Finland: Changes in the Finnish legislation regarding an Agreement of non-competition
The Finnish Employment Contracts Act (55/2001) is the basic law of working life. There have been several amendments to it since it entered into force 1 June 2001. Some of the amendments were based on the national implementation of European Union’s directives and some amendments have developed, for example, provisions on working time in a way that better suits to modern working life.
Scope of Application
Employment Contracts Act is applicable in all legal relationships where the work is done by an employee, or jointly by several employees as a team, agreeing personally to perform work for an employer under the employer's direction and supervision in return for pay or some other remuneration.
One of the recent amendments, which entered into force 1 January 2022 is something that should be recognised when recruiting personnel to management positions as well as to tasks that require rare or narrow expertise and the protection of trade secrets.
Agreement of non-competition
Employment Contracts Act included already in 2001 provisions on Agreement of non-competition. The provisions are in Chapter 3 (Employees’ obligations) Section 5 (Agreement of non-competition). According to the Subsections 1 and 2 (in italic):
For a particularly weighty reason related to the operations of the employer in the employment relationship, an agreement made at the beginning of or during the employment relationship (agreement of non-competition) may limit the employee's right to conclude an employment contract on work to begin after the employment relationship has ceased with an employer which engages in operations competing with the first-mentioned employer, and also the employee's right to engage in such operations on his or her own account.
In assessing whether very serious grounds exist for instituting an agreement of non-competition, consideration shall also be given to the nature of the employer's operations and any need for protection related to keeping a trade secret or to special training given to the employee by the employer, and the employee's status and duties. As of 1 January 2022, Subsection 3 provides for the employer an obligation to pay compensation to the employee for the limitation period agreed in the non-compete agreement, the amount of compensation, the maximum length of the non-compete agreement and the time of payment. The conclusion of a non-compete agreement would directly imply an obligation under the law to compensate the employee for the limitation period.
In Finland there is only little Supreme Court case law on non-compete agreements. There is no case law of the Supreme Court on the extent of the liability for non-compete agreements for more than six months or on issues related to their implementation.
Prevalence of agreements of non-competition
The Central Chamber of Commerce and the Helsinki Region Chamber of Commerce conducted a national survey in 2017 on non-compete agreements. According to the survey they are used in every other company (52%). The non-compete agreement is used by more than half of the respondents in the industry and services sector and almost one in two companies in the trade survey.
Provisions on compensation
According to the Chapter 3 (Employees’ obligations) Section 5 (Agreement of non-competition) Subsection 3 (in italic):
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If a limitation period of up to six months has been agreed, the employer must pay the employee compensation equal to 40 per cent of the employee's salary for the limitation period. If the limitation period has been agreed to be more than six months, the employee must be paid compensation equal to 60 per cent of the employee's salary for the limitation period. The limitation period may not exceed one year from the end of the employment relationship. Compensation must be paid within the limitation period for the pay periods observed during the employment relationship, unless otherwise agreed after the termination of the employment contract. A non-compete agreement may provide for a contractual penalty in lieu of damages, up to a maximum of six months' salary prior to the employee's termination of employment.
By adjusting the two different levels of compensation, a clear division into non-compete agreements of up to six months and longer is still maintained under the current law. The limitation period may not exceed one year from the end of the employment relationship. There are, however, exceptions regarding employees whose duties and position are considered to perform the management of a company. These are provided in Subsection 5.
Provisions on termination
According to the Chapter 3 (Employees’ obligations) Section 5 (Agreement of non-competition) Subsections 4 and 5 (in italic):
The employer has the right to terminate the non-compete agreement in accordance with a notice period of at least one-third of the limitation period, but not less than two months. However, the right to terminate no longer exists after the employee has terminated the employment contract.
A non-compete agreement is not binding on an employee if the employment relationship has been terminated for a reason attributable to the employer. The provisions of subsection 3 concerning the limitation of the duration of a non-compete agreement and the maximum amount of the contractual penalty do not apply to an employee whose duties and position are considered to perform the management of an undertaking, entity or foundation or an independent part thereof.
Employer’s right to terminate the non-compete agreement is meant for situations where the circumstances and the need for a non-compete agreement change during the employment relationship. An important perspective is that a non-compete agreement is not binding on an employee if the employment relationship has been terminated for a reason attributable to the employer. The employment relationship is terminated for a reason attributable to the employer, for example, if the employee is dismissed on economic and production grounds. In that case, the non-compete agreement does not involve any obligation to pay compensation either.
A mandatory right. According to the Chapter 3 (Employees’ obligations) Section 5 (Agreement of non-competition) Subsection 6 (in italic):
A non-compete agreement is void to the extent that it has been entered into in violation of the provisions of this section. Otherwise, the validity and conciliation of such an agreement shall be governed by the provisions of the Law on Property Transactions (228/1929, Law on Legal Transactions). Provisions on liability and the amount of compensation are a mandatory right. A non-compete agreement is void insofar as it has been entered into in violation of the provisions of this Section.
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Entry into force.
A non-compete agreement entered into before 1 January 2022 is governed by the provisions in force at that time, for one year. If the compensation has been paid before 1 January 2022 the provisions in force at that time shall also apply to the agreement for one year after the entry into force of these amendments.
The employer has the right to terminate the non-compete agreement agreed before 1 January 2022 within one year without notice.
Article was written by Keijo Siiskonen
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