Prohibition of Competition

According to the Employment Contracts Act an employee may not undertake work for someone else than the employeror engage in such activity if such work is likely to harm the employer. The law restricts all employee’s competing actions, not only making employment contracts with another employer. Prohibited competitive acts are e.g. making another employment agreement, undertaking work on one’s own behalf on a part-time basis, setting up a business functioning on the same field as the employer or obtaining an interest in such a business.

When assessing the permissibility of an employee’s activities one must take into account the nature of the work and the employee’s status. That means that fixed-term employees, for example, have the right to work for another employer unless the specific nature of the work otherwise demand. The determining factor is whether the work undertaken is capable of harming the employer, i.e. whether the employee and employer are competing for e.g. the same customers.

Prohibition of competition may also be agreed upon in the employment contract. In the employment contract, the employer may either prohibit or permit competitive activities of the employee. If the employer was aware of the employee’s competitive activities at the time the employment contract was concluded, but failed to prohibit such in the agreement, the employer is generally regarded as having consented to the activities.

The prohibition of competition is generally only in force during the employment relationship. It is also in force during lay-offs but the employee is permitted to take other employment during such. After the termination of the employment relationship, the employee may take employment in a competing business or set up a competing business, unless the employment contract provides for a prohibition of competition extending beyond the duration of the employment relationship. See [2.2.3.10 Non-Competition Agreement].

An employee’s right to prepare for competitive activities during the employment relationship is also restricted. Mere planning of competitive activities, registration of a business or obtaining a professional driver’s license is not prohibited preparation but soliciting the employer’s customers through marketing acts or asking other employees of the employer to transfer to the new business is prohibited.

Employment contracts competing with the employer must be distinguished from secondary employment contracts, which are in general permitted. An employer cannot prohibit an employee from undertaking other work during his/her spare time when the work is not competing with his/her regular work. The employer may, however, prohibit an employee from undertaking secondary work if it negatively affects the employee’s ability to undertake his/her work for the employer. This could become apparent from e.g. a decline in the results of the employee’s primary work.

The employer and employee may also agree in the employment contract the kind of secondary work the employee is permitted to undertake. This may be necessary e.g. for experts who may wish to undertake other consultation work or act as lecturers.

An employee having breached the prohibition of competition is liable to pay compensation to the employer for any resulting damage. The damage may for instance consist of loss of customers or a substantial sale or order and the resulting financial loss. A competitor may also obtain confidential materials.

In addition to the employee, a person having employed the employee knowing that the employee is prohibited from undertaking competitive activities by reason of a former or existing employment contract is liable to pay compensation to the former employer for any damage.

Separate non-competition agreements may also provide for contractual penalties. Then the employee is liable for the amount specified in the agreement when he/she breaches the prohibition of competition even it does not cause anydamage to the employer or not. In case law it has been held that an amount equivalent to six months’ salary is a reasonable contractual penalty for breaching a non-competition agreement.