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Under the Employment Contracts Act, an employee and an employer may enter into a non-compete agreement. A non-competition agreement refers to an agreement made at the start of or during the employment relationship, under which the employee agrees not to work in a competing field or engage in competing business activities after the employment relationship ends.
The maximum duration of a non-compete agreement may be agreed upon as one year from the end of the employment relationship. For employees in management positions or similar independent roles, exceptions to the maximum duration may be made.
Entering into a non-compete agreement requires a compelling reason
A non-compete agreement is a significant restriction on an individual’s freedom to engage in business. Therefore, it can only be validly agreed upon if there is a particularly compelling reason related to the employer’s operations or the employment relationship. When assessing the particular weight of the reason for a non-compete agreement, consideration must be given to the nature of the employer’s business and the need for protection arising from the preservation of trade secrets or special training provided by the employer to the employee, as well as the employee’s position and duties and other similar factors. The mere desire to restrict competition is not a sufficient reason for entering into a non-compete agreement.
An employee is entitled to compensation for the duration of the restriction
The employer is obligated to pay the employee compensation for the duration of the restriction. If the restriction period has been agreed upon for a maximum of six months, the employer must pay the employee compensation for the restriction period equal to 40 percent of the employee’s wages. If the restriction period agreed upon is more than six months, the employee must be paid compensation for the restriction period equal to 60 percent of the employee’s salary.
Compensation is paid during the restriction period in accordance with the pay period followed under the employment relationship. Compensation must be paid even if the employee takes on non-competing work during the restriction period. Thus, the employee may receive wages from the new non-competing job and, at the same time, compensation under the non-compete agreement.
Termination of a non-competition agreement
During the employment relationship, the employer may terminate a non-competition agreement by giving notice that is at least one-third of the duration of the restriction period and, in any case, at least two months. The employer may no longer terminate the non-compete agreement once the employee has terminated the employment contract.
The non-compete agreement does not bind the employee if the employment relationship ends for reasons attributable to the employer, nor under the conditions described above.
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