Transition period for post-employment non-competition restrictions ends on 31 December 2022

If a non-competition restriction has been agreed before 2022, employers have until 31 December 2022 right to unilaterally terminate the non-competition agreement to end immediately without any notice period to avoid unnecessary costs.  

No more non-competition agreements without compensation

Employer and employee can agree on a non-competition restriction that extends to the post-employment period only for a particularly weighty reason related to the operations of the employer or the employment relationship. The particularly weighty reason must exist both when the post-employment non-competition agreement is concluded, as well as when the employer is invoking the agreement.

The  amendment introduced in the beginning of this year aims to reduce the amount of non-competition agreements concluded in circumstances where appropriate reasons for non-competition restriction do not exist by obliging employers to pay monthly compensation for the whole duration of non-competition restrictions that extends beyond the end of employment. The minimum amount of the compensation depends on how long the restriction is force after the expiry of employment as follows:

• Compensation equal to 40 per cent of the employee’s regular salary, which would be paid if the employment continued, must be paid for the duration of a non-competition restriction that is maximum six months long.
• For non-competition restrictions that are over six months long, the employee must be paid compensation equal to 60 per cent of the employee’s regular salary, starting immediately from the first restriction month.

The length of a non-competition restriction period that extends beyond the end of employment is limited to a maximum of one year, however, with an exception concerning management roles.

The compensation must be paid during the restriction period aligned with the pay periods that were followed during the employment unless otherwise agreed after the notice of termination of the employment has been given.

Termination of non-competition agreements

If the non-competition restriction has been agreed upon before 2022, employers have a right to unilaterally terminate the non-competition agreement to end immediately without any notice period until 31 December 2022. 

As of 1 January 2023, all employers must follow a notice period when terminating non-competition restrictions. The length of the notice period must be at a minimum one third of the restriction period agreed in the non-competition agreement, but in any event at least two months.

It is important to note that employers do not have a right to terminate non-competition restrictions after the employee has terminated the employment by e.g. serving their resignation. However, employer and employee can agree on a shorter notice period after the employee has served a notice of termination, but not in advance.

Action points for employers

The  legislation introduced this year makes it even more important to assess the necessity of non-competition restrictions in each individual  case.  Despite the statutory compensation, non-competition agreements are in place in many situations, e.g., for employees in product development or management roles. 

The non-competition clauses should be phrased carefully for instance whether the restriction applies also if the employment terminates already during trial period, and employers should take into consideration other possibilities to protect the company as well. As a result of the legislative amendment, more and more emphasis is put on employees’ confidentiality, non-recruitment and non-solicitation obligations as tools to protect the business . However, employers should also be  mindful when using clauses that would in practice restrict employee’s competitive activities after the termination of employment. Depending on how such clauses have been worded, in case law  different kinds of restrictive clauses have been deemed to be comparable to a non-competition agreement, i.e., subject to the rules set out in the Employment Contracts Act concerning non-competition restrictions.

Employers should also review existing non-compete agreements (embedded typically within employment contracts) on an ongoing basis, and seek to amend them or terminate unnecessary terms without delay, at the same time ensuring possible gaps are bridged for instance by solid confidentiality undertakings. Also for instance possible severance pay clauses should be reviewed to consider alignment with the obligation to compensate non-competition restriction, as appropriate.  Thus, the importance of employer’s contract management is highlighted.

Our team of employment lawyers at Bird & Bird has extensive experience of consulting employers in questions relating to the protection of business by means of restrictive covenants. We are happy to help employers to navigate through the changes of the  legislation. The new legislation also offers a  natural opportunity for employers to conduct a more comprehensive overview of the company’s strategy on protecting trade secrets and general regarding business protection against competitive activities of employees.