Employers to compensate employees for all non-competition agreements – legal amendments to take effect in January 2022
Unfounded non-competition agreements restrict employee mobility, causing inflexibility in the labour market. Parliament has approved statutory amendments proposed by the Government seeking to reduce the use of unfounded non-competition agreements. Employers will also have to compensate employees for non-competition agreements lasting for less than six months.
A non-competition agreement requires a particularly compelling reason related to the employer’s operations or to the employment relationship. A non-competition agreement limits the right of an employee to:
- enter into an employment contract with another employer engaged in a competing operation for work that commences after the employment relationship ends, or
- engage in competing operations on a self-employed basis.
“I am pleased that non-competition agreements will be directed more effectively in future. Non-competition agreements have been routinely used for almost all categories of employee, regardless of whether they are key staff members for a business. This is contrary to the Employment Contracts Act,” observes Minister of Labour Tuula Haatainen.
“The reform will also promote labour mobility when unnecessary non-competition agreements no longer restrict job changes,” Minister Haatainen adds.
The formal reply of Parliament to the Government Bill for an Act that would provide for a broader obligation to pay compensation, the time of payment of compensation and the employer's right to terminate the contract was considered at a Government session on 18 November 2021. The amendments are intended to take effect on 1 January 2022.
Subject to certain exceptions and following a transition period of one year, the new regulation will also govern non-competition agreements that were made before the entry into force of the Act. The new regulation will not govern old non-competition agreements if the employer has already paid reasonable compensation under current legislation, either in whole or in part, for a non-competition agreement lasting for longer than six months. The employer may terminate an old non-competition agreement during the transition period, thereby avoiding the duty to pay compensation under the new Act.
Duration of a non-competition agreement affects the compensation payable
A non-competition agreement may continue to be imposed for no longer than one year. Compensation for this must be paid in an amount depending on the salary of the employee and on the agreed duration of non-competition agreement (the restraint period).
- If the restraint period is no longer than six months, then the employer must pay 40 per cent of the employee’s salary for the corresponding period.
- If the restraint period is longer than six months, then the employer must pay 60 per cent of the salary for the entire restraint period.
The Act does not currently stipulate the time when the compensation must be paid. Compensation must in future generally be paid in accordance with the salary payment practice applied during the restraint period and the employment relationship.
Another reform entitles the employer to terminate a non-competition agreement during the employment relationship if the circumstances change. A period of notice must then be observed amounting to one third of the restraint period stipulated in the non-competition agreement and not less than two months. An employer may nevertheless no longer terminate a non-competition agreement after the employee has terminated the employment.
Iiris Niinikoski, Special Adviser to the Minister of Labour, tel. +358 29 504 7372
Seija Jalkanen, Chief Specialist, Ministry of Economic Affairs and Employment, tel. +358 29 504 8952
Johanna Ylitepsa, Senior Specialist, Ministry of Employment and the Economy tel. +358 29 506 4207