Ask Gulf News: Can my employer enforce an excessive non-compete penalty?

Question: I have been employed by a private company for two years. Upon renewing my employment contract, my employer has asked me to sign a non-compete clause that includes a penalty provision. If I agree to the clause but the penalty provision is deemed excessive or unreasonable, would it be legally enforceable if my employer brings a claim against me for breaching the non-compete clause in the future?

Answer: In general, an employer may include a non-compete clause and a related penalty provision in an employment contract and the parties are free to negotiate and agree on the terms of their employment contract. 

Under Article 10 of Federal Labor Law No. 33 of 2021, an employer may include a non-compete clause in an employment contract, restricting the employee from competing with the employer or participating in a competing project after the termination of the employment relationship. For such a restriction to be valid, the restriction must be limited in terms of duration, geographical scope, and the nature of the work to the extent necessary to protect the employer’s legitimate business interests.

With respect to the penalty provision, the applicable law does not prohibit the parties from agreeing on a contractual penalty for breach of a non-compete clause. Such a penalty must not be exaggerated, otherwise the court may review the circumstances and exercise its power to amend or annul the clause, according to Article (852) of Federal Decree-Law No. 25 of 2025 promulgating the Civil Transactions Law which provides that (If a penalty clause is agreed upon in case of breach of the non-competition clause, and this clause is exaggerated to the extent that it becomes a means of compelling the employee to remain with the employer for a period longer than that agreed, the court may annul or amend the clause.)