Have you signed a non-competition agreement with your employer, or are such agreements common in your line of work? Read below to learn when and how non-competition compensation can affect your earnings-related unemployment allowance.
What are non-competition agreements, and what does the law say about them?
Non-competition agreements restrict the employee’s freedom to join a competing company or engage in competing business activities after the employment relationship has ended. Non-competition agreements are especially common with employees who possess the kind of expertise that competitors could exploit. These include employees working in sales or product development, for example.
Non-competition agreements and the compensation payable for non-competition are governed by the Employment Contracts Act. By law, the employer is required to pay a non-competition compensation for the period when competition is restricted. The non-competition period can be up to one year from the end of the employment relationship.
Statutory non-competition compensation does not affect earnings-related unemployment allowance
Under the Employment Contracts Act, the non-competition compensation is 40% of the employee’s salary if the non-competition period is up to 6 months, and 60% of salary if the period is longer than 6 months. If, after your employment ends, you are paid a statutory non-competition compensation, this will not affect your earnings-related unemployment allowance: the compensation will not count towards your salary used to calculate the amount of allowance or adjusted by reducing your allowance. The compensation is also not periodised, meaning that the payment of unemployment allowance is not postponed due to the compensation.
Non-competition compensation in excess of what is required by the law affects your unemployment allowance
If the non-competition compensation exceeds the amount required by law, for example 70% of your salary, the excess part is considered a financial benefit linked to the end of the employment relationship. This excess part is periodised as of the end of the employment, meaning that it will postpone the start of payment of your earnings-related unemployment allowance.
Non-competition agreements of 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 clause and compensation can also be agreed with a managing director, but such agreements are between the company and the director. Because of this, in the case of managing directors, the non-competition compensation is considered a benefit arising from the end of employment and periodised in full as of the end date of the employment relationship.
Further information:
For more information on this topic, see KOKO’s website: Non-competition compensation
For questions about non-competition agreements and compensation, contact your trade union. If necessary, you can ask KOKO for more information on how a non-competition agreement affects your right to earnings-related unemployment allowance.