Competition clause: how to protect company practices?

What is the essence of a competition clause?

A non-compete clause is an agreement between an employer and an employee whereby the employee promises not to go to work for a competitor for a certain period of time after the termination of the employment relationship and the employer pays the employee a certain compensation for the same period of time.

Thus, if your employee signs such an agreement, he will have to refrain from engaging in any gainful activity that is identical to your business or that is competitive to his. In return, you will be obliged to pay your former employee a reasonable financial compensation of at least one half of the average monthly salary.

For key specialists and senior managers only

The Labour Code expressly states that you can only negotiate a competition clause with an employee if you can reasonably require the employee to do so, having regard to the nature of the information, knowledge, working knowledge and technological processes acquired in your employment, the use of which by a competitor could seriously prejudice you. What exactly does this mean? This is the law’s way of letting us know that a non-compete clause can only be negotiated with employees who have certain know-how, knowledge of special manufacturing processes, unique contacts, and if they were to pass this on to a competitor early on, you would suffer appreciable harm. In practice, it is always judged on a case-by-case basis according to the industry in which you do business. Generally speaking, however, it does not make sense and is not impossible to negotiate a competition clause with rank and file workers and employees performing simple or ancillary work.

How and with whom can a competition clause be negotiated?

Remember that a competition clause must always be agreed in writing, either directly in the employment contract or as a separate document. The maximum period of time for which a competition clause can be agreed with an employee (i.e. the period of time for which he or she is prohibited from working for a competitor) is one year. After one year, it is no longer possible to require the former employee not to go to work for a competitor.

The Czech courts have dealt with disputes over the competition clause many times, and if the situation is not entirely clear, they often automatically side with the employee as the weaker party. Therefore, we strongly recommend that you do not underestimate the wording of the competition clause and that you defend your actions in a potential dispute in court. For this reason, it is not worth downloading a model competition clause prepared for a different type of business and for different reasons than yours. When in doubt, do not hesitate to contact an attorney with questions or requests for drafting a clause.

The Labor Code exempts the aforementioned rank and file employees from the ability to negotiate a non-compete clause. However, whether or not the rule has been violated is a matter for individual judgment. It depends on the nature of the work that the employee performs, the range of information and procedures to which he or she has access. Typically, however, it is not conceivable to negotiate a competing clause for, say, an assistant, a museum guide or a belt worker. The legislation also provides a further exception for teaching staff, who cannot be prohibited from going to a competitor.

How to cancel a competition clause?

In principle, the employer can only cancel the clause itself during the employment relationship, and only if it has defined the reasons for cancellation with the employee beforehand.

The employee can also terminate the non-compete clause if you fail to pay the agreed remuneration on time, more precisely if you fail to pay the monetary compensation or part of it within 15 days after it is due. Of course, you and the employee can also terminate the non-compete clause by mutually agreeing to this in writing. Another way a non-compete clause can be extinguished is by the employee paying a penalty (see below for more information).

Contractual penalty

Another way to get an employee not to go to work for a competitor is to negotiate a contractual penalty as part of the competition clause. If you agree on a contractual penalty, an employee who breaches the non-compete clause and starts working for a competitor within a specified period of time will have to pay you the penalty. In practice, how high to set the penalty is often a tricky issue. The Labour Code requires that the fine be reasonable. It has to correspond to the employee’s position, his know-how, the period of time he must not go to work for the competitor. On the other hand, it is necessary to keep in mind that by paying the contractual penalty the whole clause ends and the employee can go to work wherever he wants. The fine should therefore be a sufficient “disincentive” for the former employee and your competitor.

Compensation for the employee

The restriction on the employee’s right to seek employment at his or her own discretion must becompensated for by the employer’s obligation to provide the employee with reasonable financial compensation for the duration of the agreement, but at least one half of the employee’s average monthly earnings for each month of compliance.

Competitive clause without compensation

We were contacted by Linda, who worked as a senior manager in an advertising agency. She had signed the employment contract as a formality and had not noticed the clause whereby she agreed to work for listed competing agencies for one year after leaving the agency. However, the contract did not contain any compensation for such a prohibition, and her employer claimed that she was compensated within her salary, which was unusually high. Ms. Linda questioned whether the commitment should be followed. However, it is not possible to unilaterally bind an employee in this way and not provide proper compensation. A high salary certainly does not qualify as such. We therefore advised Ms Linda to find any job she wanted and to contact us if her former employer tried to litigate.

However, it is not possible to prohibit an employee from working for a competitor without providing compensation. As noted above, there is also a minimum amount of such compensation provided for by law, which may of course be higher in practice.

Competition clause between entrepreneurs

If there are self-employed (i.e. “icers”) working for your company, you can apply the competition clause to them as well. In this case, however, the clause is not a labour law clause, but a prohibition of competitive (rival) activity. The competition clause should include the territory and the range of persons to whom it applies. The maximum duration in this case is five years.
However, in this case, self-employed workers are not protected by the provision of compensation. Only the general principle that the freelancer should not be restricted more than the necessary protection of the client requires applies. If the clause would be manifestly unreasonable, the court may limit it, annul it or even declare it null and void in the event of a dispute.