Employers are advised to prepare for the forthcoming amendment to the Employment Contracts Act concerning non-competition agreements.
All non-competition agreements become subject to compensation
The government is preparing an amendment to the law, according to which the employer's obligation to pay compensation for non-competition agreements after termination of employment would be extended to all non-competition agreements, regardless of the duration of the non-compete restriction. Under current law, the obligation to pay compensation applies only to non-compete restrictions lasting more than six months. The amendment is expected to take effect on January 1, 2022.
The amount of compensation to be paid to an employee for a non-compete restriction would be based on the employee's salary and the length of the non-competition agreement. If the non-compete restriction lasts up to six months, the employer would have to pay a compensation equal to at least 40% of the employee's salary over the non-compete restriction period. If the duration of the non-compete restriction is more than six months, the compensation would correspond to at least 60% of the salary.
Transition period concerning non-competition agreements in force
The amendment to the law will also apply to non-competition agreements in force, but these agreements will be subject to a one-year transition period. The old non-competition agreements will therefore be subject to current regulation until the end of 2022.
If the non-compete restriction of the agreement in force expires during the transition period, there is no obligation, whereas if the restriction period of the non-competition agreement expires after the end of the transition period, the liability applies to the part of the restriction period that falls after the end of the transition period.
The implementing provision contains an explicit provision that the employer has the right to terminate the old non-competition agreement without notice during the transition period. If the non-competition agreement is not terminated during the transition period, the obligation to pay a compensation will also apply to the non-competition agreements concluded before the amendment takes effect.
After the transition period of one year, the employer has the right to terminate the non-competition agreement only in accordance with the notice period prescribed by law. Thus, there is no longer a right to terminate the non-competition agreement after the employee has terminated the contract of employment and in that case the employer has an obligation to pay compensation for the non-compete restriction period.
Preparing for the amendment
Before the amendment comes into effect, it is a good idea for the employer to consider what kind of non-competition agreements will be made in the company in the future. It is advisable for the employer to already take into account the planned amendments to the law when considering concluding a new non-competition agreement with an employee.
Within the limits of the transition period mentioned above, the employer may, if necessary, negotiate amendments to the existing non-competition agreements and terminate unnecessary non-competition agreements during 2022, in which case the employer can avoid the obligation to pay unnecessary compensation.
Originally published 23 September, 2021
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