The rules for non-competition agreements and the compensation payable for such agreements are given in the Employment Contracts Act.
Non-competition agreements restrict an employee right to:
- enter into an employment contract with a new employer immediately after the end of the employment relationship if the new employer is engaged in a competing activity, or
- engage in activities that compete with the former employer for the employee’s own account.
The employer must pay the employee compensation for the period of the non-competition agreement. A non-competition clause can be agreed in the employment contract or with a separate agreement during the employment relationship. The non-competition period can be up to one year from the end of the employment relationship.
Amount of non-competition compensation under the Employment Contracts Act
- Non-competition clause of up to 6 months: the amount of compensation is 40% of the employee’s salary.
- Non-competition clause of more than 6 months: the amount of compensation is 60% of the employee’s salary.
Effect on daily unemployment allowance
Non-competition compensation paid to you after your employment relationship ends on the basis of the Employment Contracts Act will not affect your daily allowance. The compensation is not included in your salary used as the basis for the daily allowance or as part of adjustment, meaning that it will not decrease the amount of daily allowance you are paid. The compensation is also not periodised, meaning that the payment of the daily allowance is not postponed due to the compensation.
Non-compete compensation that exceeds the amount required by law
Sometimes, the employer and the employee may agree on a larger non-competition compensation than the law requires, such as 70% or 100% of the employee’s monthly salary. The part exceeding the legally required amount is considered a financial benefit arising from the termination of employment. This excess amount is periodised as of the end of the employment relationships. Periodisation means the time during which no daily allowance can be paid.
Example
Exception for managing directors
The Employment Contracts Act and its provisions on non-competition clauses and compensation do not apply to managing directors’ employment contracts.
A non-competition agreement and compensation can also be made with a managing director, but such agreements are between the company and the managing director. Because of this, in the case of managing directors, the non-competition compensation is considered a financial benefit arising from the termination of employment and periodised in full as of the end date of the managing director’s employment.