Advice and Tips
Non-compete clauses in employment relationships
Many employment contracts contain restrictions on what can happen after you terminate your employment. The rules of the Working Environment Act are clear, and here you will get an introduction to the most important things.
What are non-compete clauses?
A non-compete clause is an agreement in an employment relationship that imposes restrictions on what an employee can do after the employment relationship has ended. An example of this is a regulation that says that the employee cannot work for companies that are in direct or indirect competition with the employer for a period after leaving.
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Non-compete clauses are intended to protect companies from your misuse of classified information such as trade secrets, know-how and patents in competing businesses.
The term know-how is not defined in the law, but is described in case law as “the collection of technical details, knowledge and experience that together can be crucial for a company’s competitiveness, but which individually may seem insignificant.” This can, for example, be a composition, method or process that will be valuable for the company and can have significant damage potential for the employer if these are revealed to competitors. It can therefore be difficult to draw the line between know-how and more general knowledge. An important pointer can be whether this knowledge is protected or not.
What does the law say about the use of non-compete clauses?
Chapter 14 A of the Working Environment Act requires that restrictions must be agreed between the parties. The wording of section 14 A-1 number 1 of the Act reads as follows;
"...an agreement between the employer and the employee limiting the employee's freedom to take up a post at another employer or to commence, operate or participate in other undertakings following termination of the employment"
The agreement must be entered into in writing to be valid, and the text should appear in the employment contract or as an attachment to it. Such an agreement can in case apply for a maximum period of one year after termination of employment.
The need must be assessed
Even if an agreement on a non-compete clause has been entered into, the employer must nevertheless, in connection with your departure, make an assessment of the real need to make the clause applicable. A possible outcome could therefore be that a non-compete clause is not implemented or that it is made applicable for a shorter period than agreed. It is therefore important to be aware that an agreement on a non-compete clause is actually only a warning that such a clause may be activated if you leave your position.
It is thus the employer’s need that must be assessed.
It is thus the employer’s need that must be assessed. No consideration shall be given to what effects it will have on the employee. The assessment should therefore not take place in relation to the employee’s future plans with regard to new position or new business, but should be based on the employer’s future protection needs.
In assessing whether you possess knowledge that entails a special need for protection for the employer, your position and length of employment may be relevant factors. Employees who cannot be said to have a superior, managerial or particularly trusted position will probably rarely have such insight into and knowledge about the business that it justifies activation of a non-compete clause.
Even if the employer concludes that there are special reasons why a non-compete clause should apply, it must still be limited in scope to what is necessary. This may mean, for example, that restrictions may be placed on type of business or position, and that the length of the clause must be assessed.
Non-compete clauses cannot apply when employment ends due to company circumstances, such as reorganization and downsizing. A non compete clause cannot apply if the employer’s breach has caused you reasonable grounds to terminate your employment relationship, for example if the company does not pay wages on time.
You can request an explanation from your employer
To ensure greater predictability, the employer must, upon termination, give the employee a so-called explanation of whether the non-compete clause will apply. You can also demand such an explanation at any time. You are not obliged to provide any justification for such a claim. In such cases, the employer is obliged to provide a written explanation within four weeks. Such a claim should be made in writing. Failure to comply with the obligation to provide an explanation within the four-week deadline on the part of the employer means that the non-compete clause lapses.
If you resign from your position and there is not already a binding explanation, the employer must provide you with an explanation within four weeks. If the employer terminates your employment, an explanation must be given at the same time as the termination. In case of dismissal, the explanation must be provided within one week. The explanation is binding on the employer for three months and, in case of termination, applies throughout the notice period.
Local Tekna group - and routines for explanations
The Local Tekna group can, on behalf of and in understanding with its members and in consultation with the employer, establish routines for when the employer should provide explanations for competition bans. This can, for example, be once a year and can help to make the employer aware of its use of non-compete clauses.
Requirements for the content of the explanation
The explanation must be formulated so clearly that it is possible for you to adapt to its content. It must justify why there is possibly a special need for protection of the employer’s interests going forward. It should therefore state what about the employee’s employment relationship and knowledge is the reason for the need for protection.
Right to compensation
If the employer chooses to activate a non-compete clause, you have a statutory right to compensation during the quarantine period. 100% compensation shall be paid up to 8G, while compensation may be limited to 70% between 8G and 12G, and above 12G there is no statutory right to compensation.
There is nothing wrong with entering into a better agreement. The payment date for compensation does not appear from the law and should be agreed upon in more detail.
Compensation shall be calculated based on previous “work remuneration”. This is normally the benefits you have earned through work, such as regular salary, overtime allowance, commission-based salary and bonuses. We recommend that the calculation basis be included in the agreement on non-compete clause.
Please note that the Working Environment Act allows for deductions from compensation for other work remuneration or work income during the quarantine period.
Customer clauses are also a form of non-compete clause. It is a written agreement between employer and you that limits your access to contact your employer’s customers after termination of employment.
Here too, the Working Environment Act requires that the employer provide an explanation of its protection needs before activation. The explanation must specify which customers will be covered by the clause. A general reference to any customer being covered is not sufficient.
There are two types of customer relationships that can be affected - either customers you have had contact with or those customers you have been responsible for in the last year. It is especially customers you have been responsible for that can form the basis for your employer’s claim for activation of the clause.
Customer clauses can apply for a maximum of one year. No compensation is paid if you are subject to such customer quarantine.
These are clauses that prevent you from recruiting other employees after your departure. Such clauses are not regulated in the Working Environment Act but are common. They must be assessed based on their content, loyalty obligation and section 38 in act relating to conclusions of agreements (in norwegian).
Non compete clause in both employment contract and shareholder agreement
Many are bound by non-compete clauses both as employees and as shareholders. This double binding raises special questions and we recommend that you contact us for guidance if you find yourself in such a situation.
What if I break the non-compete clause?
Agreements on competition restrictions may contain clauses on conventional fines for violations of the provisions. In general, we recommend that you think carefully before accepting an agreement on a conventional fine.
- In case of discrepancies between the agreement and the law, the rules of the Working Environment Act apply.
- Non-compete clauses and customer clauses can apply for a maximum of one year after termination of employment.
- You can request that the company provide you with an explanation of whether and how the non-compete ban will apply.
- You are entitled to financial compensation if the non-compete clause is activated.
- Competition clauses should only apply to the extent necessary.
- The payment date for compensation and indication of how compensation should be calculated should be agreed upon.
- Customer clauses can only apply to customers you have had contact with or been responsible for in the last year.
- Competition-restricting clauses may lapse.
- Contact Tekna’s legal department if you have specific questions about competition clauses or if you need assistance.