdt/2016/PT.BTN jo. 787/Pdt.G/2014/PN.Tng.

School A had hired an Indian Teacher through an employment agreement. In the employment agreement, the Indian Teacher is obliged to be a teacher of the School A for 2 (two) years, starting from July 2012 to June 2014. The School A is obliged to finance the arrangements for the Indian Teacher to enter and work in Indonesia.

Pursuant to Article 4.4 of the employment agreement, the Indian Teacher is prohibited to accept any job in Indonesia from any institution for a period of 18 (eighteen) months since the date of termination of the employment agreement or the date of resignation. A violation of this stipulation leads to a penalty of USD 10,000 (ten thousand United States dollars).

On 14 March 2014, the Indian Teacher handed in his resignation. The School A however, discovered that the Indian Teacher work as a teacher for School B in less than 18 (eighteen) months since the date of resignation. Therefore, the School A filed a breach of contract lawsuit to the Indian Teacher and the School B seeking for compensation of USD 10,000 (ten thousand United States dollars) plus material and immaterial losses of IDR 1,196,800,000 (one billion one hundred ninety-six million eight hundred thousand Indonesian Rupiah).

The District Court rejected the claim under the consideration that the act of the Indian Teacher who worked for the School B subsequent to the resignation from the School A is not a breach of contract. The Appellate Court upheld the decision of the District Court under the consideration that the non-competition clause in the employment agreement cannot be justified because it is contrary to the Human Rights Law.

Since it prohibits the Indian Teacher from working elsewhere even though his employment period has ended, thus contradicting Article 38 paragraph (2) of the Human Rights Law which states that everyone has the right and freedom to choose the job they like. Furthermore, the Supreme Court also upheld the decision under the norm that the School A, based on human rights, cannot prohibit the Indian Teacher from working for the School B after the Indian Teacher resigned and stopped working for the School A.

Hence, this decision confirms that a non-competition clause, even though explicitly stipulated under the employment agreement with specific period and penalty for violation, is not considered to have binding force because it is deemed to violate human rights by the judge. Therefore, a violation to the non-competition clause does not constitute as an act of breach of contract.

 

“This decision confirms that a non-competition clause is not considered to have binding force because it is deemed to violate human rights by the judge”

This jurisprudence portrays that from the perspective of Human Rights Law, non-competes are in violation of the law [Article 38 paragraph (2) of Human Rights Law], which ensures everyone to hold the equal rights and freedom to choose the job they like. A non-competition clause however, would restrict such rights and freedom in principle.

Therefore, such violation of the law would lead to the non-fulfilment of the legal requirements of an agreement under the Article 1320 of the ICC which requires an agreement to have a valid cause. Based on the prior consideration, it is understandable when the judge decided that the non-competition clause cannot be justified because it is contrary to the Human Rights Law.

PT Martina Berto Tbk v. Tiara Pradyta Adikusumah, Jurisprudence No. 2961 K/Pdt/2019 jo. 303/PDT/2018/PT.DKI jo. 54/Pdt.G/2017/PN.Jkt.Tim.

Company A, engaged in the business field of cosmetics and herbal products, raised a fixed-term Employee to a permanent position with the title of deputy director of marketing in 1 April 2014. The Company A and the Employee subsequently signed a confidentiality agreement.

Pursuant to Article 2.4 of the confidentiality agreement, there is a non-competition clause, whereas if the second party [the Employee] resigns from the first party [the Company A], then the Employee shall not join another company engaged in the same business field according to their last position, or if the Employee must join a similar company, at least 2 (two) years after the Employee resigns from the Company A.

On 2 December 2014, the Employee resigned from the Company A and was effective as of 31 January 2015. The Employee subsequently established Company B, a company producing lipstick (similar to the Company A), on February 2015. Therefore, the Company A filed a breach of contract lawsuit to the Employee seeking for compensation amounting to IDR 500,000,000 (five hundred million Indonesian Rupiah) plus incurred costs of IDR 306,000,000 (three hundred six million Indonesian Rupiah).

The Employee defended that the non-competition clause violated: (i) the equal rights and opportunities to choose a job, obtain a job, or move to another job and earn a decent income either inside or outside the country (Art. 31 of Employment Law), and (ii) the human rights where everyone has the right to freely choose the job they like and is also entitled to fair employment conditions (Art. 38 paragraph (2) of Human Rights Law), and where every Indonesian citizen has the right to work and have a life that is worthy of humanity (Art. 27 of the 1945 Constitution). Hence, the non-competition clause which is the basis for the lawsuit does not fulfil the requirements for a valid agreement based on Article 1320 of the ICC due to being made for a prohibited reason or in conflict with the law.

