Grounds for Non-Competition Agreement

According to the Employment Contracts Act, a post-employment non-competition agreement must be supported by particularly weighty reasons related to the employer’s business activity or the employment relationship itself. When assessing the reasons, the nature of the employer’s business must be taken into account as well as the need for protection provided by the non-competition agreement. The need for the protection is determined by assessing the importance of safeguarding trade and professional secrets, special training provided by the employer to the employee and the employee’s position and work tasks.

A non-competition agreement is particularly justifiable in employment relationships when the employer is in the business of product development, research or other similar activity and the employer has the knowledge or know-how about matters, which other employers in the same business sector do not have. The use of a non-competition agreement may also be justifiable by reason of protecting a client’s interests.

When assessing the particularly weighty reason, the business sector in which the company operates must also be taken into account. Non-competition agreements are more justifiable in business sectors where the fast development of information and technology is a central factor in the production activity.

The employee’s position in the company is also of importance. The higher in rank the employee is in the organization, the more justifiable it is to conclude a non-competition agreement. Employees principally carrying out performing work may rarely be subject to non-competition agreements. The determining factor is, however, whether or not the employee possesses important information from a competition point of view.

It must also be borne in mind that as the managing director of a company is not an employee of the company; the provisions of the Employment Contracts Act concerning non-competition agreements do not apply to him/her. Therefore, if the company wants to limit the managing director’s right to participate in competing activity during the service relationship and thereafter, the parties should conclude a non-competition agreement both for the time that the managing director is working and also for the time after that. The provisions of the Employment Contracts Act regarding the length of the non-competition prohibition of the maximum amount of the contractual penalty are not binding when it comes to managing director.