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Chile Employment: Terminating for Unfair Competition

We mentioned in our previous article that there are constitutional rights that heavily protect the employee rights. This makes it very difficult to terminate employees without paying severance whether you have reason or not.

The example we discussed was about an Australian client that had a General Manager who was incorporating an entity to offer similar products as the employer. This example brings up some important questions about unfair competition.

This article discusses that the labor contract can be terminated effective immediately and without severance pay if the employee “Executes negotiations that fall in the line of business of the employer and such prohibition has been set in writing in their employment contract..”

As mentioned previously, there are constitutional rights that heavily protect the rights of the employee. In other words, you cannot fire the employee if he/she only performs similar or analogous activities that do not infringe or alter the conditions of free competition.

We will deconstruct and explain Art. 160 No 2 of the Chilean Labor Code in order to address the “unfair competition” aspect and related requirements.

The expression “…negotiations that fall in the line of business of the employer…” of article 160 No 2 of the Chilean Labor Code can only refer to unfair competition. It seeks to prevent an employee from starting a new business in order to compete with the employer by stealing current customers, using knowledge acquired while performing company duties or using privileged or confidential information that the company has not made available. In these cases, the competition would become unfair due to the advantage obtained by the abovementioned factors.

In order for this situation to take place, the commercial law doctrine has indicated that the following requirements must be met:

  1. The act or activity must objectively be contrary to good faith requirements;
  2. An act or activity should be performed in the market with the aim to compete.
  3. The action must be able to potentially cause damages.

It is sufficient that an act takes place that objectively falls within any of these cases without any specific intent to harm, cause damages or even consciously violate good faith requirements. To clarify, no malicious intent or even negligence is necessary.

To summarise, unfair competition arise when the employee, using his knowledge of the organization and production techniques from his/her former employer may potentially cause damages or alter the level of competition. Under these circumstances, the company could be justified for terminating an employment contract without paying severance.

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Jorge is a corporate and commercial lawyer that specialises in employment law. Jorge advises clients on business and legal structures, and is able to provide cost-effective solutions to matters including relationships with public entities, negotiation of contracts and corporate governance.