The government is planning to change the non-competition rules of the Finnish Employment Contracts Act. In this blog, we’ll take a look at the current legislation and tell you what the proposed changes would mean for employees.
We have looked at the standard terms of Finnish employment contracts in one of our previous blogs. Non-competition clauses do not belong to these standard terms. But as can been seen from below they’ve come increasingly common. The government is trying to regulate their use a bit more by tightening some aspects of the Employment Contracts Act.
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Regulations in the current law
The Finnish Employment Contracts Act in general doesn’t allow employees to work elsewhere or have their own business if that activity causes obvious harm to the activities of the employer.
This doesn’t mean that employees cannot have several employers or have their own business. They can do that if those are not in direct competition with the employer’s business.
The Employment Contracts Act, however, also includes specific provisions relating to non-competition clauses or agreements. The Act allows specific non-competition agreements for “particularly weighty reasons”. The purpose of this provision is to protect the employer’s business secrets.
These agreements prevent the employee from engaging in employment or business activities that may jeopardize those secrets.
The time limit for such an agreement is six months after the end of the employment relationship.
The current law doesn’t require the employer to pay the employee any compensation for this period. Only if the employer is willing to compensate the employee can the period be extended beyond six months. Then the maximum period of such an agreement is one year.
The law doesn’t specify those “particularly weighty reasons”.
These could exist, for example, in positions where the employee is in product development or research where they have access to information only this employer has. Or in positions where the employee has access to important client data.
So, the current law says that non-competition agreements can be used for “particularly weighty reasons”. I have explained very briefly what those weighty reasons can be. Let’s see now how these types of agreements have been used in reality.
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The current reality of non-competition clauses and agreements in Finland
Akava, the Confederation of Unions of Professional and Managerial Staff in Finland, did a survey in 2017 about non-competition clauses or agreements among their membership.
33 % of respondents said their employment contracts included a non-competition clause. An additional 4 % said they have a separate agreement.
In that survey, non-competition clauses in employment contracts were most common in the ICT field (37 % of employees). Next was commerce (33 %) and industrial fields (32 %). A separate non-competition agreement was most common in commerce (12 % of employees) and law (6 %).
Most often the period during which the employee couldn’t engage in competing activities was less than 6 months (56 % of those who had such a clause or an agreement). Most often they did not receive compensation for that period.
In 2018, the Ministry of Economic Affairs and Employment published a report on the use of these types of agreements in Finland.
There are industry-specific practices concerning non-competition agreements. In the IT field, for example, employment contracts may include a three-month non-competition clause by default. In consulting, in contrast, non-competition agreements may be introduced later on when the employee has risen to a high enough position.
The problem that the report recognized is that often employers introduce non-competition agreements by default. Justification for the use of such agreements is often lacking. Sometimes employers introduce them for positions that cannot possibly have access to the type of business secrets that would warrant a non-competition agreement.
Although individual misuses of such agreements have been identified, the report concluded that this standardized use is more problematic.
A 2019 memo by a working group set by the Ministry said that non-competition clauses and agreements have become more common. They also concluded that increasingly they are used in situations where there hasn’t been adequate evaluation of whether particularly weighty reasons exist.
The main proposed changes to the non-competition rules of the Employment Contracts Act
The government has thus seen a need to tighten the regulations surrounding the use of non-competition clauses and agreements.
Currently, employers are under no obligation to pay employees compensation for non-competition periods that are shorter than 6 months. They are only expected to pay for longer periods. The government now wants to mandate compensations also for shorter periods.
The idea is that by making it more expensive for employers to apply non-competition clauses or agreements, they will be careful with the situations in which they want to use them.
The suggestion is that for periods shorter than 6 months, employers would have to pay 40 % of the employee’s normal salary for that period. For periods over 6 months, the compensation would be 60 % of the employee’s salary for that period.
By making the longer agreements more expensive the government is trying to direct employers towards shorter periods. The government didn’t make compensations 100 % of the employee’s salary in either case because the employee is, after all, free to engage in activities not covered by the non-competition agreement.
The proposed law will also stipulate when the employee should receive that compensation. According to the proposed law, the employer should pay it in normal salary payment intervals during the non-competition period. The employer and employee can agree on different payment intervals after the end of the employment relationship. This allows, for example, a single payment.
Should the parliament accept the proposed changes to the law, the new provisions will take effect on January 1, 2022. After a year’s transitional period, the law would apply also to existing non-competition clauses or agreements.
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