The District Court however, upheld the non-competition clause, declared that the Employee has committed a breach of contract, and condemned the Employee to pay for compensation as stipulated in the confidentiality agreement amounting to IDR 500,000,000 (five hundred million Indonesian Rupiah), under the consideration that the Employee had resigned from the Company A, then joined Company B producing similar products with the Company A, including lipstick, before the 2 (two) year period had lapsed.

The Appellate Court confirmed this consideration and upheld the decision under the consideration that the Employee has been proven to have committed a breach of contract supported by strong evidences. Furthermore, the Supreme Court also upheld the decision under the norm that the Employee had committed a breach of contract due to violating the obligation stipulated in Article 2.4 of the confidentiality agreement [the non-competition clause], therefore the decision of the judex facti does not conflict with the law.

Hence, this decision confirms that violation to a non-competition clause is a breach of contract.  Even though it is challenged under the reason of violation of human rights and non-fulfilment of the requirements for a valid agreement, the non-competition clause remains considered binding and enforceable to the individuals who have concluded them by law [the employer and the employee], and shall be executed in good faith.

 

“This decision confirms that violation to a non-competition clause is a breach of contract”

This jurisprudence portrays that from the perspective of the ICC, non-competes are not in violation of the law as long as it is agreed in a written agreement by the parties and the employee has not been unfairly disadvantaged by such clause. Different from the previous jurisprudence, even though it is part of the Employee’s legal argument, in this jurisprudence, Judex Facti and Judex Juris do not consider that the non-competition clause is in conflict with Article 38 paragraph (2) of the Human Rights Law which states that everyone has the right and freedom to choose the job they like. Thus, the non-competition clause shall bind the individuals who have concluded them by law, as provided in Article 1338 of the ICC.

PT Berca Schindler Lifts v. Shara Agustina, Jurisprudence No. 3549 K/Pdt/2023 jo. 753/PDT/2022/PT.BDG jo. 545/Pdt.G/2021/PN.Bks.

Company A, engaged in the business field of lift and elevator, hired an Employee as a marketing staff. The Company A and the Employee subsequently signed an employment agreement. In the employment agreement, there is a trade secret clause, where one of the stipulations is that if the Employee resigns from the Company A, then the Employee cannot work for another company of the same type as the Company A within 12 (twelve) months after resigning. Based on the facts of the case, it is known that the non-competition clause in the employment agreement is regulated as part of the clause on trade secrets, so it is slightly different from the concept of non-competition clauses in general.

One day, the Employee had resigned from the Company A, and in less than 12 (twelve) months after the resignation date, the Employee was discovered to have worked at Company B, a company engaged in the business of lift and elevator, similar with the Company A. Therefore, the Company A filed a breach of contract lawsuit to the Employee seeking for compensation amounting to IDR 634,743,900 (six hundred thirty-four million seven hundred forty-three thousand nine hundred Indonesian Rupiah).

The District Court rejected the claim from the Company A and furthermore, the Appellate Court upheld the decision. Nevertheless, the Supreme Court annulled the decision of the District Court and the Appellate Court, and partially granted the claim of the Company A.

Read Also: Court provides guidance on impact of principle of balance in contractual agreements

The Supreme Court declared that the Employee had committed a breach of contract under the norm that the employment agreement does not violate the human rights law and employment law because the agreement is an agreement related to the trade secrets law. Furthermore, the Employee clearly and consciously knew of the existence of the trade secrets and sensitive or confidential information of the Company A and had absorbed such information during her tenure for more than 10 (ten) years, nevertheless the Employee suddenly decided to resign from the Company A on 4 February 2021 and immediately joined Company B which has the same business field as the Company A, without passing the mandatory 12 (twelve) months waiting period, legally proving the bad faith of the Employee by ignoring its legal obligation based on the employment agreement. Besides that, the Employee is also strongly suspected to have leaked confidentiality data of the Company A to Company B since it is a company engaging in a similar business field as the Company A. Therefore, the Employee shall legally provide compensation to the Company A for the losses suffered due to breach of the employment agreement.

The Supreme Court however, condemned the Employee to compensate the Company A in the amount of IDR 100,000,000 (one hundred million Indonesian Rupiah) under the consideration that the claim of the Company A is too high.

Hence, this decision also confirms that a non-competition clause is binding and enforceable to the individuals who have concluded them by law [the employer and the employee] and shall be implemented in good faith. Furthermore, the judge also considered that non-competition clauses do not violate the human rights or the rights of employees, because the underlying agreement is an agreement relating to the trade secrets law.

