Government draft bill to reform rules on non-competition agreements

Posted on

17 Aug

2020

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Dittmar & Indrenius > Insight > Government draft bill to reform rules on non-competition agreements

Employers who wish to prevent their employees from engaging in competing activities after their employment has ended should keep a keen eye on a legislative proposal that the Finnish Government is preparing. According to a draft government proposal, employers would be required to pay a compensation to departing employees during the non-compete period.

The existing restrictions on non-competition agreements under the Finnish Employment Contracts Act would also remain in place, including the requirement of a ‘particularly weighty’ reason that the employer needs to satisfy in order to enforce a non-competition agreement.

Pay requirement

Current law does not provide for any compensation to be paid to the employee for a post-termination non-competition undertaking, if the length of the non-compete period is up to six months. For longer restrictions, the employer has to pay a ‘reasonable’ compensation. With its proposal, the Government seeks to curb the use of non-competition agreements by expanding the employee’s right to compensation.

The draft proposal would extend the pay requirement to all non-competition agreements regardless of the grounds for or the duration of the non-compete period. In contrast to existing law, which does not specify the amount of the ‘reasonable’ compensation, the proposal defines the amount of the compensation and timing of its payment. The compensation level would depend of the length of non-compete period. If the period does not exceed six months, the compensation would be 40% of the employee’s salary. For longer periods, the employer would be required to pay 60% of the salary (during the entire period).

The payment would take place on the same pay dates as during the employment. The employer and the employee could agree to change the statutory payment schedule only after notice of termination of employment has been given.

Termination of non-competition agreement

The employer would have the right to terminate a non-competition agreement (separately from the rest of the employment contract) by giving notice to the employee and observing a notice period corresponding to the duration of the non-compete period. This would allow the employer to unilaterally withdraw from a non-competition agreement should the restriction become unnecessary, for example, due to a change in the employee’s job duties or other circumstances. In practice, concluding a new employment contract without non-competition provision (for instance, in connection with a change of work duties) would also lead to a similar result but it of course requires the employee’s consent. No unilateral right of termination exists after the employee has given notice of termination of employment.

Transition period

According to the draft Government proposal, the changes would enter into force on 1 January 2021 and, significantly, would also apply to existing employment agreements. However, in order to give employers time to adjust to the changes, the proposal envisages a transitional period of one year concerning existing agreements. The new rules would not be applied to these agreements before the expiry of the one-year period. During that time, the employer would also have the right to terminate a non-competition agreement without notice. In addition, for those non-competition agreements that provide for payment of reasonable compensation, the proposed amendments would not become effective at all if the compensation has been paid (even in part) before the date of entry into force of the amendments.

The Government is expected to give its final proposal to the Parliament in the coming weeks.

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