With the objective of mandating employers to pay compensation to employees for all non-competition agreements, the Finnish Government has proposed amendments to the Employment Contracts Act (the “Act”) and the Seafarers’ Employment Contracts Act effective as of 1 January 2022.
The amendments would create a significant risk of increased expenses to employers, above all to those who have used non-competition clauses as standard clauses in their employment agreements. This article concludes with some practical advice on how employers should react to the upcoming changes and some alternative ways to protect the employers’ business.
In this article, we examine the termination of employment agreement issues from the Employer viewpoint.
Non-competition agreements at present
Post-termination non-competition agreements restrict the employee’s right to enter into employment with an employer engaged in competing activities and the right to engage in competing activities on his or her account after the termination of the employment relationship. At present, the obligation to pay compensation only applies to agreements longer than six months, and ‘reasonable’ compensation is payable for the part of the restriction exceeding six months.
Non-competition agreements can only be used for a particularly weighty reason and only when a real need to restrict competition is related to the employee’s role. For employers, one key motive in using non-competition agreements is the need to protect trade secrets.
Non-competition agreements are typical in contracts between the employer and management or specialists. However, at present, many employers use non-competition clauses routinely with other groups of employees as well, and without practicing case-by-case discretion on the necessity of such clauses.
With the upcoming amendments, the Government aims to curtail the use of non-competition agreements that violate the conditions laid down in the Act. If the amendments are passed, the obligation to pay compensation will be extended to all post-termination non-competition agreements. The amount of compensation would be fixed and relative to the length of the non-competition restriction:
— For a non-competition period of up to six months, compensation would be equal to 40% of the salary during that period.
— For a non-competition period longer than six months, compensation would be equal to 60% of the salary for the entire non-competition period.
If not agreed otherwise after the termination, the compensation payments would follow the same salary payment periods applied during the employment. The employer pays the compensation in addition to the notice period salary. Also, the compensation must be paid whether or not the employee suffers any actual loss of income during the non-compete period.
As currently, the maximum duration of the non-competition would be 12 months. In addition, the provision on contractual penalty in non-competition agreements would remain the same. In such cases, the compensation obligation would not arise.
Employer’s right to terminate the non-competition agreement
The particularly weighty reason for the non-competition agreement should be present both when the non-competition agreement is concluded and when the agreement is invoked. The circumstances may change during the employment relationship, and the need for non-competition restrictions may cease (for example, due to changes in the employee’s duties). Therefore, the employer would be granted the right to terminate the non-competition agreement (without terminating the rest of the employment contract).
The non-competition agreement’s notice period would have to be at least one-third of the agreed duration of the non-competition restriction and, however, two months at the minimum. The employer would not be able to terminate the non-competition agreement after the termination of employment.
However, if the employee would terminate the employment contract after the employer had terminated the non-competition agreement, the employer would be obliged to pay non-competition compensation insofar as the non-compensation agreement’s notice period would continue after the end of employment. Termination of the non-competition agreement should be carried out in a way that is easily proven, in other words, signed by the employee. The other method, concluding a new, non-compete-free employment contract, requires the employee’s consent.
New amendments will affect old non-competition agreements as well
The compensation obligation envisaged in the proposal would, after a transition period, apply to non-competition agreements that were signed before the effective date of the proposed amendments. Therefore, employers should review all non-competition agreements and employment agreements that include non-competition clauses. A failure to terminate non-essential non-competition agreements contains a risk of material and unnecessary expenses.
The transition period
The proposed amendments would be effective as of 1 January 2022. The year-long transition period would mean that the old rules apply to old non-competition agreements during 2022. However, insofar as the non-competition restriction that has started during the transition period would continue after it, the new compensation rules would apply to the remaining part of the restriction.
During the transition period, the employers would have a right to terminate old non-competition agreements without notice periods. Therefore, the transition period is a good time for employers to terminate unnecessary non-competition agreements.
How to react?
In the future, recruiting employers must consider on a case-by-case basis whether non-competition agreements are necessary and, on the other hand, worth the compensation. All employment relationships do not demand non-competition restrictions, and the employer should be careful in including non-competition clauses to employment contracts. If the particularly weighty reasons do not exist or cease to exist (for example, employee’s work duties change considerably during the employment), non-competition agreements should not be used either.
On the other hand, when a genuine need for the non-competition agreement exists, the employer should pay attention to the desired duration of the non-competition restriction. For example, a non-compete that exceeds six months will be notably costlier.
Are there any alternatives available?
Employer may still use both non-disclosure and non-solicitation clauses in their employment agreements. With detailed drafting one can get almost the same result as with non-competition clauses.
Some employers use non-competition agreements specifically to protect trade secrets. In these situations, one possibility is to consider whether the sought-after protection can be achieved with a non-disclosure agreement and statutory protection. The Trade Secrets Act (595/2018) improved employers’ legal remedies against an employee that takes advantage of the previous employer’s trade secrets.
The other option is to include non-solicitation clauses in employment contracts. Employers may also in the future use non-solicitation provisions instead of, or combined with, non-competition clauses. Such clauses restrict the employees, after their termination or resignation, from soliciting, contacting or dealing with customers and/or employees of the employer.