Transition period of non-competition agreements is ending – what can be done?
AURORALAW Attorneys
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The statutory transition period in the amendments made to the Finnish Employment Contract Act considering the post-employment non-competition agreements is coming to an end on 31.12.2022. After this deadline also employment agreements made before 1.1.2022 with post-employment non-competition obligations will lead to either 40 % or 60 % compensation payable to the employee depending on the duration of the agreed non-competition obligation.
The company CEO is not considered as an employee but a company organ in Finland and stands outside the scope of Finnish Employment Contracts Act. The new rules however may apply to all other employees, managers and directors working in Finland.
The Employment Contracts Act permits the use of post-employment non-compete clause for weighty reasons related to the operations of the employer. Due to the amendments made to the Finnish Employment Contract Act all non-compete agreements and non-compete clauses of employment contracts are subject to compensation from 1.1.2022 onwards.
The amount of payable compensation is tied to the duration of the non-competition period. If the duration of the non-competition period is max. six months, the amount of the compensation is 40 per cent of the director’s normal salary. If the duration of the non-competition period is more than six months, the compensation is 60 per cent of the director’s normal salary. Compensation must be paid at usual salary periods unless otherwise agreed after the termination of the director’s agreement.
What is transition period?
Transition period from 1 January 2022 until 31st?December 2022 applies to non-compete agreements signed before 1 January 2022. The purpose of the transition period is to give companies possibility to terminate unnecessary non-compete agreements and clauses. During the transition period company can terminate director’s non-compete agreement without any notice period. The termination must be executed before year 2023.
After the transition period, i.e. 1 January 2023 onwards, the amendments of the Employment Contracts Act apply also to non-compete agreements signed before 1 January 2022. However, one exception exists regarding a situation where the duration of the non-compete agreement has been agreed to be more than six months, the director’s employment relationship has ended before 2023 and the company has started to pay to the director reasonable compensation for the period of non-competition under the previous legislation. According to the previous legislation an employer was obligated to pay to the employee reasonable compensation if the duration of the non-competition clause exceeded six months.
For example, a director’s agreement including a 12-month non-competition clause has been signed in 2019. The director has resigned, and the notice period has ended 30 September 2022. The non-competition period has started 1 October 2022 and lasts until 1 October 2023. The company has paid to the director reasonable compensation since the beginning of the non-competition period. The company continues to pay the same reasonable compensation also during 2023. The amount of the compensation is not adjusted to 60 per cent of the director’s normal salary even though the transitional period ends on 31 December 2022. The director receives the same reasonable compensation from the company until 1 October 2023.
Can non-compete agreements be terminated after 2022?
After 2022 non-compete agreements can be terminated following a notice period which must be at least one-third of the non-competition period or minimum of two months in any case. For example, if the duration of the non-compete period is twelve months, the company must follow a notice period of at least four months.
The right to terminate the non-compete agreement no longer exists after the director has terminated the director’s agreement. In this case, at the end of the director’s agreement, the company is obligated to pay to the director compensation for the period of non-competition.
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What remains unchanged?
As before, concluding a non-compete agreement requires weighty reason related to the employer’s operations or the employment relationship. A non-compete agreement is not binding if the employment relationship is ended based on reasons attributable to the employer, such as economic or production-related situations.
Company and the director may still agree a contractual penalty or other contingency as a sanction for breaching a non-compete agreement. The amount of contractual penalty or the duration of the non-compete agreement is not limited when the contract is made with an employee which, in view of their duties and status is deemed to be engaged in the direction of the enterprise, corporate body of foundation or an independent part thereof or to have an independent status immediately comparable to such managerial duties.
What future holds?
Obligation to pay compensation may limit the use of non-compete clauses but at the same time may transfer company’s focus to non-disclosure and non-solicitation clauses with significant contractual penalties. For directors companies may also offer partnership or stake in the company, which may allow non-compete clauses to be transferred to a much stricter shareholder’s agreement.