Non-compete clause in an employment relationship

In the opinion of experts the provisions of the Labour Code on a non-compete clause needs to be refreshed, as there are many ambiguous issues which are also not fully regulated by the jurisprudence. There are many disputable and debatable issues which are often interpreted differently by an employer and by the courts.

A non-compete clause during the employment relationship

A competitive activity towards an employer are activities of a self-employed person (as an entrepreneur) or for the benefit of a third party (as an employee or a contractor etc.) if these activities coincide, at least in part, with the employer’s scope of activity. This applies both to the production of goods or services of the same type and to goods and services related to that of the employer which can replace them (substitute goods or services). The non-compete agreement should clearly specify the types of prohibited activities for the employee and the geographical territory on which this prohibition is covered.

This means that an employee cannot pursue a competitive activity for a specified period of time. The prohibition to conduct a competitive activity should refer to the core business activity of the employer, as defined by the law or provisions of the articles of association, the statutes or agreements which define the entity therefore a non-compete clause cannot include provisions which would oblige an employee not to take up activities which do not interfere with the employer’s business. The experts recommend including the relevant PKD codes (Polish Statistical Classification of Economic Activities) in the contract with the employee to avoid future ambiguities. If the activity is expanded, it is recommended to annex the contracts.

The non-compete, clause during the employment relationship, is closely linked to the employment contract. It is a contractual extension of the employee’s obligation to protect the company’s image (article 100 § 2 item 4). The employer may condition the conclusion of an employment contract to signing a non-compete agreement in line with art. 1011 and 1012. An important element is the period of its validity, which can be no longer than the duration of the employment relationship. Moreover, the employer may demand that the employee signs a non-compete agreement during the employment relationship and refusal to do so may be grounds for the employee’s dismissal.

The non-compete agreement must be in written form under pain of invalidity. It should be in the form of a separate agreement and in practice it may be a separate contractual clause in an employment agreement. It expires when the employment agreement is terminated. This type of agreement may be free of charge or provide a cash benefit for the employee. It is often assumed that the equivalent for non-competition is included in the employee’s salary. However, this must be clearly stated in the agreement.

Can the employer dismiss the employee who has been conducting a business activity for many years and does not have a non-compete clause? Experts give an example of a company where many employees, alongside regular employment, conduct their own business activities, which is not a secret for the employer and for many years there has been a general acceptance of such a solution. Although, the employer has not paid any attention to this fact, he or she may submit a non-compete agreement to the employee, but the employee has the right to choose whether he or she decides to sign such an agreement or to terminate the employment relationship. After such a long period of time tolerating the running of an additional business activity, even if potentially competitive, there is no possibility to dismiss the employee on disciplinary grounds or terminate the employment contract for this reason.

When defining geographical territory (e.g. the territory of Poland) covered a non-compete agreement, the employer may require including a provision to automatically extend the prohibited territory to a new area of its activity.

“As a result of defective determination of the type of competitive activity or the territory to which the prohibition applies, the provisions are null and void, however in general only partially. For example, an employer cannot enter the whole world as a territory”, says Katarzyna Kochanowska, a lawyer at Taylor Wessing in Warsaw.

In the event of unintentional harm to the employer, the employee is liable under the terms of Article 114-121 Labour Code (i.e. up to a 3-month salary). If any damage is done intentionally the employee responds to the maximum limit of the contractual penalty.

Non-compete clause after termination of an employment agreement

Compensation for a former employee is determined by a labour court as it is concluded between an employer and an employee and its scope includes prohibition of competition due to the particularly sensitive and confidential information the employee was privy to during the employment relationship. This applies to the parties’ obligations after termination of the employment relationship, as well as incurring the former employee’s liability under the Civil Code. The Code does not provide for the facility to terminate a non-competition agreement after terminating an employment contract. The parties may, however, provide such possibility to terminate this agreement or withdraw by the former employer in the contract. The Agreement may be terminated or amended at any time by mutual agreement of the parties. One should be bear in mind that a banning an activity after terminating the employment relationship is not established if the contract does not stipulate the length of the prohibition period. Competitive prohibition covers the period after termination of the employment relationship is updated and becomes effective at the point in time when the employment relationship no longer exists between the parties.

The agreement which provides a ban on a competitive activity after terminating the employment relationship without financial compensation is valid, however it is automatically replaced by the compensation guaranteed by the Labour Code, i.e. at least 25% of the remuneration received by the employee prior to terminating the employment relationship, for the period covered by the non-competition agreement, which is not considered as income from employment, only compensation thus ZUS contributions are not deducted. There are doubts as to whether 25% is to be calculated from the net or gross remuneration, therefore it is advisable to include a specific amount in the contract, as the jurisprudence does not explicitly explain this issue.

The amendment notice (Article 42 of the Labour Code) does not modify the content of the non-competition clause entered into the contract of employment. The employer cannot waive or terminate the agreement without the employee’s consent, unless such facility is provided for in the contract. Withdrawal from the agreement is retroactive and has the effect as if it had not been concluded at all. To exercise the withdrawal right effectively, it is necessary to indicate when the right may be exercised, e.g. by the last day of the contract. When there is a termination or withdrawal clause and the employer decides that holding the employee in the competitive prohibition period ceases to have economic value, he may terminate or withdraw from the contract.

There is no prohibition after termination of the employment relationship if the contract does not stipulate the length of prohibition in the contract. The jurisprudence indicates that the maximum period for competitive prohibition is two calendar years, yet the most common period is from 6 months to 1 year.

