Compliance with the Non-Compete Clause
We are often asked which steps you need to take with the state administration bodies for your records.
Negotiating a non-compete clause in an agreement is becoming a common practice, especially for managers or members of governing bodies. However, its implementation often encounters certain pitfalls.
Pursuant to Section 310 of the Labour Code, a non-compete clause is an agreement between an employee and his or her employer under which the employee undertakes to refrain from performance of any gainful activity identical to the employer’s business activity or that would be of a competitive nature to the employer’s business activity for a period of not more than one year after termination of employment. In contrast, the employer agrees to provide the employee with reasonable financial compensation for each month of compliance with this commitment. The compensation must be at least one half of the average monthly earnings for each month of fulfilment of the commitment.
A written agreement of the non-compete clause is an essential part of its validity. (It can be part of the employment contract.) However, the agreement is only entered into with a delineated range of employees. These are employees who obtain information, knowledge of working and technological procedures from the employer, the use of which could make the employer’s activities seriously more difficult. However, it does not have to be only employees in managerial or other key positions. The non-compete arrangements are also often part of management contracts with members of governing bodies of corporations.
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If the agreement is valid, payment is made under it. The company pays income to someone who is no longer its employee. From the point of view of the Income Tax Act, this is income that arises in connection with the former performance of the activity, i.e.?taxable income.
Pursuant to Section 3(3) of the?Act on Social Security Contributions and Contributions to State Employment Policy, a natural person who, after termination of employment giving rise to participation in sickness insurance (termination of employment), is credited with income that is includable in the assessment base is also considered an employee for the purposes of this Act. Such income includes the fulfilment of the non-compete clause. As this is recognised taxable income that is not listed in the exemptions (Section 5(2) of the Social Security Contributions Act), it is subject to social security contributions. However, bear in mind that participation in sickness insurance is bound to the term of a relevant legal relationship referred to in Section 5(a) of the Sickness Insurance Act, as amended, which always ceases upon the termination of such a relationship, even if the income on which the social security contributions were paid is subsequently accounted for after its termination!
There is a legislative anomaly with respect to the payment of?health insurance?premiums on the basis of a non-compete clause. Please note, in accordance with the law, health insurance premiums are paid on the basis of the remuneration paid after the termination of the employment. This is usually for one year after the termination of the employment. During that period, the former employee?is no longer?considered (for the purposes of the records) to be an employee. However, a former employee who receives consideration arising from the non-compete clause cannot register with the labour office as a jobseeker either! At the same time, however, for the purposes of payment of health insurance premiums, such a person is recorded as having no taxable income for the term of the performance of the non-compete clause and is thus obliged to pay the health insurance twice!