The legislation regarding non-competition clauses in Finland is facing significant changes, with proposed amendments aiming to restrict the use of non-competition agreements. A Government proposal suggests amending the Employment Contracts Act by introducing a mandatory compensation for all non-competition agreements in Finland. The new legislation is expected to come into force on 1 January 2022.
At the moment, it is possible to agree on post-employment non-competition restrictions in case particularly weighty reasons exist. The first six months of the non-competition period do not need to be compensated to the employee in any way.
If the employee receives a reasonable compensation, the restrictive period may be longer than six months, the maximum being a period of one year.
What is the proposed change?
A Government bill has been presented to Parliament in November 2020. It suggests the introduction of new compensation elements as follows:
- The employer’s obligation to pay compensation to an employee for a non-competition restriction is supposed to cover all non-competition agreements regardless of their length.
- Compensation is proposed to be paid on a percentage basis tied to the employee's salary and the duration of the non-competition period. For a period of up to six months, the compensation would be 40% of the normal salary, and for a period of more than six months, 60%.
- The compensation would have to be paid on the same paydays as during employment, i.e. usually in monthly instalments, if not agreed otherwise with the employee upon termination.
- Non-competition agreements could be terminated by the employer following a notice period of at least two months or one third of the restricted period, whichever is longer. However, a termination would not be possible anymore once the employee has handed in his/her notice.
If the proposed changes come into force as suggested, it is no longer possible to agree on non-competition covenants without compensation. This is a significant change in Finnish employment legislation.
After a one-year transition period, the changes would also apply to employment contracts made before 2022.
To avoid compensation falling due for 'old' non-competition undertakings, employers would be entitled to terminate them without notice during the transition period (i.e. during the year 2022).
'Old' non-competition agreements signed before 31 December 2021 could be enforced according to the current rules within the transition period.
How should employers prepare for the proposed change?
Companies employing staff in Finland should consider revising their existing employment contracts as well as their contract templates as soon as possible. Employers will need to take decisions whether they wish to pay compensation for non-competition agreements now, in order to avoid costly and unpleasant surprises in the future.
Depending on the practices, policies and templates of each employer, non-competition clauses must be reassessed and changed to respond to the limits of the new legislation, but also to correspond to the employer's needs. It is also highly recommended to assess existing non-disclosure agreements in order to align them with non-compete covenants. In light of the fact that the use of non-competition agreements will be expensive in future, the role of confidentiality provisions aiming to protect companies' trade secrets will be increasingly important in future.
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