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The employer shall pay a non-compete compensation to current employees if he wants to limit them from working for a competitor during their employment. 2016-03-10

Summary

Following the latest case law of the Supreme Court of Lithuania (held on 12 Feb 2016) it is not enough to state that an employee cannot work for a competitor during their employment. It is necessary to pay compensation in order for the non-compete obligation to be legally enforceable owing to the nature of such obligation being merely an agreement not to compete, which in any case must be onerous.

Facts

The employee claimed for wrongful dismissal against the employer. The employee had been dismissed because of a gross breach of work duties, as he had not, during his work time, performed his responsibilities. By signing the employment contract the employee had undertaken, without prior permission of the employer, directly or indirectly not to work, act or participate in any other company or business outside the employer’s. However, the employee, by using the employer’s car and petrol, had promoted another company’s goods and had acted for the interests of a spouse, but not for the employer. The Courts agreed that a breach of work duties by the employee had been committed. However, it considered that such breach cannot be treated as a gross breach, and therefore recognized that the imposed disciplinary sanction ‒ dismissal ‒ had been too strict. Based on this, the Courts declared the dismissal unlawful. The employer disagreed with the lowest Courts’ decision and subsequently brought a cassation complaint before the Supreme Court.

Judgment

The Supreme Court of Lithuania upheld the lower Courts’ decision.

With regards the non-compete, the Supreme Court started by reiterating its previous practice in that the parties can enter into a non-compete agreement both during employment and after. The Supreme Court stressed that a non-compete agreement restricts the constitutional right of an employee to choose a job, and therefore this restriction in any case must be time-limited, and respectively an adequate compensation must be paid.

The Supreme Court disagreed with the employer’s interpretation that during employment compensation for an employee’s limitation to not compete is not necessary. On the contrary, the Supreme Court emphasized that the non-compete compensation shall be clearly expressed by defining its amount and purpose and be distinguished from any others payments.

On those grounds the Supreme Court affirmed the lower Courts’ decision that the dismissal was wrong and ruled that the non-compete clause, which was involved in the employment contract and which is gratuitous, is contrary to the mandatory legal norms, and therefore is null and void.

Commentary

The foregoing judgment blazed the trail for its previous reasoning, in that the Supreme Court’s interpretations in non-compete cases when it had construed that the compulsory payment shall be paid to an employee during employment for restriction to work or be engage in the same activity as the employer.

It was clear that a non-compete compensation to a former employee must be paid if after the termination of employment the employer wishes to limit an employee to compete. It is now obvious that such compensation shall be paid during the employment as well as. However, during the employment common sense dictates that an employee shall be loyal to an employer. Namely it is laid down in the Labour Code of Lithuania that the obligation of both employers and employees to comply with the law, respect the rules of communal life and act in good faith, as well as adhere to the principles of reasonableness, equity and fairness. Moreover, the Labour Code states that abuse of one's right shall be prohibited. This means that an employee is under an obligation not to act in a way that could damage the employer’s interests. In practice, the majority of the companies have policies which prohibit employees from working for a competitor or be in the same activity as an employer during employment or that such condition is involved in the employment contract. However, separate compensation for this is not paid. It is understandable that a salary which is paid by the employer to an employee covers this, i.e. is an adequate consideration in exchange for the non-compete agreement. After the above-mentioned judgment the message to business can be read that an employer must clearly distinguish a non-compete compensation in the employment contract or set it out in a separate non-compete agreement in order to secure their business from unfair competition. Failing this, the employer may well consider that he has a non-compete but it could be legally unenforceable or otherwise inadequate.

On the other hand, a well-drafted non-compete agreement with clearly distinguished consideration can be advantageous to an employer. This could be a source of proof for damage when the non-compete is breached. As is common in such kind of cases, the assessment of damage is an important issue as to why the claims for the unfair competition are denied or just not filed. Nevertheless, an employer’s investment in its employees, commercial relations, trade secrets and confidential information is too valuable to leave exposed to unfair competition.

Judgment data: The Supreme Court of Lithuania, Judgment of 12 February 2016, civil case No. 3K-3-32-687/2016.

Author: Inga Klimašauskienė, Associate Partner at GLIMSTEDT

The article was published in eela.org


Teisininkai: Inga Klimašauskienė



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