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Legal amendment: Compensation obligation extended to all non-competition agreements

11.2.2022
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News article

In the future, employers are obligated to pay employees 40 or 60 percent of their salary during a non-competition period.

The restriction on the right to engage in competing activities during an employment relationship can also be extended after the termination of the employment relationship by concluding a non-competition agreement. Such an agreement restricts the employee's right to enter into employment with a competing employer and the right to engage in competing activities on their own account after the termination of their employment. A non-competition agreement can therefore make it harder to find a new job or prevent former employees from starting a competing company during the non-competition period.

A non-competition agreement can be a separate agreement, but it is often included in the employment contract as a non-competition clause.

The mere desire to restrict competition is never an acceptable reason for concluding a non-competition agreement.

Concluding a non-competition agreement always requires a particularly weighty reason regarding the employer's operations or to the employment relationship, and the existence of such a reason should be assessed on a case-by-case basis.

This assessment must consider, for instance, the position and duties of the employee, the nature of the employer’s operations and the need for protection arising from preservation of the employer’s business secrets or from special training.

The mere desire to restrict competition is never an acceptable reason for concluding a non-competition agreement.

A much-needed amendment

Prohibitions of competition for up to six months have previously been entirely gratuitous, meaning that employers have been able to include a non-competition clause in any employment contract just in case.

It is the opinion of the Academic Engineers and Architects in Finland TEK that the statutory case-by-case assessment has been poorly conducted.

At their worst, non-competition clauses have become automatic additions to employment contracts, with no consideration to their necessity or expediency.

In terms of an individual employee, an unfounded prohibition of competition makes it harder to find a job and can easily put their livelihood at risk for several months.

In the wider society, the practice has caused harmful rigidity in the labour market.

Together with the other member unions of Akava, TEK has highlighted these problems for years and suggested the possible solution of changing non-competition clauses so that they require consideration.

What will change?

The Parliament approved the legislative amendments concerning non-competition agreements on 10 November 2021.

The key change is that the employer will now have to pay compensation to the employee for the period they are bound by a non-competition agreement.

The compensation equals at least 40 percent of the salary for a non-competition period of up to six months, and 60 percent for longer periods.

The key change is that the employer will now have to pay compensation to the employee for the period they are bound by a non-competition agreement.

For example, for an agreed non-competition period of 6 months, the employer must pay the employee compensation that is equal to at least 40 percent of the salary for 6 months after the termination of the employment relationship. Similarly, for an agreed non-competition period of 12 months, the compensation is equal to 60 percent of the salary for the entire non-competition period.

The compensation must be paid during the restrictive period in accordance with the salary payment practice applied during the employment relationship, unless otherwise agreed upon after the termination of the employment relationship.

The new law is applied, with certain limitations, as of 1 January 2022. In 2022, the amendments will only apply to new agreements concluded on or after 1 January 2022. As of the beginning of 2023, the amendments will also apply to non-competition agreements concluded before the amendment.

An employer must therefore also pay compensation for a non-competition agreement concluded before the entry into force of the Act as of the beginning of 2023, unless the employer terminates the non-competition agreement before this time.

An employer has the right to terminate a non-competition agreement concluded before the entry into force of the Act without a period of notice during 2022. This allows employers to prepare for the legislative amendments and terminate all unnecessary non-competition agreements.

Non-competition agreements under the new legislation can, in the future, be terminated with a typical notice period of two months.

However, non-competition agreements cannot be terminated if the employee has resigned from employment.

The obligation to pay compensation for non-competition agreements is likely to lead to a situation where non-competition agreements will be concluded only in employment relationships where they are genuinely necessary.

Retaining unfounded non-competition agreements will take its toll on employers’ wallets by the year 2023 at the latest.

The amendment therefore improves labour mobility and, when necessary, ensures the livelihood of employees during the restrictive period of a non-competition agreement.

More information about the amendment and its background is available e.g. at: kilpailukieltosopimukset.fi/en

What is this all about

The Constitution of Finland guarantees every individual the right to carry out any lawful business or profession. It is possible for an employee and employer to restrict this right by agreeing on a prohibition of competition.

The prohibition of competition will restrict the employee’s right to be engaged in competing or rival work activities after the employment relationship ends.

The parties agree on a prohibition of competition either by drawing up a separate non-competition agreement or by including a non-competition clause in the employment contract. The parties shall also determine the duration of the restrictive period binding the employee.

The restrictive period begins when the employment relationship ends, and the employee is bound by the prohibition of competition until the end of the said period.

Source: Akava, kilpailukieltosopimukset.fi/en

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