Employees with agreements of non-competition to receive compensation

The Government made a proposal to the Parliament to amend the Employment Contracts Act in a way that the employees with agreements of non-competition will be entitled to receive compensation. The amended law will come into force at the beginning of 2022.

The proposal aims to prevent unnecessary agreements of non-competition, which should contribute to a more dynamic labour market and positive developments in employment levels.

The most significant changes concern the maximum duration of the agreements of non-competition and the amount of the compensation. According to the Government’s proposal, an agreement of non-competition can have a maximum duration of one year after the end of the employee’s employment relationship. According to the current law, an agreement of non-competition without compensation can be valid for a maximum of six months.

The amount of the compensation is determined by the duration of the agreement of non-competition. If the parties agree on a restriction period of a maximum of six months, the employee should receive compensation equivalent to 40% of their salary. If the duration of the agreement of non-competition exceeds six months, the employee will receive compensation equivalent to 60% of their monthly salary. During the duration of the agreement, the employee will receive their compensation on the regular paydays of the employer, unless the parties have agreed otherwise after the termination of the employment contract.

The employer has the right to discontinue the agreement of non-competition with a minimum notice period that corresponds to the duration of the restriction period. This right ceases, however, after the employee has terminated their employment contract. The right to discontinue the agreement of non-competition provides the opportunity to re-evaluate the grounds of the agreement during the employment relationship and to react to changes in the duties of the employee, for example.

Even after the amendment, a particularly weighty reason is needed to institute an agreement of non-competition. The purpose of the amendment is not to expand the field of application of the agreements of non-competition. Like at present, the validity of the agreement of non-competition will cease if the employment relationship is terminated for a reason deriving from the employer, for example if the employee’s employment contract is terminated due to financial or production-related reasons.

The amended law will conserve the possibility to agree on a contractual penalty instead of compensation for loss. This penalty shall not exceed the amount of pay received by the employee for the six months preceding the end of the employee's employment relationship.
By the look of things, the amended law will come into force at the beginning of 2022, and its provisions will be applied to all current agreements of non-competition with a transition period of one year.

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