Background for amendment regarding non-competition clauses in employment agreements
Proposal to amend the Finnish Employment Contracts Act (55/2001) and the Finnish Maritime Employment Act (756/2011) as of 1.1.2021 are currently on a statement round regarding amending non-competition clauses in employment agreements. The proposed amendment would also affect non-competition clauses agreed prior the proposed amendment becomes effective. However, a one-year transition period would apply to non-competition clauses agreed prior the amendment becomes effective.
The Finnish Employment Contracts Act enacts in Chapter 3 Section 5 that a non-competition clause can be agreed for a particularly weighty reason related to the operations of the employer in the employment relationship. Such agreement can be made at the beginning of or during the employment relationship. In case the employee can be deemed to receive a reasonable compensation for the restrictions imposed by the agreement of non-competition, a restriction period can be maximum of one year.
Compensation level for a non-competition clause to be enacted
According to the proposed amendment the payment of compensation shall be extended to cover all non-competition clauses. Currently the payment is effective to such non-competition clauses where a longer than six months non-competition period is agreed.
The proposed amendment enacts that compensation to be paid for the employee should be based on percentage compensation. The amount of compensation would be based on employee’s salary level and period of non-competition (limitation period). In case the non-competition period would be no more than six months compensation would be that of 40 % of normal salary. In case the non-competition period would be longer than six months in such case compensation should be that of 60 % of normal salary. The maximum time period for non-competition clause would stay the same – one year.
Furthermore, the proposed amendment contains a new clause regarding payment time for the compensation. According to the proposal payment time would be during the non-competition term is in effect and to correspond the period when normal salary would be paid during employment. Payment term can also be agreed between the parties but only after the employee has been given notice of termination.
Right to terminate a non-competition clause
The proposed amendment introduces also a new option for the employer to terminate the agreed non-competition clause. The employer would be entitled to terminate the agreed non-competition clause in case circumstances during the employment have changed. When terminating the non-competition clause, the employer should follow a termination period. The termination period should correspond at least the period of the non-competition period.
Purpose of the amendment
The purpose of the proposed amendment is to limit the use of unnecessary and unfounded non-competition clauses. In Finland the use of non-competition clauses has increased rapidly and has started to limit employee’s possibility to change a work place. Furthermore, the purpose of the amendment is to clarify the basis for compensation when such clauses are agreed to be part of the employment contract.
Our recommendations | non-competition clauses in employment agreements
Companies should review their model and individual employment contracts and notice whether they contain a non-competition clause. At the same time should be reviewed the compensation level of currently applied non-competition clauses and whether they correspond to the proposal’s level. Furthermore, it should be considered whether it is necessary to apply the non-competition clause in employment contract and if yes, to which extent and to which positions and work tasks.
To do list – for corporates and human resources department
- Review whether company’s employment contracts include non-competition clauses
- Review and consider whether non-competition clauses are necessary in every employment contract currently applied
- Consider to terminate such non-competition clauses which are not necessary in individual employment contract
- Notice the costs which current non-competition clauses cause when applied if proposed amendment becomes effective
- Consider drafting a corporate policy for applied payment term when the employee terminates employment contract including a non-competition clause
- When necessary contact our business law specialist for detailed advice in an individual case