The Finnish Government proposed establishing a mandatory employer’s compensation liability for all post-employment non-competition restrictions on 12 November 2020. A post-employment non-competition obligation will still be allowed if there is an extremely weighty reason justifying the existence of the obligation. The aim of the proposed amendments is to prevent the excessive use of post-employment non-competition obligations and to make the labour market more dynamic.
We outline the proposed changes in more detail below. Please note that the Finnish Parliament has not accepted this proposal yet and thus, there may be certain changes to the final legislation, even though this is unlikely.
What will change?
The proposed amendments would require employers to pay their employees compensation for the duration any post-employment non-competition restrictions imposed on the employees. The compensation level would amount to 40% of the employee’s normal salary if the duration of the obligation is at most six months. If the restriction exceeds six months, the compensation level rises to 60% of the employee’s salary from the start.
Currently, employers are only obliged to pay reasonable compensation to the employee if the duration of the post-employment obligation exceeds six months. The compensation liability would thus extend to cover shorter non-competition restrictions. The minimum compensation levels would also bind the employers.
The maximum duration of the non-competition obligation would still be one year. As before, members of management or employees in similar independent positions would be excluded from the restriction concerning the maximum duration. The compensation liability would nevertheless also extend to cover these employees as well, which is a dramatic change.
It is good to note that, pursuant to the proposal, employers would be entitled to terminate existing non-competition obligations by observing a notice period corresponding to one third of the agreed restriction period (with the minimum notice period being two months). It is also prudent to note that the employer is not allowed to terminate the restriction after an employee has resigned.
When would the proposed changes take effect?
Pursuant to the proposal, the legislative amendments would take effect on 1 January 2022. The changes would be retrospective, but there is a transition period of one year for existing non-competition obligations. Employers are not required to pay the compensation if the employee’s non-competition obligation ends before 1 January 2023. On the other hand, non-competition obligations that are put in place after 1 January 2022 will be subject to the compensation liability. This is, of course, provided that the law enters into force on 1 January 2022 as proposed.
During the transition period, employers would also be entitled to terminate existing but unnecessary non-competition restrictions without any notice period or specific grounds. In addition, employers would be able to renegotiate existing non-competition restrictions by e.g. shortening the restriction period.
What should you do?
We advise all employers who have concluded post-employment non-competition restrictions in their employment contracts, shareholder agreements or purchase agreements to review all existing restrictions and to terminate or renegotiate all unnecessary or excessive restrictions in order to avoid the new mandatory payment obligation. In addition, we recommend that employers update their existing model templates and assess whether they should agree on new non-competition restrictions.
Our experts are available to assist in addressing any questions you may have relating to the topic. Please feel free to contact any of the Borenius attorneys listed in this alert or those with whom you usually work.