Employee's Duty of Loyalty and the Non-Competition Agreement
The Employment Contracts Act only limits the employee’s right during the validity of the employment relationship to work and practice other competing activities, which are against good practice and thus may harm the employer. The employee cannot commence to prepare competing actions against the employer while working for him/her [Prohibition of Competition].
The employee’s duty of loyalty to the employer comes to an end once the employment relationship has expired and the employee is in general free to compete with the employer after that. After the employment relationship is terminated, the employer may commence competing actions if that has not been prohibited by an agreement between the parties.
The employer and employee may enter into a non-competition agreement at the outset of the employment relationship as part of the employment contract, or during the employment relationship. The non-competing agreement restricts the competing actions after the employment relationship is terminated. The freedom of contract is, however, quite limited as the employee’s ability to undertake other work after the expiration of the employment contract may be significantly restricted.
The non-competition agreement can restrict an employee's right to conclude an employment contract with a new employer who carries out activities in competition with the former employer after the employment relationship has ended. The non-competition agreement can also restrict an employee's right to engage in activities competing with his or her former employer on his or her own account as an entrepreneur. The employer must compensate the employee for the non-compete obligation. The amount of the compensation is either 40% or 60% of the employee's normal salary for the entire period of the non-compete restriction [Restrictions of a Non-Competition Agreement].