Government releases bill to reform rules on non-competition agreements

Posted on

17 Aug

2020

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

The Finnish government has just released its final legislative proposal to reform non-competition agreements. The final bill follows closely the draft proposal published in April this year which we have discussed in more detail our previous D&I Alert and D&I Quarterly article on the topic.

Obligation to pay compensation for a non-competition agreement

The new proposal has not changed the key features of the reform. The employer would be required to pay the employee compensation for a post-employment non-competition undertaking. The amount of the compensation would depend on 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).

New rules proposed to take effect in 2022

The government proposes that the amendments take effect on 1 January 2022. This gives employers more time to adapt to the changes compared to the earlier proposal, which was intended to enter into force already at the beginning of 2021.

For non-competition agreements that have been concluded before the amendments enter into force, the proposal envisages a transition period of one year. The new rules would be not be applied to these agreements before the expiry of the one-year period. In addition, for 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.

Employer’s proposed new right to terminate a non-competition agreement

The proposal entitles the employer 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. According to the final government bill, the notice period would be one third of the length of the non-compete period but not less than two months. The standard length for a post-termination non-competition period is six months, which translates into a two months’ notice period. If the non-compete period is shorter than six months, the minimum length of two months will nevertheless apply. The proposal makes an exception for non-competition agreements that have been concluded before the entry into force of the law. During a one-year transition period, the employer would be able to terminate a non-competition undertaking without notice. Thus, the notice periods would not be applicable to existing agreements until the start of 2023.

Practical considerations

As post-termination non-competition undertakings are currently widely used in employment contracts from middle management up, we foresee concrete changes in the ‘standard’ terms of the employment and contract management practices. In addition, as the government bill leaves some questions unanswered, we cannot but anticipate some confusion around the employer’s payment obligation in certain circumstances, such as termination of the employment relationship for retirement.

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