Reform of Employment Contract Non-Competition Clauses – Checklist for Employers
Finland’s Parliament is currently considering an amendment to the Employment Contracts Act and Seafarers’ Employment Contracts Act that has been in the pipeline for a long time. The amendment would obligate employers to compensate employees for non-competition agreements that extend beyond the end of the employment relationship. This obligation would not depend on the duration of the non-competition clause or on the employee’s duties.
The consideration of the bill is likely to continue in Parliament in the autumn of 2021, and the amendment is proposed to enter into force already on 1 January 2022.
The bill has generated a great deal of questions among our clients. Here is our FAQ relating to the draft amendment.
1. Who can employers make a non-competition agreement with in the future and what is the maximum duration?
The amendment would not change the group of people with whom a non-competition agreement valid after the end of the employment relationship could be lawfully made. To be valid, a non-competition agreement would continue to require a particularly weighty reason relating to the employer’s operations or to the employment agreement. Such a reason could exist, for example, with respect to employees working in product development or if the employer has an interest in retaining customers.
The maximum duration of a non-competition agreement would also remain unchanged. The main rule would be that a non-competition agreement could be valid for a maximum of one year after the end of the employment relationship.
2. What does the obligation to pay compensation mean in practice?
The obligation to pay compensation is an obligation of the employer to compensate employees for a non-competition agreement that remains in force after the end of the employment relationship. According to the bill, the compensation would be determined as follows:
- The compensation for a non-competition agreement lasting no longer than six months from the end of the employment relationship should correspond to 40% of the employee’s customary salary for the entire duration of the restriction; and
- The compensation for a non-competition agreement lasting more than six months from the end of the employment relationship should correspond to 60% of the employee’s customary salary for the entire duration of the restriction.
The proposed compensation would not be payable if the employment relationship ended for a reason attributable to the employer. Termination on financial and production grounds is one example of such a situation.
Compensation also would not have to be paid if the employer has already paid reasonable compensation for an over six-month non-competition agreement as defined in current legislation or if the payment of such reasonable compensation has begun before the new legislation enters into force.
3. Can the employer decide to waive the non-competition obligation in order to avoid having to pay compensation?
Following the amendment, the employer would be entitled to terminate a non-competition agreement extending beyond the end of the employment relationship if circumstances change during the relationship, for example, if the employee’s duties change.
The notice period would be at least one-third of the duration of the non-competition obligation, but no less than two months. However, the employer would not be entitled to unilaterally terminate a non-competition agreement once the employee has ended their employment relationship.
4. Does the compensation obligation also apply to non-competition agreements predating the amendment?
The new legislation would be mandatory and would also apply to non-competition agreements entered into prior to the entry into force of the amendment.
However, there would be a one-year transitional period before the provisions concerning the compensation obligation become applicable to non-competition agreements that predate the entry into force of amendment. Employers could also terminate such non-competition agreements without notice during the one-year transitional period.
5. What should employers do to prepare for the amendment and when do they need to act?
The proposed compensation obligation will create a new personnel cost item for employers, which highlights the importance of considering the necessity of non-competition agreements even more carefully than before. The transitional period means that now is a good time to review your non-competition agreements in light of the upcoming amendment.
- Determine whether your non-competition agreements are necessary and whether you need to update your contract templates.
- Determine whether you need to update the non-disclosure agreements you have with your employees, particularly if the justification for your non-competition agreements is the protection of business secrets.
- Determine whether you need to terminate unnecessary non-competition agreements pre-dating the amendment during the transitional period.
- Make sure you treat employees equally by ensuring that employees doing the same work have the same terms of employment, including with respect to terms restricting the time after the employment relationship ends, or by ensuring there is a justified reason for any differences.