A proposed change to the rules on non-competition agreements in employment agreements in Finland should make companies think carefully before insisting on the inclusion of post-termination non-competition restrictions in their employment agreements. Should the new legislation enter into force as currently proposed, the new rules will result in employers being required to pay potentially significant sums to employees in order for such non-competition clauses to be enforceable.
The amendments to legislation are expected to enter into force on 1 January 2022. However, it is advisable to consider the potential financial impact of the proposed amendments now, in order for employers to:
- assess the potential financial burden that the non-competition clauses in their existing employment agreements could give rise to under the new rules.
- evaluate which non-competition restrictions they wish to maintain and those which they do not feel justify the financial burden of maintaining.
- take steps to waive those non-competition clauses for which they do not feel it is commercially beneficial to pay the additional costs.
- amend their hiring process to avoid including non-competition restrictions ‘as standard’ and adopt a more ‘case-by-case’ evaluation of the need for a non-competition restriction in relation to new employees or specific categories of employees.
Current compensation obligation is very limited
Under the current legislation an employer may under certain circumstances restrict an employee’s right to conclude an employment agreement with a competitor or to engage in competitive operations on his own after the employment between the parties has ended. For a non-competition agreement to be valid, a particularly weighty reason for the restriction must exist. A particularly weighty reason is typically the employer’s need to protect its business secrets which the employee becomes aware of during his employment.
Current legislation requires the employer to pay compensation for a post-termination non-competition obligation only, if the restriction exceeds six months. Compensation is payable for the part of the restriction exceeding six months. Compensation must be reasonable. However, the law does not specify what a reasonable compensation is.
Under the current legislation employees who, in view of their duties and status, are deemed to belong to the employer’s management are not entitled to a compensation for a non-competition obligation regardless of the length of the restriction.
All post-termination non-competition obligations to become subject to compensation
The proposed legislative amendments would require an employer to pay a fixed amount of compensation for all post-termination non-competition restrictions relative to the length of the non-competition restriction as follows:
- For non-competition obligations of a maximum of six months: 40% of the employee’s regular salary
- For non-competition obligations exceeding six months: 60% of the employee’s regular salary.
Compensation would be payable for the whole of the post-termination non-competition obligation. As the main rule, the payments would be made following the salary payment periods applicable during the employment.
It is proposed that the compensation obligation would relate also to the employers’ management, which would be a significant change compared to the present.
Under the proposed amendment the employer could waive its right to invoke a non-competition obligation by giving to the employee a notice to terminate the non-competition agreement with a notice period of at least one third of the length of the restriction period, and in any case two months at minimum. Thus, terminating a non-competition agreement of e.g. 12 months, will require a notice period of four months. Waiving the right to invoke a non-competition agreement is no longer possible after the employee has given a notice to terminate the employment.
The compensation obligation would apply until the end of the notice period relating to the non-competition agreement, even if the employment terminated earlier.
Amendments to enter into force on 1 January 2022
The new legislation is intended to apply from 1 January 2022 onwards. It would apply also to non-competition agreements that have been entered into before the said date. However, a one-year transition period during which employers will have time to take steps to adjust to the new legislation and, if needed, terminate non-competition agreements that have been entered into prior to 1 January 2022, is proposed. During the transition period non-competition agreements could be terminated without a notice period.
It is further proposed that the new legislation would not apply to non-competition restrictions exceeding six months that have been entered into prior to 1 January 2022, if the statutory reasonable compensation has been paid partly or in full before the new legislation enters into force.
Time for employers to prepare for the change
Should the new legislation on non-competition agreements enter into force as currently proposed, the financial impact on employers may be significant. Thus, employers with their HR teams should keep a close eye on the progress of the legislative proposal and consider what steps to take in order to mitigate its effect on their existing employment agreements, hiring processes and standard employment agreement templates.
It is advisable to start the process by examining, whether valid grounds for the non-competition agreements already concluded by the employer exist and whether it makes commercial sense to pay the necessary compensation to keep the non-competition restriction in force in respect of a specific employee.
HPP will provide further updates on the progress of the legislative proposal when available.
Get in touch
HPP’s employment law team would be delighted to discuss the impact of the proposed legislative amendments on your business. For any additional questions or need for advice on non-competition obligations, or other employment law advice please contact:
Partner, Head of Employment
+358 50 342 2245
+358 41 501 9395