What does a non-compete clause mean in an employment contract?

The contractual ban on competitive action, or in practice known as a competition clause, in practice is increasingly becoming an integral part of the employment contract for a large number of employees. This institute represents a type of mechanism and means of protecting interests from unfair competition. However, it should simultaneously protect the rights and interests of the employee and cannot and should not be used as a mechanism and remedy for intimidation or coercion towards employees in the context of exercising their employment rights.

The competition clause, i.e. the contractual prohibition of competitive action, is regulated in Article 37 and Article 38 of the Law on Labor Relations, but we should mention that the institution of the competition clause exists as an institution in the Law on Commercial Companies.

Namely, if the employee acquires technical, production or business knowledge and business connections in the course of his work or in connection with the work, the employer and the employee may agree in the employment contract on the prohibition of performing competitive actions after the termination of the employment relationship (i.e. competition clause).

The purpose of the competition clause is that the acquired new technical, production or business knowledge and business connections acquired by the employee at the employer, not to be used and abused causing direct or indirect competition and damage to the employer where the employee was previously employed.

What is important about the non-compete clause, as opposed to the non-compete prohibition, is that it has legal consequences for the employee after the termination of the employment relationship.

The competition clause can be agreed for a maximum period of two years after the termination of the Employment Agreement, and only in cases where the Employment Agreement of the employee is terminated by his own will or fault.

But the competition clause in no case  can exclude the possibility of employment of the employee, because the right to work and the free choice of employment is a constitutionally guaranteed right of the employee and the same must not and cannot be limited by the employment contract in general and through entering the competition clause in it.

If compliance with the competition clause prevents the employee from earning adequate income, the employer is obliged to pay monetary compensation to the employee during the entire period of compliance with the prohibition.

The payment of this type of compensation in the specified period after the termination of the employment relationship is aimed by one side to  ensure the employee’s loyalty to the employer and during that period to prevent him from fair competition on damage of the employer, and on the other hand, during that period to provide the employee with adequate monetary compensation due to the inability of the employee to earn because of ensuring his economic and social security during that period.

The monetary compensation for compliance with the competition clause must be determined by the Employment Agreement and must be at least half of the employee’s average monthly salary in the last three months before the termination of the Employment Agreement.

Since the non-compete clause is a type of contractual obligation, the employer and the employee can also agree on the termination of the validity of the non-compete clause.

In the event that the employee cancels the Employment Agreement because the employer violates the provisions of the Employment Agreement, the competition clause ceases to be valid, if the employee, within one month from the date of termination of the Employment Agreement, gives the employer a written statement that he is not bound to the contract.

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