In recent times, it has come to our attention that a significant number of employment agreements drafted before 1 January 2023 still contain post-employment non-compete clauses. Such legacy agreements may impose substantial financial obligations on employers if they have not been updated in accordance with current legislation.
Pursuant to Chapter 3, Section 5 of the Finnish Employment Contracts Act (55/2001), an employee is entitled to financial compensation if they commit to a non-compete obligation after the termination of the employment relationship. The legislative amendment that entered into force at the beginning of 2022 tightened the requirements for payment of such compensation, and the transitional period expired at the end of 2022.
In practice, this means that where a non-compete has been agreed with an employee, the employee is entitled to compensation throughout the entire non-compete period as follows:
- If the non-compete period is no more than 6 months, the employee must be paid at least 40% of their salary applicable during the employment for the full non-compete period.
- If the non-compete period exceeds 6 months, the employee is entitled to compensation of 60% of their salary for the entire period.
The compensation shall be paid during the restriction period in accordance with the salary payment interval applied during the employment, unless otherwise agreed after the termination of employment.
Example: Employee A has been employed by employer X Ltd for 10 years. The employment contract was drawn up using an old employment contract template in 2015 and has not been updated since then. The employment contract includes a 12-month non-competition clause. A’s gross salary is EUR 7,000 per month. A decides to terminate their employment contract and take a sabbatical year. In this situation, A is entitled to a total of EUR 50,400 in additional compensation from employer X Ltd due to the non-competition clause in the employment contract, as calculated below:
(60% * EUR 7,000)*12 = EUR 50,400
X Ltd is obliged to pay the compensation in accordance with the salary payment periods observed during the employment relationship.
If an older employment agreement contains a non-compete clause that the employer no longer deems necessary, the clause may be terminated separately. This allows employers to update contracts in a controlled manner without automatically triggering compensation obligations under the Employment Contracts Act. The notice period for terminating a non-compete must equal at least one-third of the restriction period, and in any case no less than two months. Importantly, this right to terminate lapses once the employee’s employment has ended.
We strongly recommend that employers review their employment agreements, particularly older contracts, to assess the necessity and validity of any non-compete clauses. Employers should also be aware that agreements may include non-solicitation clauses, which in practice can operate as non-compete restrictions. In addition, shareholder agreements with employee-shareholders may contain non-compete clauses that could create compensation obligations for the employer—especially when the employee’s ownership stake in the company is minimal.
Our firm is ready to support employers in reviewing and updating employment agreements to ensure compliance with current legislation and best practices.
