Article: Employees must receive compensation even for short agreements of non-competition

The law regarding agreements of non-competition was reformed, and the amendment entered into force on 1 January 2022.

An agreement of non-competition restricts an employee’s right to enter into an employment agreement with a competing employer or to engage in a competing activity after the termination of the employment relationship. In the past, the employer did not have to compensate the employee for an agreement of non-competition with a restriction period of less than six months in duration. The legislative amendment that entered into force at the turn of the year extended this obligation to compensate to all agreements of non-competition.

The amount of compensation is based on salary and duration of restriction period

The compensation shall be no less than 40% of the employee’s normal salary for restriction periods of up to six months, and 60% for any period of over six months. The gradation is intended to encourage employers to prefer shorter agreements of non-competition. Payment of the compensation does not prevent the employee from transferring to work for an employer that does not compete with the previous employer.

The amount of compensation is based on the employee’s salary, but does not constitute actual salary for the employee. Compensation is paid to the employee per pay period, unless otherwise agreed after the termination of the employment relationship.

Due to the statutory nature of the regulation, the employer and employee cannot agree on a compensation lower than that defined in the law. In addition, explicitly agreeing on compensation is not necessary, meaning that the employer is obligated to pay compensation solely on the basis of concluding an agreement of non-competition.

Employer’s right to terminate agreements of non-competition defined in the law

The amendment also includes in the law the employer’s right to terminate an agreement of non-competition. The employer’s notice period is at least one third of the duration of the restriction period defined by the agreement of non-competition, with a minimum notice period of two months. For example, if the restriction period defined for an agreement of non-competition is three months, the employer’s notice period is two months. For an agreement of non-competition with a duration of one year, the notice period for the agreement is at least one third or four months.

In addition, the employer can no longer terminate the agreement after the employee has terminated the employment relationship. The employer must therefore assess the need for an agreement of non-competition before it is known when the employment relationship will end.

Obligation to compensate to apply also to existing agreements of non-competition

The amendment will become retroactively valid for already concluded agreements of non-competition. Starting on 1 January 2023, after a one-year transitional period, employers will also be obligated to pay compensation for the duration of the restriction period of agreements of non-competition that have entered into force before the amendment. During the transitional period, the employer can prepare for the obligation to compensate and terminate any agreements of non-competition they consider unnecessary without a notice period.

The amendment does not apply to agreements of non-competition with a restriction period of over six months in duration, which were concluded before the amendment entered into force and for which the payment of a reasonable compensation as defined by the law has already begun.

No changes to the general prerequisites for agreements of non-competition

The amendment does not affect the validity of agreements of non-competition concluded before the amendment entered into force or any of the general prerequisites. A particularly weighty reason will continue to be required for concluding an agreement of non-competition. The regulations regarding the maximum duration and the maximum contractual penalty also remain unchanged.

An agreement of non-competition is not binding on an employee if the employment relationship has ended due to a reason attributable to the employer. For example, an agreement of non-competition is not valid if the employer terminates the employee’s employment relationship for economic and production reasons.

Employers can still protect their trade secrets

Employers can still conclude an agreement of non-competition in order protect their trade and professional secrets. However, including the obligation to compensate in all agreements of non-competition means that the employer must assess their necessity more carefully. The employer may terminate an agreement of non-competition if it is no longer necessary due to changes in the employee’s status.

Employers can also protect their trade secrets using other agreements. A non-disclosure agreement is a good tool for protecting trade and professional secrets and is often better suited for this purpose compared with an agreement of non-competition. A non-disclosure agreement prevents the transfer of information, but not the transfer of employees.

Briefly

• Employers’ obligation to pay compensation for the restriction period of an agreement of non-competition was extended to agreements with restriction periods of less than six months in duration.
• The employer has the right to terminate the agreement of non-competition during the employment relationship with a notice period of no less than one third of the duration of the restriction period defined in the agreement of non-competition, with a minimum notice period of two months. However, the agreement can no longer be terminated after the employee has terminated the employment relationship.
• The amendment also applies to agreements of non-competition concluded before the amendment entered into force. The law will apply to the old agreements of non-competition starting on 1 January 2023, after a one-year transition period. During the transitional period, the employer can terminate any agreements of non-competition they consider unnecessary without a notice period.
• A particularly weighty reason will continue to be required for concluding an agreement of non-competition. There will be no changes to the regulations regarding the duration or contractual penalties of agreements of non-competition.

Originally published on Finnish Business School Graduates website.

Author: Marianna Kupias, Marianna has previously served as Communications Officer in YTN’s background group for auditing and management consulting.