Non-Competition Clauses

Defining non-competition clauses

A non-competition clause (NCC) is an agreement that’s part of an employment relationship which places limitations on what an employee can do both during this relationship and after its ends. For example, there’s a point of agreement stating that an employee can’t work for any competitors for a period of 6 months after they leave their current job.

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Non-competition clauses are meant to protect companies from having people use their company secrets and know-how to benefit other competing companies. They’re based on the idea that if an employee possesses this kind of knowledge because of their job, their employer will consequently have a strong need for protection against possible future competition if this employee leaves the company.

Although the term ‘know-how’ isn’t a legal one, it’s described in common law as «a collection of technical details, kinds of knowledge and experiences which, when taken as a whole, can be decisive for a company’s competitiveness, but which, when taken individually, can seem insignificant». This may for example be a configuration, method or process that’s valuable to the company and may cause a great deal of damage to it if any one of these things is revealed to competitors. So while it can be difficult to drawn the line between ‘know-how’ and more general knowledge, it’s important to determine whether or not your company’s treating any knowledge/information as confidential.

Using non-competition clauses and the law

The Working Environment Act (Chapter 14 A) regulates contracts between employers and employees that «limit an employee’s opportunity to accept a position with another employer or start, run or participate in another organization after their employment relationship ends». This kind of contract must be in written form in order to be valid and should be included in an employment contract/attachment to this contract. However, a non-competition clause should not be a part of a standard contract. This is because an individual assessment of whether there’ll be an actual need to have a non-competition clause for a particular employee should be completed at the same time the employment contract is being drawn up. A non-competition clause may only be signed for a maximum time of up to one year after an employment relationship ends.

Assessing needs

Even if a contract containing a non-competition clause has been signed, an employer must still complete an assessment of the actual need for applying this clause if and when their employee resigns. One possible outcome may be in this case that the non-competition clause will never actually be implemented, even if the employer/employee have agreed on the reason for it when signing the original employment contract. A concrete and comprehensive assessment must be made in each individual case that’s based on any possible consequences for an employer if the non-competition clause is not applied when the assessment takes place.

In other words it’s the employer’s need that should be assessed; because of this, no consideration should be made of the effects this assessment will have on the employee. So it shouldn’t be made according to what an employee’s future plans might be with respect to starting a new position or joining a new organization; rather, this assessment should be based on an employee’s knowledge about/insight into their employer’s organization.

In the assessment of whether an employee possesses the sort of knowledge that entails their employer’s having an extra need for protection, this employee’s position and the length of their employment relationship will be relevant points to consider. Employees having neither a senior, leading nor particularly trusted position do not as a rule have the knowledge about/insight into their organization to a degree that justifies having a non-competition clause. On the other hand, short-term employment relationships generally imply that an employer might need this clause. There must also be a good reason for being able to apply non-competition clauses for employees who have been employed for six months or less.

Even if an employer decides after a time that there are special reasons for applying a non-competition clause, it must still be limited in scope to what information must actually be kept confidential. Similarly, the application of a non-competition clause must be limited in terms of geography, time and type of business to reflect an employer’s particular need for protection from competition. For example, the clause might be limited to apply only to certain products with which an employee has been working. An assessment should also be made of whether it’s necessary to make a non-competition clause valid for an entire one-year period (the maximum allowed time).

Non-competition clauses can’t be applied when an employment relationship’s ending is caused by organizational conditions, including reorganization and downsizing; nor can it be applied in cases of unjustified dismissal/unlawful dismissal. In addition, these clauses can’t be applied if an employer’s breach of contract means that their employee has reasonable cause to end their employment relationship (for instance, in cases where a company fails to pay an employee’s wages on time). Finally, if an employer fails to comply with their reporting duties, this can in certain cases invalidate a non-competition clause (see below for more information).

Requesting a report from your employer

In order to secure greater predictability for employees, employers have a legal obligation to give them a report on whether a non-competition clause will be applied, and, if so, what this clause will contain. An employee can demand to receive this report at any given time and is not obligated to supply any reason for making this demand. If this happens, an employer is obligated to give their employee a written report within four weeks. This request should be made in writing (an e-mail is acceptable) to 1) prove it was made, and 2) prove when it was made. Requests are made in this manner because if an employer fails to comply, it might be impossible to apply a non-competition clause. In cases where an employee repeatedly requests a report – or if an employee requests a more detailed report without getting any results – this can cause a non-competition clause to lapse entirely. If you find yourself in this situation, we advise you to contact Tekna’s legal department for further guidance.

Reporting procedures

In order to avoid speculation from an employer about the extent to which one or more employees are thinking about leaving their job, a company group can, on behalf of and in agreement with its members and in consultation with their employer, establish procedures for when their employer should give reports on prohibitions of competition. This report could for example be given once a year; consequently, it could also help make an employer conscious of their use of non-competition clauses.  

