Employees often have very specific, special skills which an employer might not want to see in the service of the competition. In such cases, a non-compete agreement can be drawn up. Read on to learn how that works.
What is a non-compete agreement?
A non-compete agreement is an agreement between an employer and an employee regarding the time following the termination of the employment relationship. The employee may agree not to infringe or endanger the legitimate business interest of the employer, practically meaning they cannot enter employment or set up a business of their own with the same activity as their (then former) employer. In turn, the employer agrees to pay a fee.
When do you make a non-compete agreement?
Having such an agreement between the employer and the employee is not compulsory. It is more typical for positions that require special skills, or if the employer’s business operates on a narrow market.
In Hungary, it is normal to include a non-compete clause in the labor contract at the start of the employment relationship. However, it can be a separate agreement, or it can be signed just before the employment relationship is terminated.
Define legitimate business interest
The non-compete agreements limits what activities the employee can participate in after the employment is terminated in order not to endanger the employer’s business. As such, forbidden territories must be clearly defined, including both activities and geographical scope. Moreover, the period affected cannot be longer than 2 years.
The definition of the conditions cannot be too wide, because that would be unfair towards the employee, but cannot be too narrow either, because that could make the agreement meaningless. To avoid the most common pitfalls and prevent litigation, involve a labor law specialist to create reasonable and fair definitions.
A non-compete agreement is not valid without compensation. The amount of that must be at least the third of the monthly gross salary of the employee for every month until the end of the non-compete period, paid either in one lump sum or in monthly instalments. The law only defines the minimum; the parties are allowed to agree on different terms. The compensation is supposed to be proportionate to the skills the employee cannot put to use.
Penalties and damages
If the employee does not hold themselves to the conditions set out in the non-compete agreement, the employer can sue for damages. However, that involves providing detailed calculations regarding the actual damages, which is difficult to do. To circumvent this, agreements normally define penalties, because then only the fact of contract breach needs to be proven. At the same time, a high penalty is expected to deter the employee from breaching the non-compete agreement.
Cancelling the non-compete agreement
The employer can cancel the non-compete agreement any time up till the end of the employment relationship. Actually, this is a common occurrence if the parties part ways in a peaceful manner. If there is a mutual agreement about the termination, it should include a separate part about the cancellation, otherwise it remains in force.
The employee may also withdraw from the agreement if they quit based on extraordinary termination. That can only happen if there was a serious violation or breach of contract on the part of the employer. In that case, the employee has the right to terminate the employment relationship without further ado, in which case they can also cancel the non-compete agreement.
What to include in a non-compete agreement?
While making a non-compete agreement is not mandatory, once you decide to make one, there are some elements you must include, as detailed above:
- Activities (detailed description)
- Duration (up to 2 years after termination)
- Compensation (at least one third of the gross salary / month)
- Penalty in case of breach of contract
Helpers at your service
The Helpers Team provides assistance not only with work permit application, but also with HR support, which includes legal advisory as well as payroll administration and accountancy. We can support you operation with contract templates too – make sure to tell us what you need, so we can find the best solutions for your Hungarian operation.