Legal Validity of Non-Competition Provision in Employment Contract in Korea

There is no particular legislation under the Korean laws which specifically governs the non-competition provision in the employment contracts by which the employee is prohibited from working for a new employer who may be in competition with his or her previous employer. Whilst for directors of a company, Article 397 of the Commercial Act in Korea prohibits the directors from being a director of a competing company, whether the employees are subject to such non-competition obligation after termination or expiry of the current employment contract is left open for an agreement between the employer and the employee. Therefore, in principle, the employer and the employee are free to agree on a period of non-competition when entering into the employment agreement.

Nevertheless, the period of the non-competition as agreed by the parties is not always legally effective, even if the employer and the employee had already agreed to it. For example, in case that the parties have agreed that the employee is prohibited to work for a new employer who is in competition for three (3) years after termination of the employment agreement, the Supreme Court in Korea may regard this provision as excessive restriction in the employer’s freedom of occupation (which is expressly protected by Article 15 of the Constitution of the Republic of Korea) or excessive restriction to disturb fair competition in the market, and if so, the Supreme Court may invalidate the provision based on its determination that the provisions is considered as ‘juristic act which is contrary to good morals and other social order’ pursuant to Article 103 of the Civil Act. In such case, then the Supreme Court may either invalidate the provision at all or reduce the non-competition period at its discretion (Supreme Court Decision 97Da8229 Decided 13 June 1997). In its determination, the Supreme Court has considered the following elements comprehensively(Supreme Court Decision 2009Da82244 Decided 11 March 2010):

1. Any interests of a user which is worth to protect (e.g. whether the employee’s transfer to a competing company may result in the leakage of the company’s trade secrets, etc);
2. The position of the employee right before his leaving of the company (i.e. higher or more important his position, longer the prohibition period recognized);
3. Non-competition periods, regions and target occupations (e.g. if it is a profession that mainly deals with the company’s trade secrets, it is likely that non-competition provision is upheld);
4. Whether there was any additional consideration for employees (e.g. if there was additional compensation in their salaries which was specifically provided to the employee for the non-competition period, it is likely that non-competition provision is upheld);
5. The reason of the employee’s leaving (e.g. if the employee was fired, it may be likely that non-competition provision is invalidated);  and
6. Public interests.

As evidenced above, should there be a dispute arising in relation to whether the non-competition provision is legally valid and fully effective, it remains subject to an ultimate determination by the court. Should you have any concerns on the non-competition provision in your employment contract, please do not hesitate to contact us.