With a non-competition agreement, it is possible to restrict an employee’s right to transfer to a service of a competing employer after employment relationship’s expiry based on a particularly weighty reason related to either employer’s operations or employment relationship.
What is changing?
In the future, employers are liable to pay an employee, who is a contractual party of a non-competition agreement, compensation for the duration of a non-competition term, i.e. limitation period. If the limitation period is:
- 6 months, a compensation payable for the limitation period corresponds with 40 % of an employee’s salary.
- More than 6 months, a compensation payable for the limitation period corresponds with 60 % of an employee’s salary.
The aforesaid compensation will become payable during the limitation period following the previously applied pay period.
As a main rule, the maximum duration of a limitation period is one year from the expiry of the employment relationship.
When?
The legislation amendment enters into force on 1 January 2022. A non-competition agreement agreed upon prior the new law enters into force shall be governed by the previously valid legislation until one year has passed from the amendment’s entry into force.
Why?
The amendment aims e.g., to reduce the number of groundless non-competition agreements and to increase flexibility in labour market.
How to prepare?
As employees are in the future automatically entitled to a compensation based on a non-competition agreement, it is recommendable to go through non-competition agreements entered into by the company in order to evaluate, among others:
- Is a non-competition agreement and its limitation period still justified?
- Is a non-competition agreement in line with the employer’s interests regardless of the compensation obligation deriving from the legislation amendment?
- Is it necessary to update non-competition agreements / employment agreements / employment agreement templates / internal guidelines?
- Can the employer’s interests be secured in a way other than a non-competition agreement, such as making more specific agreements on non-solicitation of customers/personnel, confidentiality and/or intellectual property rights?
Depending on the results of the check-up, it is recommendable for the employers to terminate “unnecessary” non-competition agreements and/or to agree on shorter limitation periods to avoid a situation where the employer is obligated to pay compensation sums which are disproportionate with the agreements’ original objectives.
Until one year has passed from the legislation’s entry into force, an employer is entitled to terminate with an immediate effect a non-competition agreement which was made prior the amendment’s entry into force. In addition – until an employee has terminated one’s employment agreement – an employer is entitled to terminate a non-competition agreement by following a notice period of at least one third of the length of the limitation period, however with a minimum length of two months.
Further information:
Hanna Vuoria
attorney-at-law
050 362 5787
hanna.vuoria@sisulaw.fi