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Non-competition Clause After the Termination of the Employment Contract

Non-competition Clause After the Termination of the Employment Contract

Serbia
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The Labour Law contains only 2 articles related the non-competition clause.

It says: “An employee could be prohibited by the employment contract to perform certain work on his own behalf and for his own account, and also on behalf and for the account of another legal or natural person, without the consent of his employer (hereinafter: non-competition clause).

The non-competition clause could be stipulated only in case the employee, by working with the employer, could acquire new, particularly important technology know-how, a wide circle of business partners, or learn significant business information and secrets.

Territorial validity of the non-competition clause is determined by employer’s internal act and employment contract, and it depends on the type of prohibited work.

In case the employee breaches the clause, the employer is entitled to claim damages from the employee. (Article 161)

It can be stipulated in the employment contract that the non-competition clause is obligatory after the termination of the employment, covering a period that may not exceed two years after the termination of the employment contract.

This non-competition clause could be stipulated if the employer is obliged by the employment contract to pay pecuniary compensation to the employee in the agreed amount. (Article 162)”

In practice, the courts (both the Basic and the Appellate) do not have unanimous stands on an employer’s possibility to release his employee from the non-competition clause after the termination of the employment contract.

There are judgments stating the employer is not entitled to release the employee from the non-competition clause without consent of employee. The argumentation says that the employment contract is bilateral, hence the wavier of enforcement of the non-competition clause could only be done through the mutual consent of the contractual parties and not solely by the employer. Therefore, signing the Annex would be necessary.

In another words, prior to the termination of the employment contract the employee should be served with the offer for changing the employment contract, i.e., the offer for conducting the Annex by which he will be released from the non-competition clause. The employer is in even worse position should he decide to resolve the employee from the non-competition clause after the termination of the employment, having in mind that the Annex could not be concluded after such termination. It seems that in this scenario employers’ “hands are tied” and he will be forced to pay compensation to the employee even if he does not have an interest to protect himself by the non-competition clause.

Contrary to this, there are judgments stating that non-competition clause actually represents a damage compensation for the employee since after the termination of the employment he will not be able to use his know-how or conclude another employment. Consequently, if the employer releases the employee from the prohibition of competition, the damage will not occur to the employee, since he can freely use new, particularly important technology know-how, a wide circle of business partners, significant business information and secrets. Thus, the employee will not be entitled for the damage compensation i.e., compensation for the non-competition clause.

Furthermore, the wording of the law is that the employee is forbidden to conduct any work without the employer’s consent. Using argumentum a contrario, in case of the employer’s approval, the employee is allowed to perform work on his own behalf and for his own account, and on behalf and for the account of another legal or natural person.

It is important to note that in any case, the employer’s right to release the employee from the non-competition clause should be assessed through examining whether the employee has acquired new, particularly important technology know-how, a wide circle of business partners, or learn significant business information and secrets during the employment period. If not, it seems that the conditions for activating the non-competition clause were not met and therefore the employee can be released from such an obligation (even if it can be claimed that the clause is non-binding).

Due to the contradiction of the courts practice on such an important issue, particularly of the Appellate courts, and a necessity for the legal certainty, the Supreme court needs to take a stand on this issue and decide whether the employer is entitled to waive the enforcement of the non-competition clause or not. We will keep you posted on this and in the meantime, consider stipulating in the employment contract that upon its termination the employer could waive the enforcement of the non-competition clause in writing, whereby the employee explicitly consents in advance to such waiver of the non-competition clause. 

The information in this document does not constitute legal advice on any particular matter and is provided for general informational purposes only.

By Ivana Disovic, independent Attorney at Law in cooperation with Karanovic & Partners

Serbia Knowledge Partner

The oldest full service commercial law firm in Serbia, founded in 1991, JPM with three decades of experience in assisting local and international businesses presence and growth not only in Serbia but throughout the SEE region.

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