Non-competition (non-compete) clauses came into the spotlight this year as the US Federal Trade Commission (FTC) decided to impose a broad ban on their use. The underlying motive for this is the perception that the non-compete clauses, in the words of FTC Chair Lina Khan, keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new start-ups that would be created a year once non-competes are banned. However, this rule quickly faced challenges, including a lawsuit from the US Chamber of Commerce, which argued that it was unfounded and that the FTC exceeded its authority.
Non-compete clauses have enabled companies to protect their competitive advantages by preventing the “leakage” of valuable information through (former) employees. Employees often obtain specific knowledge and skills while working for a company, and businesses frequently invest in developing these capabilities. To incentivize and justify these investments in its employees and trust that companies vest in their employees, non-compete clauses serve as contractual protection for the employer and its business interests.
The Serbian legal system also recognizes non-compete clauses under its Labor Act. These clauses are typically part of the employment agreement but can also be subject to an independent contract. Many factors must be considered when incorporating this clause into an employment agreement, as it can have legal implications during and after the employment relationship.
Non-compete clauses specify the activities (works) that an employee cannot perform on their own behalf or for their own account, nor on behalf and account of another legal or natural person, without their employer’s consent. Additionally, non-competes can only be established if the employee gains new, important technological knowledge, access to a broad network of business partners, or access to critical information and secrets. Another essential element is the territory of application.
Non-competes can be effective during the employment period but may also extend beyond the termination of employment for a maximum of two years. If the non-compete survives the employment, the (ex) employee is entitled to compensation.
Therefore, to have an enforceable non-compete per Serbian law, it must meet the following conditions: (a) it is agreed between the employer and the employee, (b) it sets out activities that the employee cannot work without the employer’s consent, (c) the employee has access to new, technological knowledge, access to a wide network of business partners, as well as access to important information and secrets, (d) it has a defined territory, and (e) it includes compensation in case of surviving non-competes.
Although the Serbian non-compete rules seem relatively straightforward, they raise many questions. For instance, can the employer broadly prohibit “any activity,” or must the specific activities be carefully enlisted? Regarding territorial scope, can an employer stipulate worldwide applicability and use general terms such as “territories where the employer conducts business,” or must specific countries be listed? The law does not provide clear guidelines, and case law has yet to develop clear answers.
Another issue is compensation in case of surviving non-compete. The law only refers to an “agreed amount” without setting any additional requirements or rules on the compensation. In that situation, it is not uncommon for employees in Serbia (the weaker side in negotiating employment contracts) to agree to relatively low amounts, such as EUR 100 or even less. In Serbia, the available case law is limited in this matter and there is no generally accepted approach to non-compete compensation. By looking at international practice, we observe different models.
There are jurisdictions where the law does not mandate compensation (e.g., Switzerland), and regular salary may be considered as compensation for the non-compete. However, in the Swiss case, the courts are cautious about when and how they enforce non-compete clauses.
Other jurisdictions provide more clarity. German law prescribes remuneration of 50% of an employee’s salary. Overall, German law offers more detailed regulations on non-compete clauses.
Given Serbian courts’ general pro-employee stance, the general principles of equality in contracts, and Serbian rules on damages, employers who wish to enforce a non-compete should consider offering reasonable compensation, such as the German (50%) or Slovenian (one-third) model. Nevertheless, the law does not prohibit offering less, and such practice and enforceability could be achieved.
Non-compete clauses are valuable in protecting an employer’s interests and preventing conflicts of interest. However, it is essential to balance limiting employees’ labor rights and safeguarding the employer’s interests. When drafting such clauses, diligent care is needed to tailor the agreement to the specific circumstances. With proper drafting, enforcing a non-compete clause should not pose significant challenges.
By Nemanja Sladakovic, Head of Labor, and Marko Jovic, Associate, Gecic Law
This article was originally published in Issue 11.10 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
