A non-compete agreement is an agreement between an employer and an employee that restricts the employee from engaging in competitive activities against the employer, both during and after the employment relationship has ended. Employers sometimes decide to establish a non-compete also for a certain period of time after the termination of employment (usually from a few months to two years). How is the earning issue on the employee’s side shaped in such a case? We invite you to read the article.
Non-competition agreement
A non-competition agreement is an agreement, often included in the wording of the employment contract, but a non-competition agreement can also be signed as a separate contract already during the employment relationship. The non-competition agreement contains provisions limiting the employee’s competitive activity towards the employer, as well as the provision of work within the employment relationship or on any other basis to an entity carrying out such activity. The conclusion of a non-compete agreement mandatorily requires that the agreement be in writing, otherwise it is null and void.
Such agreements are usually used when the employee has access to particularly important information, the disclosure of which could expose the employer to harm. Such a prohibition often limits the employee’s ability to find another job or to take up other forms of earning. Accordingly, the Labour Code provides for a minimum amount of compensation to the employee for refraining from competitive activities.
Compensation for non-competition
The Labour Code stipulates that the compensation may not be less than 25% of the remuneration received by the employee prior to the termination of the employment relationship for the period corresponding to the duration of the non-competition. At the same time, the compensation may be paid in monthly instalments. The parties may therefore determine the remuneration at a higher level than the indicated 25%.
It is worth remembering that the provision refers to the remuneration received by the employee, thus it should be assumed that the amount constituting the basis for determining the amount of compensation includes in total all remuneration components actually paid to the employee in a given period, i.e. basic remuneration, bonuses, awards, allowances, remuneration for overtime, etc. What is worth remembering, the regulations provide that the non-competition will cease to apply before the expiry of the term for which the non-competition agreement was concluded if:
- the reasons justifying the non-compete after the termination of the employment relationship cease to exist, or
- the employer defaults on its obligation to pay compensation for the non-compete.
In the event of a dispute, the compensation is decided by the labour court.
As is clear from the case law of the civil courts, non-compete remuneration contained in a civil contract (whether B2B or otherwise) cannot be implied, nor can the above provisions be applied to them by analogy.
Compensation for non-competition in adjudication
- In the judgment of the Court of Appeal in Gdańsk of 22 November 2018 (ref. III Apa 20/18), the court took the view that Article 1012 § 3 sentence 1 of the Labour Code, which makes the amount of compensation dependent on the employee’s actual remuneration, contains a mechanism that increases the protection of the employee in a manner proportionate to the involvement of that employee in the performance of his or her duties, which is thus correlated with the employer’s interest. The court clarifies that the basis for determining (non-compete remuneration) is the remuneration received by the employee prior to the termination of the employment relationship for a period of not less than the duration of the non-compete, even if the employee’s actual employment with the employer lasted for a shorter period. In addition, the minimum compensation referred to in Article 1012 § 3 of the Labour Code means the sum of the received (and not averaged) components of the remuneration for work during the period equal to the duration of the non-compete.
- In the judgment of the Court of Appeal in Katowice of 27 March 2015 (ref. III APa 52/14), the court held that the obligation imposed on the employer to pay compensation should be interpreted in such a way that if the employer’s obligation consists of obligations to pay individual agreed instalments on specific dates, the failure to comply with even one of them is a cause for the termination of the non-compete.
- In addition, the Supreme Court, in its judgment of 16 July 2014 (ref. II PK 266/13), expressed the view that the scope of the non-compete imposed on an employee should be defined concretely and as precisely as possible, by referring it to a specific set of products or services and not to any analogous activity.
Summary
Given the above, the labour law introduces protection for the employee while allowing for negotiation of the terms of the non-compete agreement and the amount of compensation for the non-compete after the period of employment. The employee and the employer can negotiate the scope and duration of the agreement and set the compensation at a higher level than the code. It is important to note that when implementing a post-employment non-compete, the terms of the non-compete should be clear and fair to the employee. These provisions cannot be applied to persons employed under civil law contracts.
