Secrecy and competition

Last updated: 03.08.2021

An employer may determine which information an employee is obligated to keep as a production or business secret.
Confidentiality and restraint of trade clause agreements shall be entered into in writing.

Duty to maintain confidentiality

An employer and employee may agree on a duty to maintain confidentiality (section 22 of the Employment Contracts Act).

Not all confidential information relating to a company shall be considered a business secret. The concept of business secrets is regulated in the Restriction of Unfair Competition and Protection of Business Secrets Act. A business secret is information which meets the following requirements:

it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;
it has commercial value because it is secret; and
it has been subject to reasonable measures under the circumstances, by the person lawfully in control of the information, to keep it secret.

The employer determines which information related to his or her activities requires protection and shall inform the employee by listing the confidential information either in the employment contract, organisation of work rules or in a special document. Usually, the duty to maintain confidentiality is related to the work process, product development, pricing, remuneration policy or customer base. Not everything related to an employment relationship can be declared confidential. For example, an employee cannot be required to keep the amount of his or her wages a secret even from family members.

In an employment relationship, an employee can only be bound by the duty to maintain confidentiality if the employer has clearly defined the confidential information and communicated it to the employee in writing. If an employer has failed to notify an employee in writing of the confidential information, the law presumes that the employee is not bound by the duty to maintain confidentiality (subsections 6 (9) of the Employment Contracts Act).

After cancellation of the employment contract, the employee shall remain bound by the duty to maintain confidentiality to the extent required to protect the legitimate interests of the employer. The former employee is not entitled to any additional special remuneration; however, the duty to maintain confidentiality, unlike the agreement on restraint of trade clause, cannot restrict the employee’s options in finding a new job or reduce his or her chances of earning income.

Agreement on restraint of trade clause

Under an agreement on restraint of trade clause an employee assumes the obligation not to work for the employer’s competitor or not engage in the same economic or professional activity as the employer. An employer cannot prevent an employee from working in a sector where he or she does not operate. An employee cannot be prohibited from performing any work for a competitor, only activities at another job that may affect the economic activities of the employee’s former employer (Judgment of the Supreme Court. 2-15-16682/73).

An agreement that significantly reduces the employee’s opportunities for free self-realisation and higher income is justified if (Judgment of the Supreme Court. 2-15-16682 /73 ):

the restriction is necessary to protect the special economic interest of the employer, as the employee may significantly harm the employer by using the knowledge acquired in the course of the employment relationship;
the restriction is reasonably delimited in terms of space, time and objects (the restriction is proportionate to the interest protected by the employer and the employee understands in which territory, for how long and for which activity the restriction applies); the employee understands the nature of the restriction and has been informed of its content in writing.
If any of the above requirements are not met, the agreement on restraint of trade clause is void pursuant to subsection 23 (4) of the Employment Contracts Act. A void agreement has no legal consequence from the outset and does not have to be performed.

It is usually agreed that the restraint of trade clause only applies during the employment relationship and that the employer has no obligation to pay additional remuneration for it. However, there are particularly competitive areas of activity where it is essential for the employer to keep production or business secrets and the customer base a secret in order to protect their economic interests. In this case, a written agreement on restraint of trade clause is entered into pursuant to section 24 of the Employment Contracts Act which shall not remain in effect longer than 12 months after expiry of the employment relationship.

Pursuant to subsection 24 (1) of the Employment Contracts Act, an agreement on a restraint of trade clause applicable after the expiry of an employment contract is valid only if it meets the following conditions:

It is necessary for protecting the employer’s special economic interest, in maintenance of confidentiality of which the employer has a legitimate interest, especially if the employment relationship allows an employee to become acquainted with the employer’s clients or access the employer’s production and business secrets, and the use of this knowledge may harm the employer considerably;
it has been delimited reasonably and recognisably for the employee in terms of space (geographical scope), time (duration) and objects (object of agreement);
it has been made in writing;
An employer shall pay the employee reasonable monthly compensation for adherence to the agreement on the restraint of trade clause after the expiry of the employment contract;
it has been made for up to one year starting from the expiry of the employment contract.

If the agreement on restraint of trade clause does not meet all the conditions, it is considered void.

The amount of compensation paid for the restraint of trade clause shall be fair and compensate for the restricted choice of work because the employee is limited in his or her area of activity and free choice of work (Judgment of the Supreme Court. . 3-2-1-39-11).

Contractual penalties

The definition of a contractual penalty is provided in sections 158–163 of the Law of Obligations Act. A contractual penalty is an obligation which is prescribed in the contract and under which the party which fails to perform the contract undertakes to pay an amount of money determined by the contract to the injured party (section 158 (1) of Law of Obligations Act).

An employer is not free to impose any fines in an employment relationship. There are five grounds for agreeing on a contractual penalty in an employment relationship:

breach of the obligation to maintain business and production secrets (section 22 of the Employment Contracts Act);
breach of restraint of trade clause obligation (section 26 of the Employment Contracts Act)
refusal to commence employment (section 77 of the Employment Contracts Act);

leaving employment for the purpose of termination of employment as a wrongful breach of the employment contract on the part of the employee (section 77 of the Employment Contracts Act); violation of occupational health and safety requirements (section 14¹ of the Occupational Health and Safety Act)

Reduction of contractual penalty

If a contractual penalty to be paid is unreasonably high, the court may reduce the penalty to a reasonable amount at the request of the party obligated to pay the penalty, taking into particular account (subsection of 162 (1) of the Law of Obligations Act):

the extent to which the obligation has been performed by the party;
the legitimate interests of the other party;
the economic situation of the parties.

A party obligated to pay a contractual penalty does not have the right to require a reduction of the penalty after the party has paid the penalty (subsection 162 (3) of Law of Obligations Act). Therefore, if an employer claims a contractual penalty from an employee that the employee finds to be unreasonably high, an application to reduce the contractual penalty should be submitted to a labour dispute resolution body (labour dispute committee or court) prior to payment.

The Supreme Court has clarified in judgment No. 3-2-1-132-12 that the court can intervene in changing the amount of a contractual penalty only at the request of the debtor. The reduction of the contractual penalty is a court’s discretionary decision that the court makes by considering the interests of the parties. In doing so, it shall take into particular account the extent to which the obligation has been performed by the defendant, the legitimate interests of the plaintiff and the economic situation of the parties pursuant to subsection 162 (1) of the Law of Obligations Act. The absence of damage may be a cause to reduce the contractual penalty if reclaiming the contractual penalty to the agreed extent is not in accordance with the principle of good faith.