News – 23.04.2021

A big task for companies to sort out non-competition agreements

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Tomi Haapman

Counsel, Attorney at Law, CIPP/E

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From 2022, employers are liable to compensate employees for non-competition agreements as the Government Bill is eventually enacted. Companies should find out with whom agreements have been concluded and with whom the agreements should actually be concluded, remarks Specialist Counsel Tomi Haapman.

The Government Bill amends the statutory framework on non-competition in the Employment Contracts Act by setting an obligation on employers as of the beginning of 2022 to compensate employees for non-competition agreements, which aim to limit the employees’ post-employment possibilities in competitive undertakings. So far, there has been no obligation to compensate for non-competition agreements, which have a maximum term of six months.

The change is a step forward to a more pan-Nordic approach.

“In this respect, Finland has been anomalous. Therefore, agreements may in many cases have been concluded just in case without considering carefully if the agreements meet the legal requirement ofparticularly weighty reasons”, states Tomi Haapman, Specialist Counsel at Procopé & Hornborg.

Haapman has handled his fair share of non-competition agreements throughout his extensive career in employment law at Nordea and Employers’ Organizations such as Service Sector Employers PALTA and Technology Industries of Finland.

In accordance with the Government Bill, employers are liable to pay reasonable compensation also for non-competition agreements, which have a term of less than six months. In the case of non-competition with a maximum term of six months, the compensation should amount to at least 40% of the employee’s salary during the term of non-competition. When the term exceeds six months, the corresponding amount should be at least 60% of the employee’s salary.

Current agreements should be verified

Different from the previous law, the new law will contain provisions of termination of non-competition agreements. However, in accordance with the Government Bill, employers have until the end of 2022 to terminate previous non-competition agreements, which have been concluded prior to the entry into force of the new law. After this period, the termination provisions shall also apply to non-competition agreements pre-dating the new law.

In large corporations, the change will involve a big task given that employers do not even necessarily know with whom agreements have been concluded over the years.

“For this reason, it is important to first establish with whom non-competition agreements have been concluded. In many establishments, this might amount to lengthy manual labour”, observes Haapman.

Who should actually be bound by a non-competition agreement?

As non-competition agreements will incur a price, many companies are forced to assess even more than before with whom a non-competition agreement should be concluded in the first place. Both the current and new law require particularly weighty reasonsas the legal basis for a non-competition agreement.
“In my view, these agreements have many times been concluded even in the absence of legal gorunds”, Haapman remarks

From here on, cost-conscious companies probably will start carefully assessing the grounds for non-competition agreements. The agreements should not be terminated automatically without a view on the future.

“It is worth assessing carefully which positions actually involve such know-how the relocation of which to a competitor might cause damage. Even though the transition period is one year it is nonetheless a short time to deal with the whole rigmarole”, Haapman states.

Haapman also reminds that non-competition agreements are not the most appropriate tool for every purpose. Non-competition agreements are useful, for example, in situations where there is a genuine fear that clients might follow the employee to a competitor.

“In many cases, the more appropriate way to protect trade secrets is to conclude a non-disclosure agreement, which applies to the period after the termination of employment. These agreements may be concluded cost free.”

On the other hand, compensation for non-competition might bring about a coveted extra earning to an employee changing jobs if the employee is employed by an employer who is not a competitor of the previous employer. In this case, the employee can receive compensation from both the previous and new employer. Employers no longer may in accordance with the new law invoke the right of termination of non-competition after the employee has given notice of resignation.