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 draft bill suggests amending the Employment Contracts Act by introducing a mandatory compensation for all non-competition agreements in Finland. The new legislation is suggested to come into force on 1 January 2021.
At the moment, it is possible to agree on post-employment non-competition restrictions in case particularly weighty reasons are at hand. The first six months of the non-competition period can be without any legal mandatory compensation. The law states that weighty reasons are required for the usage of such post-contractual obligations, and many employers have carefully considered this whilst using such restrictions.
According to current legislation, the restrictive period may be longer than the above-mentioned six months if the employee receives a reasonable compensation, the maximum being a restriction period of one year.
What is the proposed change?
A Government draft bill was published in April 2020 and currently awaits presentation to the Parliament. The draft bill 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 suggested 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 non-competition period of up to six months, the compensation would be equal to 40% of the normal salary, and for a non-competition period of over six months to 60% of the normal salary.
- The compensation would have to be paid during the non-competition period, and the date of payment would be the same as the employee’s regular salary payment day during the employment.
- Other payment arrangements could be agreed upon, but only after the employee’s resignation. This right would only apply to the timing of the payments, not the amount.
- The suggested amendments also introduce a new regulation concerning the employer’s right to terminate non-competition agreements by following a notice at least as long as the non-competition period in order to respond to the possibly changing circumstances of each employment. This one-sided termination right could be used until the employee has terminated the employment, but not afterwards.
- The employer would also be entitled to terminate the non-competition agreements agreed before the entry into force of the amended act without notice within one year from the effective date.
This means that if the proposed changes come into force as suggested, it is no longer possible to have non-competition agreements in place without any compensation being paid. This is a significant change from the current situation.
The changes are suggested to cover all non-competition agreements, including - after a transitional period of one year - those concluded before the entry into force of the amended act.
During the one-year transition period, non-competition agreements signed before 31 December 2020 could be enforced without any compensation falling due for the first six months. In addition, the employer would have the right to terminate existing non-competition agreements without any notice period until 31 December 2021.
How should employers prepare for the proposed change?
The transition period is short, and most employers should consider revising their existing employment contracts as well as their contract templates in the near future. Companies need to decide whether they wish to pay compensation for the non-competition agreements they sign today, since most of these non-competition agreements will be enforced much later, after employment has ended.
Depending on the practices, policies and templates of each employer, non-competition clauses must be revised, reassessed and changed to respond to the limits set by the proposed legislation, but also to correspond to the employer's needs. Also, it is 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 more costly in future, the role of confidentiality provisions aiming to protect companies' trade secrets will be increasingly important.
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