Suggested legislative changes regarding non-competition agreements

A tripartite committee finished its draft in the spring regarding legislative changes concerning the use of non-competition agreements between employers and their employees. The circulation for comment for the suggested legislative changes ended in May and the preparation of the matter will continue in the fall.

No changes are suggested concerning the ground or length of non-competition agreements. A non-competition agreement can be entered into due to a particularly weighty reason and primarily for a maximum of twelve months.

The most significant suggested change concerns the compensation paid to the employee based on the non-competition agreement. According to the current legislation, the employer is not obligated to pay compensation to the employee if the prohibition of competition lasts for six months or less. Even if the prohibition of competition lasts longer, the employer is obligated to pay the employee only a reasonable compensation. The amount of reasonable compensation is not specified in the legislation and the vagueness of the said provision has left the parties with a certain freedom of contract. 

The committee suggests that employees bound by the non-competition agreement should always be paid compensation. In case the prohibition of competition lasts for six months or less, the employee should be paid 40 percent of employee’s regular salary. If the agreed length of the prohibition is more than six months, the compensation should be 60 percent of the employee’s salary.

The compensation should be paid to the employee during the prohibition of competition. The payday should be the same as during the employment, unless otherwise agreed after the termination of the employment contract.  

In addition, the committee suggests that as an option for paying the compensation, the employer is entitled to terminate the non-competition agreement. Should the employer terminate the non-competition agreement, the employee would not be entitled to compensation after the term of notice. However, the employer would forfeit its right to terminate the non-competition agreement once the employee has terminated the employment contract.

The changes are scheduled to enter into force on January 1^st, 2021. Time will tell what the final changes will actually be.