The permissibility of non-compete agreements
In principle, the Employment Contracts Act prohibits competing activities during the employment relationship. In addition, the law allows the restriction of competition after the termination of the employment relationship by concluding a non-competition agreement, subject to certain restrictions. A non-competition agreement is only valid if it is made for a particularly compelling reason. When assessing the permissibility of a non-competition agreement, the employee’s position and tasks are taken into account, among other things. The conditions for concluding a non-competition agreement are most typically met by people working in leading positions, but the existence of a particularly compelling reason must always be assessed on a case-by-case basis. According to the jurisprudence of the supreme court, fairly strict conditions have been set for the conclusion of a non-competition agreement.
The limited duration of the non-competition ban, compensation to be paid under the law and agreement on a contractual penalty
The duration of a non-competition agreement can be a maximum of 12 months. Compensation must be paid to the employee for the post-employment restriction period.: for a restriction period of up to six months, the amount of compensation corresponds to 40 percent of the employee’s salary, and for a restriction period of more than six months, 60 percent of the employee’s salary. However, the maximum duration does not apply to directors, so directors can be banned from competing for more than a year. In practice, however, excessively long suspensions can be considered unreasonable, and suspensions of more than 12 months are rarely seen.
Even if the non-competition clause is valid in itself, it is not valid if the employment relationship ends for a reason attributable to the employer, such as termination of employment on the basis of financial and production -related grounds.
Instead of damages, a contractual penalty can also be agreed upon for violating the non-compete. Its maximum amount for employees in normal positions is the amount corresponding to six months’ salary. Directors are not subject to the maximum amount of the fine.
The employer has the right to terminate the non-competition agreement with a notice period of at least one third of the duration of the restriction period, but not less than two months. However, the right to terminate the non-competition agreement no longer exists after the employee has terminated the employment contract.
The forementioned restrictions apply only to employees. If the person is not in the position of an employee. for example, for their CEO position or share ownership, the restrictions do not apply. However, every contract is subject to the condition of reasonableness, in which the case the contract or its condition can be mediated as unreasonable.
The non-solicitation clause prevents an employee from soliciting employees and customers after the end of his or her contract
Prohibitions on solicitation are also common in employment- director/manager- and CEO -contracts. The solicitation ban can be used to prohibit the solicitation of the employer’s employees and/or customers for a certain period after the end of the employment relationship. The employment contracts act does not have specific provisions on the prohibition of solicitation, so its validity and significance must be assessed on case-by-case basis. Depending on the content and effects of the non-solicitation ban, it can also be interpreted as a non-competition agreement, in which case the restrictions according to the Employment Contracts Act apply.
A non-disclosure agreement extends the confidentiality obligation to the period after the employment relationship
The employment contracts act obliges the employee to keep the employer’s professional and business secrets secret, but the obligation ends when the employment relationship ends. Often however, the confidentiality obligation is extended by a non-disclosure agreement to cover the period after the end of the employment relationship for certain defined period or an unlimited period. A confidentiality clause can be included in employment-, manager- and CEO contracts. The confidentiality obligation, et least for a manager or CEO is often accompanied by a contractual penalty clause to prevent the violation of the clause.
There is no actual provision in the Employment Contracts Act regarding the binding of the confidentiality obligation regarding the period after the employment relationship, but the prevailing perception is that the confidentiality conditions protecting the employer’s professional and business secrets are valid and any breach may result in a contractual penalty. However, the situation is different if the non-disclosure clause prevents the employee from engaging in competitive activities, in which case its validity is assessed in the same way as a non-competition clause.
Help with drafting non-competition, non-solicitation, and non-disclosure clauses?
We assist our customers in drafting non-competition, non-solicitation and non-disclosure clauses, and we make sure that the clauses are valid and clear in content at the time of drafting. Ambiguities and disputes related to the validity of the terms appear often. In such cases we assist the customer in clarifying the matter and taking possible measures.
