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 2021. 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.
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. The current legislation provides that there must be a particularly weighty reason for an employer to enter into a non-competition agreement with an employee. A particularly weighty reason is typically the protection of the employer’s business secrets which the employee becomes aware of during his employment.
The current legislation does not require any compensation to be paid to the employee for the non-competition obligation provided that the restriction does not exceed six months. For restrictions longer than six months (the restriction shall never, however, exceed 12 months) the employee is entitled to reasonable compensation for the part exceeding six months. The legislation 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.
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.
The compensation shall be paid following the same salary payment periods as during the employment, unless the parties agree otherwise (such agreement is possible only after a notice to terminate the employment has been given).
It is likely that under the new legislation the compensation obligation will extend also to the employers’ management, which would be another significant change compared to the present.
The proposed legislation does provide for the possibility for the employer to waive its right to invoke the non-competition obligation, if it discovers that the need for the restriction no longer exists. To waive its right to invoke the non-competition restriction, the employer must give a notice to the employee by following a notice period the length of which corresponds to the length of the non-competition obligation. Taking into account that the duration of a non-competition obligation may be as long as 12 months, it may, thus, take even 12 months for an employer to free itself from the non-competition agreement and related compensation obligation. If the employee has given a notice to terminate the employment, the employer’s waiver in unavoidably too late: it can no longer be given.
The compensation obligation applies until the end of the notice period without exception.
The new legislation is intended to apply from 1 January 2021 onwards, but it will 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 2021, is proposed. During the transition period non-competition agreements can be terminated without a notice period.
It is further proposed that the new legislation shall not apply to non-competition restrictions exceeding six months that have been entered into prior to 1 January 2021, if the statutory reasonable compensation has been paid partly or in full before the new legislation enters into force.
Impact on Employers
From an employer’s point of view, should the new legislation on non-competition agreements enter into force as currently proposed, the financial impact on employers may be significant. Thus, employerss and 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