Non-compete for an employee, a manager or a seller: what the law lets you put in the contract

A non-compete clause always looks like the same thing: someone agrees not to compete with the business for a period of time. But Portuguese law treats it very differently depending on who is bound by it — an employee, a manager or director in office, or the person selling the business. Drafting the clause under the rules for one case and applying it to another is the fastest way to make it worthless.

Employee: up to two years, in writing and with compensation

The starting point in Article 136 of the Código do Trabalho (Portuguese Labour Code) is a prohibition: any clause that may in any way restrict the freedom to work after the contract ends is void (paragraph 1). A restriction is only lawful if it meets three cumulative conditions (paragraph 2):

• it is set out in a written agreement — in the employment contract or in the termination agreement;
• it concerns an activity whose exercise could cause harm to the employer;
• the employer pays the employee compensation throughout the restriction period, which may be reduced fairly if the employer has incurred substantial training costs.

The maximum period is two years after termination. It rises to three years where the employee held a position of special trust or had access to particularly sensitive competitive information (paragraph 5).

Two points that are often missed:

• If the dismissal is declared unlawful, or the employee terminates the contract for just cause due to an unlawful act by the employer, the compensation is raised up to the amount of base pay at the date of termination — otherwise the business cannot rely on the clause (paragraph 3).
• Anything the employee earns from another activity started after termination is deducted from that compensation (paragraph 4).

No clause is needed while the contract is in force. The duty of loyalty in Article 128(1)(f) already prohibits the employee from trading on their own or someone else’s account in competition with the employer, and from disclosing information about the organisation, its production methods or its business.

Not to be confused with a retention agreement

If what the business wants is not to lose the employee after investing in their training, the right tool is a different one: the pacto de permanência (retention agreement) in Article 137. The employee undertakes not to resign for a period not exceeding three years, as compensation for substantial training costs, and can release themselves by repaying those costs. It does not prevent competition after leaving — it prevents leaving early.

Manager or director: a statutory prohibition for as long as they hold office

Here the starting point is reversed: nothing needs to be written, because the law itself prohibits it.

In private limited companies, Article 254 of the Código das Sociedades Comerciais (Portuguese Companies Code, CSC) prevents managers from carrying on, on their own or someone else’s account, any activity that competes with the company’s without the shareholders’ consent. The article defines the concepts precisely:

• an activity competes if it falls within the company’s corporate purpose, provided the company carries it on or the shareholders have resolved to do so (paragraph 2);
• acting on one’s own account includes holding an interest in a company with unlimited liability, or a stake of at least 20% in the capital or profits of a limited liability company (paragraph 3);
• consent is presumed if the activity pre-dated the appointment and was known to shareholders holding a majority of the capital (paragraph 4);
• a breach is just cause for removal and obliges the manager to compensate the company (paragraph 5), but these rights lapse 90 days after all shareholders become aware of it, or five years after the activity began (paragraph 6).

In public limited companies, Article 398(3) does the same for directors, requiring authorisation from the general meeting — and that authorisation must set out the rules on access to sensitive information (paragraph 4).

The limit of this protection is time: the prohibition lasts as long as the office. Once the manager or director leaves, company law no longer prevents them from competing, and any later restriction has to be negotiated separately. If the same person is also an employee of the company, that later restriction must comply with the Labour Code rules described above.

Selling a business: the three-year benchmark

When a business is sold, the seller’s non-compete protects what the buyer paid for: the customer base and the know-how. The official reference text on what duration is considered justified is the European Commission Notice on restrictions directly related and necessary to concentrations (2005/C 56/03):

• up to three years where the sale includes the customer base (*goodwill*) and know-how (point 20);
• up to two years where it includes goodwill only (point 20);
• not justified where the sale is limited to tangible assets — land, buildings, machinery — or to exclusive industrial property rights (point 21);
• it should be limited to the geographical area where the seller already operated (point 22) and to the products and services of the business sold (point 23).

This is a notice on concentrations under EU competition law, not a Portuguese statute setting a ceiling for every sale — but it is the most objective benchmark available for sizing the clause, and the further a clause departs from it, the easier it is to challenge.

The three situations side by side

Three mistakes that make the clause worthless

• A clause without compensation in an employment contract. It fails Article 136(2)(c) and falls under the voidness rule in paragraph 1. Saving on compensation effectively means having no protection.
• Periods copied from a sale agreement into an employment contract. The three years accepted for the seller of a business only apply to an employee in a position of special trust or with access to sensitive information.
• Treating a founder only as a shareholder. In a project raising investment, the founder is often a shareholder, a manager and an employee at the same time. Each of those roles has its own rules, and the shareholders’ agreement should address each one separately.

So which one should you use?

It depends on who needs to be bound, and when.

• If the risk is a key employee taking clients or know-how when they leave, use the non-compete agreement under Article 136 — in writing, for up to two years (three only if the role justifies it), with the compensation budgeted from day one.
• If the risk is the employee leaving early after expensive training, the tool is the retention agreement under Article 137, not a non-compete.
• If the risk is a manager or director competing while in office, the law already protects you; what is left to regulate is the period after they leave.
• If you are buying a business, ask for a seller non-compete using the duration, territory and products in the Commission Notice as a benchmark — and do not count on one if you are only buying property or equipment.

In every case, the final wording should be reviewed by a lawyer: the validity of these clauses is assessed case by case, and an excessive period or scope can bring down the whole clause.