Ban on engaging in competing activities

Employees may not perform work for other parties or engage in such activities that would cause manifest harm to their employer and would be a competing activity contrary to fair employment practices. This ban applies to both work during an employment relationship and the employee’s own business activities. This ban is based on the Employment Contracts Act and does not require a separate agreement. (Chapter 3, section 3 of the Employment Contracts Act (55/2001)

Non-compete agreement

A non-compete agreement is a separate agreement that limits the employee’s right to conclude an employment contract with a competing employer or engage in competing activities after the end of the employment relationship. A non-compete agreement can only be concluded for particularly weighty reasons that concern the employer’s activities or the employment relationship. The non-compete agreement can be valid for a maximum of six months from the end of the employment relationship but in certain cases it can be in effect for up to one year. (Chapter 3, section 5 of the Employment Contracts Act)

Prerequisites for a non-compete agreement

A non-compete agreement can only be concluded for particularly weighty reasons. The reasons must also exist when a party invokes the ban on competition. This means that even if the particularly weighty reasons exist at the start of the employment relationship, a party should no longer use the non-compete agreement as justification for its actions when the reasons no longer exist.

The employer and the employee must take into account the following when considering the particularly weighty reasons:

• The tasks of the employee, the sector where they work and the special characteristics of the tasks and the sector
• Employee’s position in the organisation and such matters as their access to information
• Type of the employer’s activities
• The need for protection based on the employer’s trade secrets
  • Trade secret, product development, customer relationships, does the employer possess information and expertise that the competitors do not have.
• Special training provided by the employer.

Concluding a non-compete agreement

There is no special format for the non-compete agreement. It can be a separate document or part of the employment contract. The agreement can be concluded at the start of the employment relationship or as the work tasks change.

The non-compete agreement can be concluded as part of an employment relationship that is valid indefinitely or a fixed-term employment relationship. If the non-compete agreement is only concluded after the expiry of the employment contract, the non-compete agreement provisions of the Employment Contracts Act no longer apply to the agreement.

The following should be included in the non-compete agreement:

• Tasks banned during the agreement period
• Duration of the agreement
• Geographic scope of the agreement.

A non-compete agreement can prohibit an employee from engaging in competing activities as an employee or an entrepreneur. The agreement may prohibit the employee from engaging in indirect competing activities, for example participation in competing activities in a company owned by the employee’s family member. Under the non-compete agreement, the employee may also have an obligation to notify any new employer of the validity and content of the non-compete agreement.

Validity of the non-compete agreement and its relevance at the end of the employment relationship

A non-compete agreement may be valid for a maximum of one year. The time limit does not apply to an employee who, on the basis of their duties and position, is considered to perform management work in a company, organisation or foundation or its independent part or be in an independent position that is directly comparable to such a management task.

The period during which a non-compete agreement limits an employee’s employment after the end of an employment relationship is called a non-compete period. When the non-compete period is set at no more than six months, the employer must pay the employee compensation equal to 40% of the employee’s pay for the duration of the non-compete period. When the non-compete period is set at more than six months, the employee must be paid a compensation equal to 60% per cent of the employee’s pay for the non-compete period. The non-compete period may be set at a maximum of one year from the end of the employment relationship.

The compensation must be paid during the non-compete period according to pay periods observed during the employment relationship (for example on the 15th of each month) unless otherwise specified after the termination of the employment contract. The compensation can also be paid as a lump sum.

Instead of compensation for loss, the non-compete agreement may include a provision on a contractual penalty, which may not exceed the amount of pay received by the employee for the six months preceding the end of the employment relationship.

Binding nature of the non-compete agreement and termination of the agreement

The non-compete agreement is not binding on the employee if the employment relationship has ended for a reason attributable to the employer. This means that the agreement is not binding if the employment relationship ends on financial and production-related grounds, for example.

The non-compete agreement is binding on the employee if the employment relationship ends on the basis of employee’s negligence or similar reasons attributable to the employee’s person.

The employer has the right to terminate the non-compete agreement in accordance with the period of notice. The period of notice must be at least one third of the non-compete period but at least two months. However, the agreement can no longer be terminated after the employee has terminated the employment contract. However, the employer and the employee can also agree after this date that the non-compete agreement is not valid and no compensation for the non-compete period is paid. However, the employer no longer has any unilateral right to terminate the agreement after the employee has terminated the employment contract.