In cases where an employee gives notice and there’s no binding report in place, their employer must give them a report within four weeks. In cases where an employer dismisses their employee, this report must be given at the same time as the dismissal, while in cases of resignation, the report must be given within one week after the employee leaves. Once a report is given, it’s binding for the employer for three months, and, in cases of resignation, during the entire notice period. The fact that the company is bound in this way means among things that it may be obligated to pay compensation (see below).

Requirements: report content

The law contains certain requirements about a report’s content. For example, it must conclude by stating whether a non-competition clause will be applied, and, if so, to what degree it will be applied. The period for which the clause will apply must also be stated. The report should also say which business areas, organizations and geographical areas the clause will cover. The report must be as easy as possible for employees to understand; it should also reflect the fact that it’s based on a thorough assessment of each employee’s situation.

The reasons why an employer needs strong protection from competition should also be stated in this report. It should therefore present what it is about an employee’s particular work situation – for example, their position or areas of responsibility – that causes their employer to believe this is needed.

Since any assessment shouldn’t be based on an employee’s future plans, the report shouldn’t focus on this topic, either. Similarly, an employee can’t be required to inform their employer about their thoughts and plans regarding a new job. (However, this doesn’t prevent an employee from talking about these topics if asked.)

Right to compensation

If a non-competition clause is applied, an employee has a legal right to receive compensation during the waiting period. While the amount of compensation must be calculated based on their earnings over the past twelve months, it may be limited in accordance with the statutory provision, which corresponds to G (The National Insurance plan’s basic amount), where 1G as of 1 May 2019 was NOK 99, 858. Full (100%) compensation is to be awarded up to 8G, while it may be limited to 70% between 8G and 12G; there is no legal right to receive compensation over 12G. However, this is the minimum requirement set by law, and there’s nothing in the way to sign a better deal. Compensation payment is not covered by law and should be agreed upon either in the non-competition clause or when an employer decides to apply this clause.

Compensation is to be calculated based on previous «earnings», including all forms of payment that have been earned through working, for example salary, overtime pay, commissions and bonuses. Vacation money should also be included in the compensation amount. It may be practical to include a detailed description of the calculation basis in the contract/non-competition clause.

An agreement may be reached regarding deductions in the compensatory amount for other earnings or work-related income during the waiting period. However, these deductions can only be made for up to 50% of this income. If both sides agree to this type of deduction, an employer can demand to be informed regularly about an employee’s income sources during the waiting period.

Can I take my clients with me?

A client clause is a written contract between an employer and employee that limits the employee’s opportunity to contact their employer’s clients after their employment relationship ends. Although there’s no legal requirement for compensation with respect to these clauses, this does not prevent the possibility of an employer/employee agreeing on compensation if they choose.

In order for a client clause to be applied, an employer is required to produce reports. This requirement mainly coincides with the requirement for reporting on non-competition clauses. However, their content might be somewhat different as there is no legal requirement stating that using these client clauses must be justified by an employer’s strong need for protection from competition. At the same time a client clause report must specify which clients are covered by this clause. These clients must be identified in a way that makes it clear who they are; in other words, making a general statement such as ‘every client is included here’ is not satisfactory.

In addition, client clauses are only valid for clients the employee has been in contact with or had responsibility for over the past year. Having had occasional contact is not enough; however, customer care, follow-up, contract negotiations or overall responsibility for a customer relationship (without any connection to regular customer care) comprise a sufficient level of contact. As a result, a client clause may be applied.

Client clauses may be applied for a maximum time of one year: It’s only the employee’s possibility to contact the client that is limited. An employee can therefore not be obligated to reject clients if clients themselves initiate this contact as this type of limitation hampers the client’s freedom to choose for themselves who they want to work with.

What if I breach the non-competition clause?

Contracts on competitive limitations may contain clauses about conventional penalties for violations of current provisions. There may be a need for an employer to have this kind of sanction possibility due to the fact that it’s often difficult to prove a direct cause for financial losses. One possible unreasonable aspect of large penalties for minor violations must be evaluated as it pertains to the Obligations and Contract Act. The courts might find cases where there have been very unreasonable applications of agreed conventional penalties to be invalid. Generally speaking, individuals are advised to be cautious and consider any situation very carefully before signing a contract containing conventional penalties. We encourage you to contact Tekna’s legal department for legal counsel if you’ve been presented with a contract containing these kinds of penalties.

A brief summary:

• If there’s any discrepancy between a contract and the law, the law will apply.
• Non-competition clauses and client clauses are valid for a maximum time of one year after an employment relationship has ended.
• Both during an employment relationship and at its conclusion, you can ask your company to report on if/to what degree a prohibition of competition will be validated.
• You have the right to receive financial compensation if a non-competition clause is used.
• Non-competition clauses should only be applied to the extent that is necessary.
• You should have a contract stating 1) when compensation will be paid, and 2) showing how it will be calculated.
• Client clauses are only valid for clients you’ve been in contact with over the past year; this contact must have taken place more than occasionally. These clients must be listed in the report.
• There may be several reasons why competition-limiting clauses have lapsed.
• Please contact Tekna’s legal department if your employer wants to draw up a contract containing a non-competition clause with you, or if you need help after having given notice at work.