Non-compete clause

Everybody has the right, according to their capabilities, to freely choose where they will work or which profession they will choose. One of the ways of limiting this freedom is a non-compete clause that is stated in Articles 161 and 162 of Labour Law of the Republic of Serbia.

The topic here is not about Law on Protection of Competition of the Republic of Serbia that deals with first and foremost companies, entrepreneurs, and their relation on the market, but about the non-compete clause that concerns organizing relations between an employee and an employer.

What is a non-compete clause

As a matter of fact, a non-compete clause is an article in the contract between an employer and an employee that defines what jobs the employee cannot do, for how long, and the compensation the employer has to pay otherwise. By including this clause in the contract the employer protects his interests at the expense of the employee. Therefore, it is essential to set certain conditions in order to form a balanced relation between these two interests.

Labour Law defines the term itself. Namely, this restraint indicates that in the contract jobs that an employee cannot perform in his/her own name and on his/her own behalf, for the account of another legal entity or natural person, without the consent of his/her current employer. So the prohibition is not absolute, because the employee can perform certain jobs if there is a consent.

Labour Law also defines that the named clause of the prohibition of competition can be stated only if there are conditions that the employee through his/her work with the employer, acquire new, especially important technological knowledge, a wide circle of business partners or acquire knowledge of important business information and secrets. This is a broadly defined subject, also alternatively set, so that the employers can relatively easily justify the reasons for the execution of the clause. It is important to emphasize that this clause can be determined only in the employment contract, not in the company legislation. It is also necessary to specify in the contract the types of work this prohibition applies to, that is to clearly state what jobs the employee may not perform in his/her own name and on his/her own behalf without the consent of the employer. Therefore, the prohibition on flat-rate employees is not applicable.

Who does this non-compete clause refer to?

The prohibition applies to both newly employed persons and persons who do not enter into an employment relationship. With this clause, it is also possible to limit the employee who is under a contract of supplementary work at another employer’s, as well as the directors of companies who are under the managerial contracts.

How and when can the non-compete clause be arranged?

The non-compete clause can be arranged during the establishment of the employment, but also later during the labor relation with the annex of the employment contract. However, it is clear that the clause must be stated in the contract or in the annex, not in the company legislation.

Is the non-compete clause territory-bound?

Whether the non-compete clause is territory-bound can be determined not only in the employment contract but also in the company legislation, depending on the line of work that is being done.

How long can the prohibition of the competition last?

It is crucial to define the period of time this clause is valid. It is apparent that the prohibition is legally binding for the employee as long as he/she is in the labor relation with the employer who has written the contract containing the clause. However, the Law enables stretching the expiring period of the prohibition, so that it can last after the termination of the contract, despite the reasons for the termination, but not longer than two years after the termination date. In this way, the employee is additionally being limited and therefore it is stated in the contract that certain compensation will be paid due to the extended expiring period. The logic behind it is following – the employee will not be able to perform any job for which he/she has the skills, knowledge, and experience, and therefore will lose earning, so he/she has the right for the compensation.

During the prohibition, are taxes and social services being paid?

As mentioned, this is the type of material compensation for the lost income and it is being transferred at the termination of the contract. This compensation is taxed, but the social services are not covered, as the Ministry of Finance stated in number 011-00-325/2015-04 on 14/10/2015.

How big is the compensation?

Neither minimum nor maximum amount of the compensation has been stated by the law, as well as the means of calculating it. It is based on the employer’s risk in the situation when the ex-employee turns to performing jobs that are the subject of the clause.

The compensation is not the part of the income, therefore the amount, the way of payment are to be agreed between the parties.

What are the consequences if the employee violated the prohibition of the competition?

Should an employee violate the prohibition of competition, en employer shall be entitled to claim damage compensation from the employee, according to the Law on obligation relations. The compensation can be stated in the contract and the employee would pay an amount of money if the prohibition was violated. The employer cannot terminate a contract on this basis because the reasons for the termination are stated in Article 179 of the Labour Law.

It is evident that the employers who recognize the significance of the innovation and the investment in the human capital are motivated to use the non-competence clause as frequently as possible. However, bearing in mind that the stated clause limits the employees and presents the inconvenience when establishing employment relationship, it would be beneficial for the employees if the minimal amount of the compensation was stated in case of the extended prohibition – all in cause of making the relationship employer-employee as fair as possible and fully protecting the right to work.

Authors: Aleksandar Pavleski – attorney at Law and Aleksandra Veselinović – associate