Compensation

The amount of compensation due to the employee is agreed by the parties to the non-competition agreement, however, it cannot be less than 25% of the salary received by the employee before termination of the employment relationship for the period which corresponds to the duration of the non-competition agreement. The amount of compensation should be in parallel with the scope of the non-competition clause for the employee. Compensation payments can be made in monthly instalments or in full, paid in advance or in the form of a post payment. The contractual flat rate compensation paid to the employee for the agreed term of the restriction of competition is a guaranteed payment and only requires proof that the employee abstains from any competitive activity.

If the employer does not fulfil the obligation to pay compensation, the non-competition agreement, after terminating the employment agreement, does not cease to apply before the expiry of the period for which it was concluded and the employee retains the right for compensation. The employee can choose whether he or she takes up a competitive activity or pursue due compensation from the former employer. Termination of the competition prohibition (Article 1012 § 2) only refers to the obligation undertaken by the employee in the non-competition agreement after the termination of the employment relationship and not the employer’s obligation to pay compensation. When the employer ceases to pay compensation, control over the contract is lost. The employee must, in order to obtain compensation, only declare that he or she has not run a competitive business. When the former employee violates a non-competition agreement, the employer is authorised to cease paying further compensation from the date the employer becomes aware of that fact, and the instalments have been paid at the time of the ban being violated. In order to recover compensation from their former employee. The employee’s violation of the provisions of the non-competition agreement is not a sufficient justification for the employer to seek compensation. It is necessary to demonstrate that the employer has suffered damages with by indicating and calculating the value/amount. The employer is obliged to prove that the employee is at fault and the relevant relationship between the employee’s activities and the damage (also in the context of its amount).

Contractual penalty as a tool to ensure compliance with the prohibition

It is permitted to include the contractual penalty in a post-termination non-compete agreement for the benefit of the former employer in the event that the employee violates or improperly performs the obligation to refrain from a competitive activity.

“If the contract does not have a contractual penalty, then one could liken this to a rifle without a cartridge, thus it is essential that a contractual penalty should be included in the non-compete contract”, says Krystian Stanasiuk, Partner in Taylor Wessing in Warsaw.

It is permitted to diversify contractual penalties when the obligation to refrain from competitive activities has been largely done by the employee, the penalty is grossly excessive or the remuneration for work or compensation due to the employee was significantly lower than the contractual penalties provided. Improper performance of an employee’s obligation when it does not result in damage to the employer, this may constitute the basis to reduce the contractual penalties.

Non-competition clause in civil law contracts.

As for other forms of employment, the principle of freedom of civil code contracts apply. There is no legal basis for applying solutions provided for in the Labour Code to the civil law. The Supreme Court rulings uniformly accepts the admissibility of a contractual ban on competition after terminating a service contract (including the self-employed). It is possible to establish a ban on competition after the termination of the contract under the Civil Code without compensation and even with the obligation to pay contractual penalties in the event where a person is non-compliant and is bound by prohibition. There is a tendency in the Supreme Court rulings to limit the freedom of contract for non-competition agreements without compensation when the parties pursue employment under a civil law contract. It is been highlighted, for example, that the principle obligation to refrain from taking “unfair competition” for a period of 3 years after the contract ends is not in line with the principles of social coexistence if the prohibition does not provide any compensation.

Prohibition of competition in other regulations.

Prohibition of competition which may affect people employed on the basis of an employment relationship is established, inter alia by:

• The Code of Commercial Companies – for the members of the management board of a joint stock company and a limited liability company;
• Banking Law – for members of the board of directors and members of the supervisory boards of banks;
• Act on functioning of cooperative banks, their associations and associated banks – for members of the boards and members of supervisory boards of co-operative banks, members of the boards and members of supervisory boards of affiliating banks, and for persons holding managerial positions in such banks;
• Act on Co-operative law – for members of the board and the board of co-operatives.

 

On the expert

Krystian Stanasiuk, LL.M., Attorney- at-law, Partner, Taylor Wessing Warsaw

Krystian Stanasiuk is a Partner at Taylor Wessing in Warsaw. He specialises in all areas of Corporate, Commercial Agreements, Litigation & Dispute Resolution and Employment & Pensions. He has in-depth know-how in adapting and developing contracts, regulations, leading and resolving disputes and litigations. He advises and represents clients in terms of group health insurance for foreign employees posted to Poland. He also successfully represented a transport entrepreneur in an insurance pay dispute against one of the largest insurers in the Polish market. As a result of the court trial the insurance company was forced to pay the full claimed compensation. Recently Krystian supported an international insurer in regression claims against one of Poland’s largest companies from the infrastructure development industry. He also continuously advises companies on M&A projects in all take-over aspects and the transfer of employees from one entity to another.

He has extensive experience in residence legislation and in the legal process of recruiting foreign management level specialists, as well as highly qualified specialists for large construction projects.

Krystian is co-author of “Lexicon of the Polish Law“ published in the German language (C.H. Beck, Warsaw 2013) and author of several articles in professional journals and economic media titles. He is a member of the Warsaw Bar Association.

Katarzyna Kochanowska, Associate, Taylor Wessing Warsaw

Katarzyna Kochanowska is an Associate at Taylor Wessing in Warsaw. She has experience in the field of energy law, with particular emphasis on the renewable energy sector. Katarzyna supports customers which operate on the domestic market as well as internationally covering various energy regulatory issues. Katarzyna also specialises in corporate law, especially in commercial law. She also advises in all aspects of labour law.

Prior to joining Taylor Wessing in 2015, Katarzyna acquired experience in internationally recognized law firms and tax advisory firms. Katarzyna was the initiator and took part in many industry initiatives such as conferences, seminars and workshops. Katarzyna is a graduate of the Faculty of Law and Administration at the University of Warsaw (2009-2014). She also completed the American Law Center (organised by the University of Warsaw in conjunction with the University of Florida, USA).

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