Brazil: Restrictive Covenants

General Principles

Non-competition, non-dealing and non-solicitation restrictive covenants are only enforceable under Brazilian law if the employer can demonstrate: (i) it has a legitimate business interest that it seeks to protect; and (ii) the restriction goes no further than necessary, both in scope and duration, to protect that interest.

There are no laws covering restrictive covenants, so the parameters for the validity of these covenants are based on Brazilian court precedents.

Legitimate Business Interests

Trade secrets, confidential information, trade connections, and maintaining the stability of the workforce are the main legitimate business interests covered by restrictive covenants.

Scope and Duration

Based on decisions rendered by Brazilian courts, the scope and duration of such restrictions must be limited, and reasonably established to guarantee the enforceability of these covenants.

Factors to be considered are the employee’s position and importance within an organization, how long they worked for their employer, the presence of a mutual agreement concerning the restrictive covenant, in addition to a reasonable duration and scope of restriction. In order to prevent excessive covenants, the scope of the restriction must be related to a specific location, activity or certain trade connections.

Payment

In exchange for such restrictions, employers must pay an indemnification to the employees. The indemnification accepted by Brazilian labour courts usually corresponds to one month of the employee’s salary for each month of restriction. Payment of this indemnification is recommended after the termination of the employment contract, preferably in installments during the restrictive period.

Non-competition

The above general principles apply to non-competition restrictive covenants.

The longest acceptable duration for non-competition covenants is generally 12 to 24 months. Non-competition covenants usually apply for shorter durations than non-dealing and non-solicitation covenants.

Non-service or non-dealing

The above general principles apply to non-service or non-dealing restrictive covenants.

Non-service tends to cover active targeting of business, whereas non-dealing prevents the employee from accepting business from a customer, even if they had not actively sought the business.

Prospective customers/clients can be included in this type of restriction, but this would generally be limited to those that the employer was actively targeting prior to termination.

These restrictive covenants are often limited to prohibiting contact with customers/clients actually known to the employee, or for whom they were responsible or had some involvement within the course of their employment.

The longest acceptable duration for non-dealing restrictive covenants is usually 24 to 36 months, which may vary in accordance with the level of restrictions.

Non-solicitation

The above general principles apply to non-solicitation restrictive covenants.

Prospective customers/clients can also be included in this type of restriction, but this would generally be limited to those that the employer was actively targeting prior to termination.

As with non-dealing restrictive covenants, these are often limited to solicitation of customers/clients actually known to the employee, or for whom they were responsible or had some involvement within the course of their employment.

The longest acceptable duration for non-solicitation restrictive covenants is usually 24 to 36 months, which may vary in accordance with the level of restrictions.

On the Horizon

In 2019, a bill of law (Bill of Law No. 4030/2019) was proposed by the Brazilian Chamber of Deputies to include an article in the Brazilian Labor Code to regulate non-competition covenants. Under this new article, non-competition covenants could only restrict an employee to a certain area of work, and for a maximum period of two years, during which the employer would have to continue to pay the employee an indemnification of at least the employee’s last salary.

There is still no timeline for the bill to be voted on and come into force, but it represents a proposal of regulation that may impact the use of restrictive covenants in Brazil in the coming years.

Back to A Guide to Restrictive Covenants