Government proposal: Employers obligated to pay compensation to employees for all non-competition agreements

In the future, an employer would be obligated to pay compensation to an employee for all non-competition agreements. At present, the obligation to pay compensation only applies to agreements longer than six months. The proposal aims to reduce the number of groundless non-competition agreements that cause inflexibility in the labour market.

“Currently, non-competition agreements are widely used in Finland. Contrary to the provisions of the Employment Contracts Act, such agreements are routinely used for almost all groups of employees, regardless of whether they are key employees of the company or not,” Minister of Employment Tuula Haatainen says.

“I am pleased that this solution will help target the non-competition agreements properly. The compensation model ensures that non-competition clauses are only imposed on people whose work genuinely requires such,” Haatainen adds.

A non-competition agreement restricts the employee’s right to enter into employment with an employer engaged in competing activities and the right to engage in competing activities on his or her own account after the termination of the employment relationship. The Government proposes that the Act lay down the broader compensation obligation, the date of payment of the compensation and the employer’s right to terminate the non-competition agreement.

The amendments would be made to the Employment Contracts Act and the Seafarers’ Employment Contracts Act effective as of 1 January 2022. The new regulation would also apply to non-competition agreements concluded before the entry into force of the Act after a transitional period of one year, with certain exceptions. The Government submitted the proposal to Parliament on 12 November 2020.

Length of non-competition agreement to affect compensation amount

The amount of compensation paid for the non-competition agreement would be tied to the employee’s salary and the agreed duration of the non-competition period. For a non-competition period of up to six months, compensation would be equal to 40% of the salary during that period. For a non-competition period longer than six months, compensation would be equal to 60% of the salary for the entire non-competition period. A non-competition agreement could be concluded for a maximum of one year, as is the case currently too.

The Act does not currently provide for the date of payment of the compensation. According to the proposal, the compensation should, as a rule, be paid during the non-competition period. The payment date would be the same as the employee’s pay day during their employment relationship.

A new provision would allow the employer to terminate the non-competition agreement during the employment relationship if circumstances change. In such cases, a notice period of one third of the non-competition period agreed in the non-competition agreement, or a minimum of two months, should be observed. However, the employer could not terminate the non-competition agreement after the employee has resigned from employment.

Non-competition agreements more common today

Concluding a non-competition agreement requires a particularly important reason related to the employer’s activities or employment relationship. Non-competition agreements are commonly used. The Government aims to reduce non-competition agreements that violate the conditions laid down in the Act. Legislative amendments are estimated to prevent groundless agreements.

A tripartite working group prepared the legislative amendments. The Ministry of Economic Affairs and Employment organised a consultation round on the amendments in April-May 2020.

Inquiries:

Seija Jalkanen, Chief Specialist, Ministry of Economic Affairs and Employment, tel. +358 29 504 8952
Johanna Ylitepsa, Senior Specialist, Ministry of Economic Affairs and Employment, tel. +358 29 506 4207