What is the purpose of a Non-Competition Clause, and when such Clause should be agreed upon?

 

Including a non-competition clause to any employment agreement might feel tempting in order to protect the employer’s trade secrets, competitive position and other interests. Under Finnish law, however, the situation is not that straightforward.

 

According to the Finnish Employment Contracts Act, non-competition clauses may be used only if there exist particularly weighty reasons that relate to the operations of the employer. The existence of such reasons is assessed considering, among other factors, (i) the nature of the employer's operations, (ii) any need for protection related to keeping a trade secret or to special training given to the employee by the employer, and (iii) the employee's status and duties.

 

The permitted effects of the non-competition clause are (i) limiting the employee's right to conclude an employment contract with an employer who engages in operations competing with the first-mentioned employer, and (ii)  the employee's right to engage in such operations on his or her own account. The limitations apply as from the termination date of the employment agreement.

 

The non-competition obligation may restrict the foregoing possibilities of the employee for a maximum period of 6 months. However, if the employee can be deemed to receive reasonable compensation for the restrictions imposed by the non-competition obligation, the period can be extended to 12 months. In relation to breaches of the obligation, the clause can include either regular liability clause for damage caused or a liquidated damages clause. The amount of liquidated damages may not, however, exceed the amount of salary the employee has received during the 6 months preceding the end of the employee's employment relationship.

 

Another factor to be observed is that the non-competition clause does not bind the employee if the employment relationship has been terminated for a reason attributable to the employer. This includes, for example, the so-called collective termination grounds and also breaches of agreement by the employer.

 

In relation to directors, the Employment Contracts Act states that restrictions on the duration of the obligation (6 / 12 months) and the maximum limit on liquidated damages (6 months’ salary) do not apply to employees who, in view of their duties and status, are deemed to be engaged in the direction of the company or an independent part thereof or to have an independent status immediately comparable to such director’s duties.

 

If the non-competition clause does not meet the requirements set out in the Employment Contracts Act, such clause is directly invalid and cannot be enforced against the employee. For this reason, a particular issue to consider is whether a slightly wider confidentiality clause would do the same trick in terms of protecting the employer’s commercial interests.

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What Amendments where made to Non-Competition Clauses?

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The provision on non-compete agreements in the Finnish Employment Contracts Act were amended  from 1 January 2022 and the employer is now obliged to pay compensation to the employee for the restriction period agreed in the non-competition agreement, also concerning non-competition agreements that were agreed upon before 1 January 2022 from 1 January 2023 onwards , the amount of compensation, the maximum length of the non-competition agreement and the compensation's time of payment. Agreeing on a non-competition agreement directly implies the obligation under the law to pay compensation to the employee for the restriction period. The amount of compensation depends on the employee's salary and the length of the restriction period agreed in the non-competition agreement.

 

If the length of the restriction period is six months, the employer must pay compensation equal to at least 40% of the employee's salary during the duration of the restriction period. However, if the restriction period is agreed to last longer than six months, the compensation must correspond to at least 60% of the employee's salary. The compensation is based on the employee's normal salary paid during the employment relationship. The compensation must be paid within the restriction period on the paydays observed during the employment relationship, unless otherwise agreed after the termination of the employment agreement. The termination of the employment agreement means the submission of a notice of termination. The date of payment cannot be agreed otherwise in advance, however, after the employee has resigned, it is possible to agree on that. The provisions on the payment obligation and the amount of compensation to be paid to the employee are mandatory and cannot be agreed otherwise.

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Is it possible to terminate a Non-Competition Clause?

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Yes, pursuant to the amendment to the Finnish Employment Contracts Act, the employer has the right to terminate a non-competition agreement. However, the employer may no longer terminate the non-competition agreement after the employee has terminated her/his employment agreement. Termination of the employment agreement means the submission of a notice of termination. The employer may unilaterally terminate the non-competition agreement in accordance with a notice period that must be at least one-third of the length of the restriction period agreed in the non-compete agreement. However, the period of notice must be at least two months. If, for example, a restriction period of six months has been agreed in the non-competition agreement, a notice period of two months or longer may be agreed in the non-compete agreement. The parties may also agree otherwise on a shorter notice period of the non-competition agreement when the employee resigns, but in advance.

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In addition, the employer has the right to terminate the non-competition agreement agreed before 1 January 2022 by 31 December 2022 with immediate effect, without any notice period and avoid the compensation obligation relating to those agreement that commences on 1 January 2023.

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