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Non-compete obligation after employment termination

1 September 2011 was the date on which a new amendment to Act 311/2001 Coll. Labour Code, as amended, came into effect, introducing several significant changes. One of the changes establishes a new institute known as a “non-compete obligation”. Before the amendment came into force it was possible to limit the exercise of any competitive activity by employees only during their employment. Under the Labour Code, it was not possible to conclude other agreements restricting employees’ competitive activities after their employment had ended; therefore, agreements or contracts intended to have similar effects were often concluded under other regulations, triggering discussions regarding the validity and enforcement of such agreements.

(Source: Courtesy of Ruzicka Csekes s.r.o.)

1 September 2011 was the date on which a new amendment to Act 311/2001 Coll. Labour Code, as amended, came into effect, introducing several significant changes. One of the changes establishes a new institute known as a “non-compete obligation”. Before the amendment came into force it was possible to limit the exercise of any competitive activity by employees only during their employment. Under the Labour Code, it was not possible to conclude other agreements restricting employees’ competitive activities after their employment had ended; therefore, agreements or contracts intended to have similar effects were often concluded under other regulations, triggering discussions regarding the validity and enforcement of such agreements.

The Labour Code enables an employer and employee to agree within an employment contract that the employee will be obliged to abstain from performing any gainful activities deemed competitive with respect to the subject of the employer’s activity for a certain period of time after their employment ends. The prerequisite for such an agreement being executed is the fact that during their employment, the employee has been given an opportunity to obtain knowledge or information which would not otherwise be freely available; and if access to and use of such information by the general public could cause damage to the employer. The agreement must be included in the respective employment contract, otherwise it is invalid. Its duration must not be longer than one year following termination of employment with the employer.

The employee’s limitation must be compensated in the form of a financial payment provided by the employer for every month during which the employee fulfils his obligation. The compensation must be at least 50% of the employee’s average pay and is payable monthly in arrears on the day which is determined by the employer as the regular payment date, unless the employee and the employer agree otherwise.

To protect the employer against an employee’s breach of their obligation in regard to limitation of the exercise of gainful activities after their employment ends the employment contract may contain an agreement that the employee shall provide adequate financial compensation to the employer in the event of breach. Extracting such compensation may be complicated and unless paid voluntarily, it could require court enforcement which may be rather lengthy. The Labour Code limits the amount of financial compensation payable by an employee so that it does not exceed the total amount of the financial compensation paid by the employer to the employee. By paying financial compensation to the employer, the employee is released from the obligation. Thus, there is a risk that some companies will be willing to pay the compensation determined in the event of a breach by a former employee in exchange for access to competitive information.

The employer can withdraw from the agreement limiting an employee’s exercise of gainful activities only during the employment relationship with the employee in question. The withdrawal must be in writing, otherwise it is invalid. The agreement lapses as of the first day of the month following the month when the withdrawal notice is delivered to the employee, at the latest on the last day of the employment.

An employee may terminate the agreement limiting the exercise of gainful activities after employment termination unless their employer pays the respective financial compensation within fifteen days following the due date. The termination notice must be in writing, otherwise it is invalid. If a termination notice is served, the agreement lapses as of the day of delivery of the termination notice to the employer.

Also, the scope of employees with whom limitation of exercise of gainful activities may be agreed, the duration of the limitation period, the minimum amount of financial compensation payable to employees and the maximum amount of financial compensation payable to employers may also be provided for in respective collective agreement.

The importance and benefits of this institute will be determined in the future.

Author:
Mgr.Martin Krendl, Junior Partner, Ružička Csekes s.r.o.

This article is of an informative nature only. For more information please contact our Law Office:
Ružička Csekes s.r.o.
Tel: +421 (0)2 3233-3434
martin.krendl@rc-cms.sk
www.rc-cms.sk

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