Post-employment non-competition agreements in Finland

When discussing an employee’s non-competition obligation in Finland, it’s essential to distinguish between the non-competition obligation during employment and the post-employment non-competition obligation. While the employment lasts, an employee has a general obligation not to compete with its employer without the employer’s separate approval.

The employee’s general non-competition obligation ends when the employment relationship ceases. Thus, the employee is free to take up employment with a competitor’s employment or to start its own competing business after termination of employment. However, unauthorized use or disclosure of trade secrets may lead to liability for damages and even criminal charges.

A non-competition obligation after the employment requires, firstly, a so-called non-competition agreement between the employer and the employee, i.e., the employer and the employee must explicitly agree about it. The agreement can be concluded when the employment begins or during the employment but before it ends. Although there are no form requirements for the non-competition agreement, it’s always advisable to do it in writing.

A non-competition agreement always requires a so-called particularly weighty reason. In other words, the employer must be able to justify well why the employee’s right to take up employment with a competing company or to start a competing business should be restricted after the employment has ended. The threshold for when a particularly weighty reason exists is set high because it restricts the employee’s constitutionally protected right to freedom of trade. When assessing whether a particularly weighty reason for a non-competition agreement exists, consideration must be given to the nature of the employer’s operations and any need for protection related to the preservation of trade secrets or to special training provided to the employee by the employer, and the employee’s position and duties. It’s crucial that the employer has a genuine interest and need to protect something. Merely a desire or endeavour to limit competition is not an acceptable basis.

As a general rule, the duration of the restriction period of the non-competition agreement can be a maximum period of one year after the end of the employment relationship. However, this limitation does not apply to employees who, based on their tasks and position, are deemed to be engaged in the direction of the enterprise, corporate body or foundation or an independent part thereof or to have an independent status immediately comparable to such managerial duties.

Nowadays, an employee must receive compensation for the entire duration of the restriction period. The amount of compensation depends on the length of the restriction period. If the agreed restriction period is up to six months, the employer must pay the employee compensation equivalent to 40 percent of the employee’s salary for the entire duration of the restriction period. If the agreed restriction period is over six months, the employer must pay the employee compensation equivalent to 60 percent of the employee’s salary for the entire duration of the restriction period.

The employer has the right to terminate the non-competition agreement while the employment lasts. The employee does not have a separate right to terminate the agreement. When the employer terminates the non-competition agreement, a notice period must be observed, which must be at least one-third of the duration of the restriction period, but always at least two months.

If the employee breaches the non-competition agreement, it leads to liability for damages. The amount of damages is not limited. If the employee has acted intentionally, the principle of full compensation applies. According to the Finnish Employment Contracts Act, a provision on a contractual penalty instead of liability to pay compensation can be included in the non-competition agreement. The contractual penalty may not exceed the employee’s salary for the six months immediately preceding the termination of the employment relationship. For employees in leading positions the contractual penalty may, however, be higher.

According to the Employment Contracts Act, a non-competition agreement is invalid to the extent that it has been entered into in violation of the provisions contained in the Employment Contracts Act. For example, the absence of a particularly weighty reason makes the entire non-competition agreement null and void, meaning that in this case, the agreement does not bind the employee at all. If a longer restriction period or a larger contractual penalty has been agreed upon, the agreement is invalid to the extent that the restriction period exceeds one year, or the contractual penalty exceeds an amount corresponding to six months’ salary before the termination of the employment.