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Non-Competition Clauses: How to Prevent Former Employees from Working for the Competition

Non-Competition Clauses: How to Prevent Former Employees from Working for the Competition

Romania
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In the present economical context, which often favors the migration of the employees from one company to another, the only tool left for employers seeking to prevent em-ployees from working for competitors after leaving their companies is to include non-competition clauses in employment contracts.

Pursuant to the Romanian Labor Code, parties may negotiate and include a non-competition clause into an employment contract expressly stating that the employee is precluded from competing against his/her employer for a maximum period of two years after the termination of the employment contract. In return for this obligation, the em-ployer shall pay a monthly compensation to the employee throughout the non-compete period.

General Conditions of Validity 

In order to be valid and have the desired effect, a non-competition clause has to be in-cluded in the employment contract by agreement of the parties, either at the conclusion of the contract or at a later date by means of an addendum.

Furthermore, non-competition clauses are effective provided that the following elements are included: a) Activities prohibited to the employee. The non-competition clause should establish specific prohibited activities rather than completely prohibiting the employee from exercising his/her profession or specialization (as such so-called “exclusivity claus-es” are prohibited under Romanian law); b) The period during which the non-competition clause takes effect. The maximum period that a non-competition clause may be effective is two years from the date of termination of the employment contract; c) Specific third parties for which the employee may not work. The rule requiring that specific third parties be named proves to be difficult in a market economy in which economic agents come and go with relatively high frequency. Therefore, the doc-trine allows third parties be listed as a category of employers (such as, for exam-ple, travel agencies, car manufacturers, etc.), in addition to the identification of primary competitors on the market; d) The applicable geographic area. As a rule, the geographic area may not include the entire country, which would be in fact an impermissible general comprehensive ban on exercising one’s profession/trade; e) The amount of non-competition indemnity. Under the Romanian Labor Code, the monthly non-competition indemnity is negotiable – and must be at least 50% of the average gross salary of the employee in the six months prior to the date of em-ployment termination. 

In the case of unfair terms, the employee may refer the matter to the competent court, which can cancel the clause totally or partially, decreasing the effects of the non-competition clause within the legal limits allowed. Therefore, as they limit the freedom to work (i.e., the right to work), care should be taken to draft non-competition clauses in full compliance with both the law and court practice in order to ensure the desired ef-fects.

Amending the Non-Competition Clause

Since the employment contract is the law of the parties, consent must be given not only when the contract is entered into but also for any modification or termination thereof. Competent courts have consistently ruled that the employer does not have a unilateral right to waive a non-competition clause, unless agreed-upon by both parties in writing in advance. 

Legal Liability

Employees who breach a non-competition clause may be obliged to reimburse the in-demnity paid by the employer. A claim for additional damages may be filed by the em-ployer provided that it can prove damages suffered as a result of the competitive acts of the employee. Penalty clauses are strictly forbidden and therefore void under employ-ment law.

Conclusion

Non-competition clauses seem to have a rather low practical relevance for the employer, as the immediate effect of breaches is only the recovery of indemnities paid by the em-ployer. Nevertheless, the psychological impact of such clauses often prevents employees from competing with their employer’s business during their effective period.

By Andreea Suciu, Head of Employment & Pensions, Noerr Romania

This Article was originally published in Issue 4.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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Țuca Zbârcea & Asociații is a full-service independent law firm, employing cross-disciplinary teams of lawyers, insolvency practitioners, tax consultants, IP counsellors, economists and staff members. It also operates a secondary law office in Cluj-Napoca (Romania), and has a ‘best-friend’ agreement with a leading law firm in the Republic of Moldova. In addition, thanks to the firm’s dedicated Foreign Desks, the team provides the full range of services to international investors seeking to gain a foothold or expand their existing operations in Romania. Since 2019, the firm and its tax arm are collaborating with Andersen Global in Romania.

Țuca Zbârcea & Asociaţii is providing legal services in every aspect of business, covering all major areas of practice: corporate and M&A; litigation and international arbitration; corporate tax; public procurement; TMT; employment; insurance; banking and finance; capital markets; competition; healthcare and pharmaceutical; energy and natural resources; environmental; intellectual property; real estate; regulatory legal services.

Țuca Zbârcea & Asociaţii is a First-Tier law firm in all international legal directories and a multiple award-winning law firm both locally and internationally. It received the CEE Deal of the Year Award (DOTY Awards 2021) and the Law Firm of the Year Award: Romania (IFLR Europe Awards 2021). 

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