Non-Compete Agreements

Changes in regulation concerning post-employment non-competition agreements 

Summary

• The Finnish Government recently introduced a proposal (HE 222/2020) to amend the Finnish Employment Contracts Act. The amendments are proposed to come into force on 1 January 2022.  

• If the proposal comes into force as suggested, it is no longer possible to have non-competition agreements restricting post-employment competition without paying compensation to the employee. Instead, employers would be required to compensate the departing employees during the non-competition period as follows:  

• If the non-competition period does not exceed six (6) months, the compensation for the non-competition period would be 40% of the salary of the employee.  

• For longer non-competition periods, the compensation for the non-compete period would be 60% of the salary of the employee.

• The proposal also stipulates on a) the timing for the payment of the compensation, as well as on b) employers right to terminate non-competition undertakings.   

• Employers should review their existing non-competition obligations before the amendments come into force and consider whether any action needs to be taken prior to the amendments coming into force.

Changes in regulation concerning post-employment non-competition agreements

The Finnish Government on 12 November 2020 introduced its proposal (HE 222/2020) (the Proposal) to amend the Finnish Employment Contracts Act (the Act). The amendment could decrease of the use of the non-competition agreements between employees and employers. According to the Proposal, employers would be required to compensate departing employees during non-compete periods. 

The proposed amendment applies retroactively to all existing non-competition agreements. The proposed amendments would come into force on 1 January 2022 with a one (1) year transition period. Employers therefore have a decent amount of time to react to the proposed changes. 

Compensation and payment 

Pursuant to the Act, an employer and employee may agree on a post-employment non-competition obligation if an extremely weighty reason for the obligation exists. Pursuant to the current Act, if the duration of the agreed non-compete period is not more than six (6) months, there is no need for the employer to pay any compensation to the employee for a post-termination non-competition agreement.  

According to the Proposal, the compensation requirement would be extended to cover all non-competition agreements regardless of the duration of the non-compete period. The proposal also defines the amount of the compensation to be paid, as well as the timing for the payment.  

According to the Proposal, the compensation level would depend on the length of the agreed non-competition period as follows:  

• If the non-competition period does not exceed six (6) months, the compensation would be 40% of the salary of the employee.  

• For longer periods, the compensation would be 60% of the salary of the employee.  

• According to the proposal, the aforesaid compensation should be paid during the non-competition period. The date for the payment should be the same date as the employee has received her/his salary during her/his employment. 

Termination 

During the one (1) year transition period, the employer would have a specific right to terminate a non-competition agreement without notice. 

In addition, the Proposal would also grant the employer a right to terminate the non-competition agreement (separately from the rest of the employment contract). This allows the employer to unilaterally withdraw from a non-competition agreement. However, the unilateral right of termination would not apply if the employee has given a notice of termination of employment. 

Guidelines for employers 

As an employer, you should consider certain actions due the proposed changes already before the transition period kicks in.  

After you have a grasp on how many employees the amendment concerns, please consider whether it would be sensible to prepare an action plan consisting of the following:  

• Possible termination of  non-compete agreements within the transition period;  

• Review of any employment contract templates to ensure that roles for a post-termination non-competition obligation are up to date taking note of the possible compensation in the future; and 

• Possible revision of the non-disclosure agreements to mitigate the impact of the amendments to the non-competition obligations (as the role of e.g., confidentiality, disclosure, and trade secret related provisions are expected to increase with respect to the protection of the employer). 

If you want to discuss the topic in depth or would need help in preparing an action plan, we are happy to hop on a call to determine your needs due the Proposal. Just give us a call or drop us an email at julius.matilainen@byro.legal.