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24 July 2013
On February 12 2013 the Supreme Court issued a ruling(1) concerning whether it was permissible to terminate the employment of an employee who refused to enter into a post-termination non-compete agreement, because the employee did not agree with the proposed amount of the contractual penalty (liquidated damages).
According to Article 101(1) of the Labour Code, an employee cannot carry out an activity in competition with that of the employer, or render work based on the employment agreement or otherwise for an entity conducting such activity, if the parties have so stipulated in a non-compete agreement. In the period following termination of employment, the non-compete obligation will apply if the parties have concluded a non-compete agreement for a fixed period (under Article 101(2) of the code) providing for compensation of an amount at least equal to the statutory minimum.
Based on Article 300 of the Labour Code, the relevant provisions of the Civil Code apply mutatis mutandis (ie, with the necessary changes) to matters not regulated in the Labour Code, provided that they are not contrary to the principles of labour law.
It is generally agreed in literature and case law that a contractual penalty can be stipulated in a non-compete agreement for the period following termination of employment. This penalty is a useful way of enforcing non-compete agreements, as it allows employers to obtain considerable payments from employees that breach the contract, without the necessity of proving the amount of damage actually incurred. However, under Article 484(2) of the Civil Code, the debtor may demand mitigation of the contractual penalty where the penalty is grossly excessive.
The defendant, an IT company, requested that its employees, including the claimant (a software developer), sign non-compete agreements for the period following termination of employment.
During negotiations with the claimant, the company had accepted the claimant's requests, except for that to decrease the contractual penalty from an amount equivalent to 24 months-worth of the employee's salary to an amount corresponding to six months' salary.
The employee refused to enter into the non-compete agreement. Consequently, the company terminated the claimant's employment, justifying it by stating that such refusal could result in the company's confidential data being leaked to competitors.
The Supreme Court emphasised in its ruling that termination on notice is a standard way of ending employment contracts and may be applied by an employer when its interests are violated or compromised. It also noted that the creation of a non-compete agreement for a period following the termination of employment is possible both on entering into an employment agreement and at a later stage. When refusing to enter into such agreement during the period of employment, the employee should be aware that his or her employment may be terminated on those grounds, as such refusal is indirect proof of the employee's disloyalty or intention to take actions that go against the employer's interests.
The court admitted that the employee's refusal to sign the non-compete agreement would have been legitimate if the proposal had not complied with the law. If this was so, refusal to sign could not justify termination of the employment. However, in the case at hand, it was not.
The court also stated that the amount of the contractual penalty in the employer's offer did not render the agreement incompliant with the law. The court noted that:
The admissibility of the termination of employment based on an employee's refusal to enter into a non-compete agreement has been confirmed previously in both case law and legal literature.(2) The assessment of a possible termination based on such refusal becomes difficult if one takes into consideration that the offered agreements may provide different levels of protection to an employer against the competitive activity of its former employee.
From the 2013 ruling discussed above, it follows that compliance with the law is deemed to be a criterion which, if not met, authorises the employee to refuse to sign a non-compete agreement without having his or her employment terminated. Furthermore, the amount of contractual penalty as an instrument securing due performance of the agreement for the benefit of the employer may also influence compliance with the law if the termination is effected based on the employee's refusal to sign the agreement.
It is the Supreme Court's prevailing opinion that the contractual penalty may not be grossly higher than the compensation for the entire period of the non-compete obligation; however, it need not be equal to or lower than the amount of compensation. By offering compensation, an employer defines the value of the non-compete obligation linked thereto. Although in the 2013 ruling a similar view was presented, the court did not mention how high the compensation for the non-compete agreement was, and thus it is not possible to estimate what proportion between the compensation and the contractual penalty was deemed justified by the court in this particular case.
When assessing whether the contractual penalty offered to an employee is grossly excessive, the judgments issued based on employers' claims for payment of the contractual penalties should be taken into account. In a January 27 2004 ruling(3) the Supreme Court referred to the nature of the non-compete agreement. According to the court, the employment-related character of this agreement imposed restrictions following from labour law principles, in particular, the principle that the employer bears the risk and that of the limited liability of an employee.
In a July 4 2007 ruling(4) the Supreme Court did not find a contractual penalty of PLN200,000 grossly excessive when the amount of compensation to which an employee was entitled under the non-compete agreement was equal to PLN90,000 (monthly instalments of PLN2,500 payable for three years). The court clearly dismissed the argument that the amount of the average monthly salary or the amount of a monthly instalment of compensation may be of relevance when establishing whether the stipulated contractual penalty is excessive. The court stressed that when examining the stipulated penalty, its amount should be compared in the first place to the value of the performance of employer, taking into account the employer's fair interest. The value of such performance is the amount of the stipulated compensation.
Alternatively, a more employee-oriented interpretation has been presented,(5) according to which an employee is entitled, without any negative consequences (eg, the termination of employment), to refuse to sign the non-compete agreement in a situation in which the contractual penalty is deemed 'excessive'.(6) However, it has been argued that by signing the non-compete agreement, an employee has agreed to pay the penalty if he or she violates his or her non-compete obligation, and since the employee has agreed, this implies that in the case of violation he or she would be able to afford to pay the penalty.
A contractual penalty is widely accepted as a convenient instrument for ensuring that the damage (or other negative consequence) suffered by an employer connected with the violation of a non-compete agreement is, in practice, compensated. This is often true; however, it is important to balance the amount of the penalty against the amount of the compensation paid to the employee for compliance with the non-compete obligation. If such balance is not kept, the employee may be justified in refusing to conclude the non-compete agreement.
For further information on this topic please contact Roch Pałubicki or Karolina Nowotna at Sołtysiński Kawecki & Szlęzak by telephone (+48 22 608 7000), fax (+48 22 608 7070) or email (firstname.lastname@example.org or email@example.com).
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