Key Takeaways:
- From 2023 onwards, employers must always compensate employees for non-competition agreements;
- Employers may terminate non-competition agreements following a notice period;
- A transitional period will give time for employers to adjust to these changes during the year 2022;
- It is important to carefully assess existing non-competition and employment agreements;
- When in doubt, always consult your legal expert. 😉
First of all, what are non-competition agreements or clauses, and how should you use them?
For a particularly weighty reason related to the operations of the employer or to the employment relationship itself, a non-competition agreement between the employer and an employee may be concluded. This prevents an employee from accepting work from a new employer who competes with the previous one, or from practicing such competing activity themselves.
Non-competition agreements cannot be made at will, but instead require a weighty reason that is usually related to the employer’s trade and business secrets, and to the employee’s tasks or position in the company. In other words, a non-competition agreement can only be made if it is necessary to protect the employer’s business. In addition, employees are not bound by the agreement if the employment relationship is ended by the employer.
Previously, employees were not usually entitled to any separate compensation for non-competition agreements, unless the restriction period was more than six months. This has now changed.
Changes to Legislation
The Finnish Employment Contracts Act has been amended, and the regulation of non-competition clauses has changed. The changes are important, and employers should be aware of what’s changed and what to do next. Let’s go through the most important changes to legislation, and practical steps to take in your company.
1. Employers Obligated to Compensate Employees
Most importantly, employers are now obligated by law to always compensate employees for the restriction period agreed upon in the non-competition clause, or in a separate non-competition agreement. Restriction period means the time period when the non-competition obligation is in force after the termination of the employment relationship, and during which the employee may not accept new work that would compete with their previous employer.
An agreement of non-competition may have a restriction period of up to 12 months. The amount of the compensation depends on 1) the employee’s salary, and 2) the length of the restriction period. The compensation is determined as follows:
- Restriction period up to 6 months: 40 % of the employee’s salary
- Restriction period longer than 6 months: 60 % of the employee’s salary for the whole period.
2. Employers’ Right to Terminate Non-Competition Agreements
Employers’ obligation to compensate all non-competition agreements is a considerable change. To balance this, the new legislation also allows employers to terminate non-competition agreements separately from the employment contract itself during the course of the employment relationship, in case circumstances and the need for a non-competition agreement change. This is important because for many employers, it may be sensible to terminate some of their existing non-competition agreements due to the new compensation obligation. Non-competition agreements may be terminated following a notice period that is at least two thirds of the length of the restriction period, but two months at the minimum.
Transitional Period
The new legislation has entered into force on 1 January 2022. However, for non-competition agreements made before this, new legislation will only be followed after a one-year transitional period. This means that old non-competition agreements that are activated this year will not be bound by the compensation obligation but will instead be subject to previous legislation. From 1 January 2023, the new regulation also applies to non-competition agreements made before the amendment’s entry into force. In addition, non-competition agreements concluded during 2021 before the amendment entered into force may be terminated without notice. Otherwise, the notice period detailed above is to be followed.
Practical Steps – What to Do Next?
So, what next? Thanks to the transitional period, companies and employers have time to adjust their operations to the new world of non-competition agreements. One of the objectives of the new legislation was to guide employers to only using non-competition agreements in situations where they are actually necessary, so as to not needlessly slow down job markets.
Now employers should take time to assess their existing non-competition relationships and calculate their financial value. Non-competition agreements may not be worth the compensation, if the compensation is more expensive than the skill and knowledge the employee might utilize in a competing company. This may be difficult to estimate, but it is likely that many employers currently have unnecessary non-competition agreements with their employees. This is a good time to assess them critically.
Also remember that non-competition obligations are often set out in the corresponding section of the employment contract – there might not be a separate agreement at all. Be sure to go through your employment contracts and contract templates in case of a non-competition clause.
As such, it is important for employers to now go through existing non-competition agreements for their grounds, duration, and consequences.
In the future, the grounds and need for a non-competition agreement should be carefully considered when recruiting new employees.
Alternatives to Non-Competition Agreements
Additionally, agreements prohibiting solicitation and recruitment may be considered. These agreements prevent employees from hiring or soliciting key partners or clients in order to run a competing business. However, the usage of a non-solicitation clause requires careful consideration, as for example in industries with few clients, such clauses may in fact form a non-competition clause despite being worded differently.
Employers might not need non-competition agreements at all. Often, the same results may be achieved using a confidentiality obligation or a separate non-disclosure agreement. These protect your business interests while allowing your employees to utilize their professional expertise freely.
If you need help with complying with the new legislation, we are here to help! Contact us to get started.
Marko Moilanen, Senior Associate, [email protected], tel. +358 40 517 0002
Henri Tuure, Legal Trainee, [email protected]
