Changes to employees’ non-competition restrictions from 1 January 2022

By Maisa Nikkola, Tomi Luukkainen

11-2021

Amendments to the Finnish Employment Contracts Act have been ratified. The amendment introduces an obligation to pay specific compensation and certain other terms to employees’ post-employment non-competition undertakings. The amendments will apply to currently existing non-competition undertakings following a transition period. Employers have until the end of 2022 to review previously existing non-competition undertakings and conclude necessary actions.

No more non-competition agreements without compensation

Like today, also in future employer and employee can agree on a non-competition restriction that extend to post-employment period only for a particularly weighty reason related to the operations of the employer or the employment relationship. The new amendment entering into force on the 1st of January 2022 aims to reduce the amount of non-competition agreements concluded in circumstances where appropriate reasons for non-competition restriction do not exist.

The amendment will oblige employers to pay compensation for all lengths of non-competition restrictions that extend to post-employment period, whereas currently the obligation to pay compensation has only applied to non-competition restrictions with a length of over six months. In future the minimum amount of the compensation will constitute as follows:

  • Compensation equal to 40 per cent of the employee’s regular salary, which would be paid if the employment continued, must be paid for the duration of a non-competition restriction that is max. six months long
  • For non-competition restrictions that are over six months long, employee must be paid compensation equal to 60 per cent of the employee’s regular salary, starting immediately from the first restriction month.

The compensation must be paid during the restriction period aligned with the pay periods that were followed during the employment, unless otherwise agreed after the notice of termination of the employment has been given.

As today, going forward the length of a non-competition restriction period that extends beyond the end of employment is limited to max. one (1) year, however with the same exception concerning management roles as currently.

Employers must follow a notice period when releasing employees from a non-competition restriction

In future, legislation defines a minimum notice period which employers must follow when terminating non-competition restrictions unilaterally. The length of the notice period must be at a minimum one third (1/3) of the restriction period agreed in the non-competition agreement, but in any event at least two (2) months.

Employers do not have a right to terminate non-competition restrictions after the employee has ended the employment by e.g. serving their resignation.

According to the preparatory works of the amendment, employer and employee can agree on a shorter notice period after the employee has served a notice of termination, not in advance.

Termination of existing non-competition agreements during the transition period

If the non-competition agreement has been concluded on 1 January 2022 or after, the new legislation applies immediately in full. However, if the non-competition restriction has been agreed before 2022, the current legislation will be applied for the duration of 2022. The new legislation contains a specific provision which grants employers a right to unilaterally terminate so-called old non-competition agreements to end immediately without any notice period during the transition period of one year (1.1.2022–31.12.2022). After the transition period the new obligations such as paying compensation for all lengths of non-competition restrictions in the course of the restricted period apply also to non-competition restrictions agreed prior to 2022. Therefore, employers have a one-year period to consider whether they want to leave all non-competition agreements concluded before 2022 in force.

Some examples concerning non-competition restrictions agreed prior to 2022:

  • according to the provisions concerning the transition period, during the year 2022 employers have a unilateral right to terminate non-competition restrictions without a notice period
  • if the non-competition restriction period ends during the year 2022, the amendment does not require employer to pay compensation
  • if the non-competition restriction period has started before 2023 and still continues on 1 January 2023, the new obligation to pay compensation will start on 1 January 2023 and will only apply to restriction period that extends to 2023 — however, with an exception concerning situations, in which compensation according to the current legislation has been already paid in full or in part before the amendment has entered into force (1 January 2022), in which case the new legislation does not cause any change to the payable compensation
  • if the non-competition restriction period starts on 1 January 2023 or after, the new legislation applies

What should the employers do?

Firstly, the new legislation must be considered when assessing the possibility of concluding new non-competition agreements from 1 January 2022 onwards. Does a particularly weighty reason required to conclude the agreement exist and does the employer consider the non-competition agreement necessary, considering also the obligations of the new legislation?

Secondly, employers should go through the existing non-competition agreements concluded before 1 January 2022 and assess them on a case-by-case basis: does particularly weighty reason still exist and is the non-competition agreement still necessary considering its purpose to safeguard business? After this it would be beneficial to contemplate if the new obligation to pay compensation changes the situation and should some of the old non-competition agreements be terminated within the transition period or alternatively renegotiated.

The amendment can increase e.g. the use of confidentiality, non-recruitment and non-solicitation clauses. However, employers should also be cautious when using clauses that would in practice restrict employee’s competitive activities during the post-employment period. Depending on how such clauses have been phrased, in case law concerning individual cases, certain kinds of restrictive clauses have been deemed to be comparable to a non-competition agreement i.e. subject to the rules set out in the Employment Contracts Act concerning non-competition restrictions.

Our team of employment lawyers at Bird & Bird has extensive experience in consulting employers in questions relating to the protection of business by means of restrictive covenants. We are happy to help employers to navigate through the changes of the new legislation. The new legislation also offers a suitable opportunity for employers to conduct a more comprehensive overview of the company strategy regarding business protection against competitive activities of employees.

We’d love to hear from you and exchange thoughts!