 

“This decision confirms that a non-competition clause does not violate the human rights or the rights of employees, if the underlying agreement is relating to the trade secrets law”

This jurisprudence view non-competes in a different perspective, where they do not violate the Human Rights Law and the Employment Law, if the underlying agreement is relating to the trade secrets law.

Pursuant to Article 1 point 1 of Law No. 30 of 2000 on Trade Secrets (“Trade Secrets Law”), Trade Secrets are information that is not publicly known in the fields of technology and/or business, has economic value because it is useful in business activities, and is kept confidential by the Trade Secrets Owner. Furthermore, Article 4 of the Trade Secrets Law stipulates that Trade Secrets Owners hold the rights to (i) self-utilize its owned Trade Secrets, and (ii) grant a license to or prohibit other parties from utilizing or disclosing its Trade Secrets to third-parties for commercial purposes. A violation to this could lead to a claim for damages, based on Article 11 of the Trade Secrets Law.

Aside from the violation of the non-compete, the judge also considered that there is a strong suspicion that the Employee have leaked the Company A’s confidential information to the Company B since they engage in similar line of business.

Therefore, based on the prior consideration, it is understandable when the judge decided that the violation to the non-competition clause is considered to be an act of breach of contract, moreover, the damages incurred shall also be compensated, based on the provisions under the Trade Secrets Law, due to the unlawful disclosure of Trade Secrets.

Indonesia employment law

The Binding Power of Non-Competition Clauses

Article 1601x of the ICC lays the foundation for a contractual provision known as a non-competition clause. While the requirement is simple, namely should be made in writing, the provision sets out several limitations and requirements to protect the interests of employees from employers. This protection can be seen, among other things, as a protection of employees’ basic rights, namely the right to work. However, learning from the various jurisprudences above, although human rights are important provisions that must be respected by all parties, including employers, these provisions are not without limits. A basic right is also limited by statutory provisions to protect the basic rights of others. The provisions regarding trade secrets regulated in the Trade Secrets Law can be seen as one of the laws that limit the basic rights of an individual, in this case an employee, from the basic rights of another party, in this case the employer who holds the trade secret. This article certainly does not discuss further the legal issues that may arise regarding whether these basic rights remain if the employer is a company.

In general, based on the legal basis and jurisprudences above, it can be concluded that a non-competition clause in an employment agreement cannot be simply considered unlawful. The legal basis for a non-competition clause is statutory, namely Article 1601x of the ICC, which is essentially part of the Employment Law. However, even though it is regulated in a law, there is a potential conflict with other legal bases at the same level as the law, namely the more general provisions of the Employment Law and the provisions of the Human Rights Law. Outside of these two laws, there are other provisions, such as the Trade Secrets Law, which actually justify non-competition clauses and, indirectly, Article 1601x of the Civil Code. Therefore, in general, a non-competition clause can be considered enforceable and binding on both employers and employees. However, specifically, this clause is at risk of being refuted and deemed non-binding as long as it is proven to violate other statutory provisions that serve as the starting point for the legal arguments of the panel of judges when deciding, such as in the case of Suresh G. Vaswani v. Ram Prakash Pandey and Global Jaya International School in Jurisprudence No. 3046 K/Pdt/2017 jo. 118/Pdt/2016/PT.BTN jo. 787/Pdt.G/2014/PN. Tng.

Author

Dhima Haris Anggara Mukti

Dhimas Haris Anggara Mukti is a MidLevel Associate in Leks&Co. He earned his bachelor’s degree of law at University of Indonesia majoring in international and banking law (2019), where he actively contributed to the society in the Student Executive Body of Faculty of Law. He earned his master’s degree of law at University of Indonesia majoring in business law (2024). His master’s degree thesis titled “the binding power of a deed of settlement made outside of court which contents differ from a legally binding court decision” was published in Jurnal Hukum & Pembangunan vol. 53 no. 1 (2023). He joined Leks&Co in 2024. At the firm, his practice area covers real estate, general corporate/commercial, commercial dispute resolution and construction.

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Editor

Dr. Eddy Marek Leks

Dr Eddy Marek Leks, FCIArb, FSIArb, is the founder and managing partner of Leks&Co. He has obtained his doctorate degree in philosophy (Jurisprudence) and has been practising law for more than 20 years and is a registered arbitrator of  BANI Arbitration Centre, Singapore Institute of Arbitrators, and APIAC. Aside to his practice, the author and editor of several legal books. He led the contribution on the ICLG Construction and Engineering Law 2023 and ICLG International Arbitration 2024 as well as Construction Arbitration by Global Arbitration Review. He was requested as a legal expert on contract/commercial law and real estate law before the court.

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