Under the Employment Contracts Act, employers and employees may agree on non-compete obligations only in limited circumstances. However, in practice, the criteria are vague and non-compete obligations have been used more commonly than what was originally intended. The reform of the Employment Contracts Act aims to change this situation and ensure that employers carefully consider when to include non-compete obligations in employment contracts.

Including non-compete obligations in employment contracts

In Finland, the validity of non-compete provisions is not tied to any single factor. Non-compete provisions are deemed permissible if employers can show that they have a 'special reason' that necessitates the inclusion of non-compete provisions in employment contracts. Whether such a special reason exists depends on the outcome of an overall assessment of the situation at hand. The reform of the Employment Contracts Act will bring no changes in this respect.

In practice, the concept of a special reason has remained vague. It has generally been accepted that non-compete obligations can, in principle, be agreed with employees working in managerial positions but, especially in smaller companies, there should not be more than a handful of such employees. Further, work within research and development has generally been regarded as constituting a sufficient special reason for binding employees to non-compete obligations since such employees may have access to sensitive information (eg, their employer's future business plans).

It is particularly difficult to assess whether a special reason exists for employees working in sales. From employers' points of view, there may be several reasons necessitating the use of non-compete obligations. It is in employers' interests to stop a salesperson from going to a competitor and persuading their clients to follow. However, this is not a special reason as required under law. Non-compete obligations are permissible only if the customer relations within the relevant industry are personal. In the absence of personal connections, there may also be a sufficient special reason to include a non-compete obligation in an employment contract if the salesperson's information on the employer's pricing and future projects can be considered a significant competitive advantage.

Compensating employees for non-compete obligations

Despite the conditions imposed for the use of non-compete obligations, employers have, in practice, tied their employees to non-compete obligations rather carelessly. Under current law, employees are entitled to reasonable compensation for non-compete obligations, but only if the non-compete obligation has lasted for more than six months. Shorter non-compete obligations require no compensation and therefore the use of non-compete provisions has involved little risk for employers. Even if a non-compete provision was ultimately invalid, the employer had not paid anything for the possibility that it may have led to the employee hesitating to move to a competitor.

The reform of the Employment Contracts Act changes the abovementioned situation dramatically. In the future, employees tied to non-compete obligations must always be separately compensated for the period during which the non-compete provision is in force. If the non-compete obligation lasts for less than six months, the employee will be entitled to compensation equalling 40% of their normal monthly salary for each month that the restriction is in force. For non-compete obligations in force for more than six months, the compensation to be paid amounts to 60% of the employee's normal monthly salary. Employees cannot effectively agree on lower compensation than that defined in Employment Contracts Act; any agreement on lower compensation will invalidate the non-compete provision.

The above requirement to compensate employees for the non-compete obligations that they are bound to also applies to existing non-compete provisions. However, the reform of the Employment Contracts Act is planned to take effect from the start of 2022 and there will be a one-year grace period before old contracts are affected, giving employers time to renegotiate or terminate existing arrangements. Thus, now is the time to review current contracts and determine which kind of non-compete provisions are worth keeping.

Releasing employees from non-compete obligations

At present, employers can, at any time, unilaterally release an employee from a non-compete obligation. However, if the employee is entitled to a separate compensation for the duration of the non-compete obligation, the employer's right to waive the non-compete obligation and to be released from such a payment obligation must be specifically stated in the employment contract.

Once the reform of the Employment Contracts Act enters into force, employers will need to notify the employee in advance of the termination of the non-compete provision. The applicable notice period is equal to one-third of the duration of the restrictive period, but it is always at least two months. Thus, a longer notice period applies only in respect of such non-compete obligations that are in force for more than six months after the relevant employment relationship has ended. However, once employees have notified their resignation, employers can no longer unilaterally release them from non-compete obligations. Employer can refrain from invoking non-compete obligations, but employees are nonetheless entitled to compensation for non-compete obligations.

Penalties for breach of non-compete obligations

Employees who violate a non-compete obligation are liable to compensate their employer for the damage caused. However, proving that the employer has suffered loss due to competing activity is in most cases so challenging that in practice, a non-compete provision does not really function unless it is tied to a contractual penalty.

Under the Employment Contracts Act, the contractual penalty may not exceed the employee's six-month salary. Since the maximum amount does not apply to employees working in managerial positions, the contractual penalty may be significantly higher for these employees.

Employers may try to stop employees from breaching non-compete obligations by seeking a temporary injunction. This means that a court may prohibit the employee from continuing the competing activity under the threat of a fine. The use of temporary injunctions for the above purpose has been approved by the courts of appeal but has not yet been subject to a preliminary ruling by the Supreme Court. Therefore, this matter is still partly open to interpretation and has not been addressed or clarified in connection with the discussed reform of the Employment Contracts Act. Until told otherwise by the Supreme Court, the possibility of resorting to temporary injunctions remains.