What is a non-compete agreement?

What is a non-compete agreement?
Marek Cieślak

Marek Cieślak

CEO CGO Finance

A non-compete agreement is a common practice among parties entering into business cooperation. Such provision can have a significant impact on the employee. What is the importance of non-compete agreement? What effects does it have? We answer in detail in the article below.

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What is a non-competition agreement?

The non-competition clause derives from Article 1011  of the Labor Code. By definition, an employee must not engage in any activity competitive to employer, as specified in a separate agreement. Nor should he work under employment relationship or another basis to the benefit of any entity involved in such an activity. In practice, this means that:

  • Employees must refrain from activities that could harm the employer’s interests.
  • The prohibition applies to running a separate business and working under an employment or civil law contract.
  • The agreement between an employee and employer determines its detailed scope.

The non-competition clause applies when an employer and employee, with access to crucial information that could harm the employer if disclosed, enter into a non-competition agreement after the termination of employment relationship. The agreement specifies duration of the non-competition clause. It also determines employee compensation, with exceptions outlined in the law. Compensation must be at least 25% of the pre-termination salary for the non-competition period. The employer may pay it in monthly instalments.

The following features characterize a non-competition agreement:

  • It is only permissible if justified by the employer’s interest.
  • Violation may result in fines or termination of the employment contract.
  • Cannot apply to activities non-competitive with the employer’s business.
  • Ceases to be effective before the specified term if reasons justifying the prohibition no longer exist. It is also no longer valid if the employer fails to pay compensation.

Form of a non-compete agreement

The non-compete agreement must:

  • Be in writing, under penalty of invalidity.
  • Specify the duration of the prohibition.

This means that you cannot conclude, extend or change the agreement informally. The legislator treats a statement made in electronic form with a secure electronic signature verified by a qualified certificate on par with a written statement (Article 78 § 2 of the Civil Code).

The written form rule applies to non-competition agreements during and after the employment. Preserving this form promotes transparency in the scope of the prohibition. It also protects the parties involved in the employment relationship.

What changes await employees and employers in the Labor Code in 2024? Find out from this article.

Scope and duration of the non-competition clause

The non-competition clause can apply during the employment relationship and after its termination. The employer can enter into a non-competition agreement with any employee It concerns not only those with access to important information that could harm the employer if disclosed. The loyalty agreement is concluded in connection with the existing employment relationship. Its basis does not matter, although it most often concerns an employment agreement. Parties agree to a non-competition clause when signing an employment contract or later.

The post-employment non-competition clause applies only to those with access to crucial information. This information must be confidential. There usually is a risk of using them by competitors to cause harm to the employer.

The non-competition agreement should specify the duration of prohibitions and restrictions during employment. It should not exceed the duration of the employment relationship. The parties may agree that non-competition agreement expires after the agreed-upon time. Another possibility is to dissolve it upon termination of the employment relationship.

A post-employment non-competition agreement pertains to the period after the termination of employment. This means that the non-competition clause becomes effective after termination of employment relationship. Such agreement is concluded with the reservation of a specific, defined term.

What is a competitive activity?

The legislator did not introduce a definition of competitive activity. The parties have right to shape its scope on their own within the statutory framework. This concerns subject matter, parties involved, duration, and territorial scope. The employer defines the scope of competitive activity in the loyalty agreement. It is usually driven by his interest in protecting the functioning of workplace.

The main determinant of the non-competition clause’s scope is the employer’s business profile. Loyalty agreements should not restrict employees from actions inconsistent with the employer’s business. The actual threat to the employer’s interests is crucial.

Examples of activities covered by the non-competition agreement may include:

  • running a company by an employee that provides the same services as the employer,
  • hiring an employee in a position with similar responsibilities in a competitive company,
  • the employee’s use of the employer’s confidential information in competitive activities.

Consequences of violating the non-compete agreement

Consequences of violating a loyalty agreement vary based on the employee’s specific actions. Such behaviour may result in:

  1. Non-material disciplinary penalty, such as a reprimand or warning,
  2. Modification of the agreement,
  3. Termination of the employment contract by the employer. It may occur even without notice if classified as a serious breach of employee duties,
  4. Liability for damages, with prerequisites including:
  5. Non-performance or improper performance of obligations under the loyalty agreement,
  6. Employee’s fault (accidental or intentional)
  7. Damage incurred by the employer,
  8. Causal connection between non-execution or improper performance of the prohibition and the damage incurred by the employer.

What is a non-compete agreement? Summary

The non-compete agreement serves to protect the employer’s interests. Through the loyalty agreement, you may prevent employees from engaging in competitive activities. They could pose a potential threat to your economic interests. The employee must adhere to terms of a non-competition agreement. Otherwise, it may cause severe consequences.

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Marek Cieślak

CEO CGO Finance