Pay attention to these restrictions in your employment contract

Topics

• Employment contract
• Labour law
• Legal assistance

A few years ago, employers were made liable to pay compensation for non-compete clauses under the Employment Contracts Act. This change has affected the use of non-compete clauses: employers are now more careful about imposing them than before, as they do not want to pay compensation for unnecessary restrictions.

This is a positive development from the employee’s perspective. At the same time, however, it has led some employers to seek alternative contractual arrangements that restrict an employee’s activities after the employment relationship ends without incurring a compensation obligation.

Always pay close attention to the content of the agreement if your employer proposes a contractual arrangement of the kind described in this article.

Share­holder agreement with a very small owner­ship stake

One such arrangement is to offer an employee a very small ownership stake in the company while requiring them to sign a shareholder agreement. Shareholder agreements often contain broad non-compete clauses that bind the employee-shareholder even after the employment relationship has ended.

As a general rule, the Employment Contracts Act does not apply to shareholder agreements. Consequently, the duration of non-compete clauses agreed upon in such agreements is generally not limited, and they do not entitle the employee to compensation for the duration of the restriction unless specifically agreed upon. In addition, the contractual penalties agreed upon in shareholder agreements can be quite substantial.

From an employee’s perspective, these so-called “formal shareholdings” can be very challenging. Therefore, it is advisable to review the terms of a shareholder agreement with particular care before signing it.

Non-solicitation clauses as a substitute for non-compete clauses

Another increasingly common phenomenon is the expanded use of non-solicitation clauses.

A non-solicitation clause refers to a contractual provision that prohibits an employee from soliciting, for example, the employer’s customers, potential customers, suppliers, and/or business partners to become customers or business partners of a competing company within a certain period after the termination of their employment.

Although a non-solicitation clause is not, strictly speaking, a non-compete clause, in practice it can restrict an employee’s opportunities to operate in much the same way. For example, in an industry with a limited customer base, a prohibition on contacting a former employer’s customers may mean that the employee is effectively unable to work in the same field.

What matters is not always the name given to the restriction, but how it actually affects the employee’s ability to work after the employment relationship ends. If a clause broadly restricts work in the same industry and effectively prevents a move to a competitor, the non-solicitation clause should be interpreted as a non-compete agreement. However, the assessment is always made on a case-by-case basis and cannot be relied upon. The safest approach is therefore to seek to influence the content of the agreement before signing it.

Broad non-disclosure agree­ments

Confidentiality obligations have long been included in employment contracts. Employers often wish to reinforce an employee’s confidentiality obligations and extend the prohibition on disclosing trade secrets to cover the period following the termination of employment, either for a fixed term or indefinitely.

The agreements also often define what constitutes confidential information. If the definition is very broad – for example, if all information related to customer relationships or the employer’s operations is classified as confidential – it may be far removed from actual trade secrets.

In practice, such broad confidentiality provisions may unjustifiably prevent an employee from engaging in competitive activities after the employment relationship ends. In such cases, the validity and reasonableness of the clause must be assessed.

However, this assessment is always made on a case-by-case basis and cannot be relied upon. The safest approach is therefore to seek to influence the content of the agreement before it is signed.

Read the contract carefully before signing it

The implications of an employment contract can extend surprisingly far into the future. That is why you should read the contract carefully and assess whether it contains any terms that might limit your future employment opportunities.

When it comes to restrictive clauses in particular, you should consider the following questions:

• Could this clause practically limit my next career moves?
• Is the restriction necessary?
• What do I get in return for agreeing to this restriction?
• Are the terms of the contract reasonable, and is the employment contract balanced overall?

As a member of YTK Worklife, you can always contact the Legal helpline for advice if you have concerns about the terms of the contract.

It’s also worth remembering that an employment contract is a contract just like any other. You can – and should – negotiate its terms with your employer. You can try to remove restrictive clauses entirely, negotiate more reasonable ones, or secure terms that are important to you in exchange.

Smart employers value employees who carefully review their contracts and know how to ask questions about them.

Taija Numminen

Senior lawyer, YTK Worklife

In my work, I develop the Lakikaveri service package. In addition, I advise and help our members with questions and sticky situations concerning law employment.

My goal is that the Lakikaveri is an easily accessible, uncomplicated and timely help for our members when they wonder about something in their work or employment relationship. At the Lakikaveri service, we always strive to offer solution-oriented help and find an agreement as easily as possible.