A committee established by the Finnish Ministry of Economic Affairs and Employment has proposed that the legislation relating to non-compete agreements be amended so that in the future employers would have to pay employees a percentage-based compensation for all non-compete agreements within the restriction period, corresponding to the pay periods in effect during employment. The proposal also includes amending the legislation so that employers could unilaterally terminate non-compete agreements during employment. Importantly, the amendments also apply to certain non-compete agreements executed before the new legislation enters into force.
According to the current Employment Contracts Act and the Seafarers’ Employment Contracts Act, a non-compete clause may, for a particularly important reason, after termination of employment, restrict an employee's right to enter into an employment contract with an employer engaged in competing activities, thereby restricting the employee's right to engage in competing activities for a specified period of time. At present, the restriction period can be up to six months or, if the employee is paid reasonable compensation, up to one year.
In November 2019, the Ministry of Economic Affairs and Employment set up a tripartite committee to consider and recommend changes to the current law governing non-compete agreements. According to the report issued by the committee, the use of non-compete agreements has increased and become more widespread. In addition, such agreements are commonly used in situations where there does not appear to be a particularly important reason justifying a non-compete agreement, which is required by law. The purpose of the proposed amendments to the law is thus (1) to prevent more effectively the use of unlawful non-compete obligations and (2) to promote dynamism in the labour market. The committee’s draft amendments were submitted for consultation in April 2020 and they are scheduled to be presented to the Government before the end of August 2020.
1. Extension of liability for compensation applies to all non-compete agreements, regardless of the duration of the obligation
Under the current legislation, the obligation to pay compensation to employees for non-compete agreements only applies if the restriction period is over six months. The proposed amendment would extend the compensation obligation to all non-compete agreements, regardless of the duration of the non-compete obligation.
2. Statutory minimum compensation amounts
The bill introduces an obligation to pay employees a certain statutory minimum percentage-based compensation for the restriction period.
According to the proposal, for a restriction period of up to six months, employers should pay at least 40% of the employee's salary where such compensation is based on the length of the restriction period. For a restriction period of more than six months, the compensation should be at least 60% of the salary.
The purpose of this amendment is to encourage employers to use shorter non-compete agreements. In addition, the actual effect of non-compete obligations on employees varies from case to case, so determining a common level of compensation would eliminate the need to determine the actual damages in each individual case.
3. Timing of payment
According to the committee report, the timing of the payment of compensation should be set in order to avoid unclear and contentious situations related to such payment. According to the proposal, compensation should be paid within the restriction period in accordance with the pay periods applied during employment. The timing of payment could be agreed upon otherwise only after the employee resigns.
4. Employer's unilateral right to terminate non-compete agreements
A non-compete agreement is only appropriate if the employer has a particularly important reason, which must be in effect when the agreement is executed, must continue throughout the term of employment and apply until the employment ends. However, circumstances may change during the employment so that the particularly important reason no longer exists. Under such circumstances parties under the current law may agree to terminate the non-compete agreement during the employment. In addition to this, the committee also proposes that employers would have a unilateral right to terminate non-compete agreements. According to the report, such a right to termination could help reduce the presence of unjustified non-compete agreements and the harm they cause.
5. The changes would also apply retroactively to non-compete agreements concluded before the Act comes into force
The amendments to the Employment Contracts Act and the Seafarers’ Employment Contracts Act are expected to come into force on 1 January 2021. A significant feature of the new regulation is that it also would apply to non-compete agreements concluded before the Act comes into force, after a transitional period of one year, with certain exceptions.
The new regulation is not intended to apply to non-compete agreements of more than six months, in which the agreed reasonable compensation has been paid or the payment has begun before the Act enters into force. According to the proposed commencement provisions, employers will have the right to terminate non-compete agreements concluded before the Act comes into force, by the end of the transitional period, without notice. The obligation to pay compensation would therefore apply to non-compete agreements concluded before the Act comes into force unless employers terminate the agreement before the end of the transitional period.
The most significant proposal is the obligation to pay at least a certain percentage-based compensation to employees for all non-compete agreements. In addition is important to understand that this obligation also applies to non-compete agreements concluded before the Act enters into force, if employers do not terminate the non-compete agreement before the end of the one-year transitional period. It is therefore important for employers to review all non-compete agreements already concluded before the Act enters into force and, if necessary, renegotiate the length of non-compete agreements and terminate unnecessary agreements. Employers also should note that the timing of compensation payments and employers’ right to terminate non-compete agreements would be governed by the new regulation.
Finally, employers should consider the strategic use of non-disclosure agreements with employees given the weaker position of employers under the new proposals for non-compete agreements.