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NON- Compete Agreements in Employment Relations2014-04-24

By Aušra Maliauskaitė and Mingailė Šilkūnaitė, GLIMSTEDT

In the current competitive economy with the ever-growing globalisation process the issue of knowledgeable employees fleeing to rival businesses or setting up competitive businesses of their own has become highly relevant. One of the main ways for the employer to seek protection and indemnification in such situations is the employee’s covenant not to compete. On account of currently changing courts case law and seeking to avoid costly mistakes as well as to minimise the risks of possible invalidity of non-compete clauses or agreements this issue requires fairly close attention.

Non-Compete Agreements

By entering a non-compete agreement the employee undertakes not to compete with the employer during his/her employment and for some time thereafter. Such non-compete agreements may be made and displayed either as (i) a separate non-compete agreement entered between the employer and the employee or (ii) a non-compete clause comprising a part of the employment contract.

Eligible Employees

Considering that the non-compete agreement restricts a freedom to choose one’s work and may also restrict (depending on its contents) a freedom of individual economic activity and initiative protected by the Lithuanian Constitution, not all of the employees should be asked to execute such agreements. In determining whether to require an agreement, the employer must take into account the purposes and the legitimacy of interests involved. Such non-compete agreements are usually given by the most key employees, though the fact that the employee holds (or does not hold) a top management position does not imply per se that the non-compete obligation has (or does not have) to be given. In order to decide whether such a covenant has to be made by the given employee in a given case, the employer should consider all of the relevant circumstances, including the type and the character of the employee’s responsibilities, the scope and the importance of the information known to that employee, the employee’s competence to deal with corporate business matters, the significance of his/her knowledge and skills, etc. (civil case No 3K-3-377/2013).

As yet, case law of the Lithuanian court of cassation does not provide for any specific criteria that could make it possible to distinguish among the employees by whom the non-compete commitment should be made. Such decision is to be taken by the employer on a case-by-case basis taking into account all relevant circumstances and applying ratio decidendi.

Non-Compete Period

In most cases, the reasonable non-compete period varies form 1 to 2 years after the employment termination/expiry date. The duration of the non-compete period should be determined taking into account a span of time during which damage might be caused to the company by the employee taking advantage of his/her knowledge to the prejudice of the company. The duration of the noncompete period depends on specific company’s business. By statute, persons to whom confidential information of the business entity has become known as a result of their employment or other contractual relations with that business entity are precluded from using such information for a period of 1 year from the termination/expiry of their employment or such other contractual relations unless otherwise proved by law or the contract (Article 15.4 of the Law on Competition). Article 2.164 (1) of the Lithuanian Civil Code (the Civil Code) stipulates that a commercial agent and a principal may agree that the commercial agent will not compete with the principal for up to 2 years after the expiry of the contract concluded between them. No other (i.e. longer) non-compete periods are provided by law. Consequently, the non-compete clause or agreement under the employment laws will not be valid for more than 2 years. Otherwise, the Constitutional right and freedom to choose one’s job or business might be found to be disproportionately restricted.

Non-Compete Compensation

Amounts payable as compensation during the non-compete period differ throughout the European Union. Countries such as Italy, Great Britain or France do not establish the minimum amount of noncompete compensation by law, while other countries require the compensation amount to be not less than 25 percent (Poland) or even 50 percent (Czech Republic, Germany, Belgium) of the employee’s former wage. Although the laws of Lithuania do not establish the minimum amount of the non-compete compensation, the amount paid should be set so as to not jeopardize the principles of justice, reasonableness and good faith and should be payable for the entire duration of the non-compete period.

Decisions rendered by the Lithuanian court of cassation over the past few years have provided further clarity and definition to the criteria used to establish non-compete payments that conform to the principles of justice and reasonableness. For example, it has been found by the Supreme Court of Lithuania (civil case No 3 K-3-377/2013) that non-compete compensation equal to 9 % of the average monthly wage paid to the employee during the last year of employment did not conform to the principles of proportionality and good faith, contravened Article 2.164 (8) of the Civil Code and created substantial inequality between the parties. The Supreme Court declared the non-compete agreement to be contrary to the mandatory rules of law and therefore invalid ab initio. When determining the monthly compensation amount, one should take into consideration that the covenant not to compete limits the person’s opportunities to earn a living. In the case at issue, neither the percentage value nor the actual monetary value (which was less than a monthly minimum wage) could be construed as just and fair compensation for the limitations imposed by the non-compete agreement as both such values were apparently too small.

The Supreme Court (civil case No 3 K-3-401/2013) also determined that an employee’s wage cannot be considered part of the compensation payable for the limitation of the employee’s rights. A wage is remuneration payable to the employee in exchange for his/her work performed under the employment contract and includes the basic wage and all additional payments directly made by the employer in whatever manner or way in exchange for the employee’s work. The employee’s wage may only be payable in exchange for the employee’s work. The employee’s wage cannot be considered compensation for the non-compete agreement because compensation paid for the noncompete does not constitute payment for the employee’s actual work, and because the compensation payable for the non-compete commitment must be established by an express agreement of the parties in which the amount and the purpose of such compensation must be explicitly defined.

In sum, if the compensation to be paid for a non-compete agreement is not just and fair, the agreement may be invalidated as being disproportionate or violating the employee’s Constitutional rights. In such cases, the non-compete clause or agreement may be deemed to create substantial inequality between the parties and may thus be found invalid on the grounds laid down in the Civil Code should one of the parties decide to file a lawsuit in courts (civil case No 3 K-3-401/2013).

Waiver of Non-Compete Undertaking

It has been explained by the Supreme Court of Lithuania that the prohibition of competition may be unilaterally waived by the employer who is free to choose whether to pay the compensation to the former employee for the limitation of the employee’s certain rights or not to pay any compensation and allow the former employee to compete with the employer in the respective business field. In that case, the non-compete clause or agreement becomes no longer applicable and the compensation no longer payable to the employee (Article 2.164 (3) of the Civil Code),who is now free to choose his/her job or business without being bound by the non-compete obligation. In this regard, it is important to note that the non-compete clause or agreement is made for the benefit and in the interests of the employer, who may waive it at any time. The right to waive the noncompete clause or agreement is vested solely in the employer. The employee has no right to waive the non-compete clause or agreement and may only terminate it in the event of the employer’s material breach of the same (e.g. non-payment of the compensation due to the employee).

Conclusion

In order to make the non-compete clause or agreement valid and binding on the employee, it is necessary to consider properly the contents of such clause or agreement, taking into account all relevant circumstances (such as the extent to which the employee’s rights will be limited, the proportionality of the compensation, the limitation period, the legitimate interests of the employer, etc.) and the provisions of law, including the rules established by the current case law. Only then can the non-compete clause or agreement be expected to be effective and provide adequate protection of the employer’s interests limiting the employee’s rights to the reasonable and proportionate extent.

Contacts

Jogailos 4, 01116 Vilnius