Non-compete agreements in employment contracts

What is a non-compete agreement?

By a non-compete agreement the employee undertakes not to work for a competitor of the employer or not to engage in the same economic or professional activity as the employer: „mitte töötada tööandja konkurendi juures või mitte tegutseda tööandjaga samal majandus- või kutsetegevuse alal“ [1] (TLS § 23 lg 1). Without such an agreement the employer may not prohibit the employee from working for another employer (TLS § 23 lg 1) [1].

According to the Supreme Court (Riigikohus), the parties must agree who the employer's competitor is and what the competing activity that may harm the employer consists of. The employee cannot be prohibited from all work for a competitor, only from activities that may affect the former employer's business (RK 2-15-16682/73) [3].

If the parties agree on a non-compete restriction, the employer must inform the employee of the content of the agreement (TLS § 6 lg 3) [4]. If the employer has not done so in writing, it is presumed that no such agreement was concluded (TLS § 6 lg 9) [4].

When is a non-compete agreement valid?

The agreement may be concluded if it is necessary to protect a special economic interest of the employer that the employer has a legitimate interest in keeping secret – in particular where the employment gives the employee access to the employer's clients or to production and business secrets, and using that knowledge could cause the employer significant harm (TLS § 23 lg 2) [1]. In addition, the restriction must be „ruumiliselt, ajaliselt ja esemeliselt mõistlikult ning töötajale äratuntavalt piiritletud“ [1] (translation: reasonably limited in territory, time and subject matter, in a way the employee can recognise; TLS § 23 lg 3).

According to the Supreme Court, the agreement is justified only if all these requirements are met; if even one is not, the agreement is void (RK 2-15-16682/73) [3]. On territory, the court held that from the point of view of a reasonable person a restriction covering the whole world cannot be considered recognisable. For an agreement concluded in Estonia, the territory is presumed to be Estonia as the country where, to the employee's knowledge, the employer operated when the agreement was concluded (RK 2-15-16682/73) [3].

When does the restriction apply after the employment contract ends?

An agreement that applies after the employment contract ends is valid only if all of the following conditions are met (TLS § 24 lg 1) [2]:

• it meets the conditions of TLS § 23 lg 2 and 3 (TLS § 24 lg 1 p 1) [2];
• it was concluded in writing (TLS § 24 lg 1 p 2) [2];
• compensation is paid for it (TLS § 24 lg 1 p 3) [2];
• it was concluded for up to one year from the end of the employment contract (TLS § 24 lg 1 p 4) [2].

Compensation. For complying with the agreement after the employment contract ends, the employer pays the employee reasonable monthly compensation (TLS § 24 lg 3) [2]. The Act does not set a specific amount.

Written form. Under the General Part of the Civil Code Act (tsiviilseadustiku üldosa seadus, TsÜS), a document in written form must be signed by hand unless the law provides otherwise (TsÜS § 78 lg 1) [5]. The electronic form is equivalent to the written form (TsÜS § 80 lg 1) [6]; a digital signature is also an electronic signature (TsÜS § 80 lg 3) [6].

If an agreement that applies after the employment contract ends does not meet the requirements of TLS § 24 lg 1, the employer cannot rely on its invalidity if the employee complies with the agreement (TLS § 24 lg 2) [2].

Can the agreement be terminated?

• The employer may terminate the agreement at any time by giving the employee at least 30 calendar days' notice (TLS § 25 lg 1) [7].
• The employee may terminate the agreement by giving at least 15 calendar days' notice if, due to a change in circumstances, the employer's interest in restricting competition is no longer reasonable (TLS § 25 lg 2) [7].
• If the employee has terminated the employment contract because of a material breach by the employer, the employee may also terminate the non-compete agreement within 30 calendar days, giving at least 15 calendar days' notice (TLS § 25 lg 3) [7].

The termination rules for the employer (30 days' notice) and the employee (15 days' notice) in TLS § 25 lg 1 and 2 also apply to an agreement that applies after the employment relationship ends (TLS § 25 lg 4) [7].

What happens if the employee breaches the restriction?

The parties may agree on a contractual penalty (leppetrahv) for breach of the non-compete obligation (TLS § 26 lg 1) [8]. The penalty does not exclude a claim for damages to the extent the penalty did not cover them (TLS § 26 lg 2) [8]. During employment, breach of the non-compete obligation is one example of good reason for which the employer may terminate the employment contract extraordinarily (TLS § 88 lg 1 p 8) [9]. Termination for a breach of duty must as a rule be preceded by a warning from the employer; no warning is needed if, in good faith, the employer cannot be expected to give one because the breach is particularly serious or for another reason (TLS § 88 lg 3) [9].

The rules of the Law of Obligations Act (võlaõigusseadus, VÕS) apply to the penalty:

• If the penalty is unreasonably high, a court may, at the request of the party obliged to pay, reduce it to a reasonable amount (VÕS § 162 lg 1) [10]. An agreement deviating from this to the detriment of the party obliged to pay is void (VÕS § 162 lg 2) [10], but a reduction cannot be claimed after the penalty has been paid (VÕS § 162 lg 3) [10].
• If the breach is excusable, the penalty cannot be claimed unless the contract provides otherwise (VÕS § 160) [11].
• The employer loses the right to claim the penalty if it does not notify the other party within a reasonable time after discovering the breach that it is claiming the penalty (VÕS § 159 lg 2) [12].

What the law says

• „Tööandja ei tohi keelata töötajal töötada teise tööandja juures, välja arvatud, kui pooled on sõlminud konkurentsipiirangu kokkuleppe.“ [1] (translation: the employer may not prohibit the employee from working for another employer unless the parties have concluded a non-compete agreement; TLS § 23 lg 1) – a second job or a new job is allowed by default.
• „Käesolevas paragrahvis sätestatud nõudeid rikkudes sõlmitud kokkulepe on tühine.“ [1] (translation: an agreement concluded in breach of the requirements of this section is void; TLS § 23 lg 4).
• „Tööandja maksab töötajale konkurentsipiirangu kokkuleppest kinnipidamise eest pärast töölepingu lõppemist igakuist mõistlikku hüvitist.“ [2] (translation: for complying with the non-compete agreement after the employment contract ends, the employer pays the employee reasonable monthly compensation; TLS § 24 lg 3).
• „Tööandja võib konkurentsipiirangu kokkuleppe üles öelda igal ajal, teatades sellest töötajale vähemalt 30 kalendripäeva ette.“ [7] (translation: the employer may terminate the non-compete agreement at any time by giving the employee at least 30 calendar days' notice; TLS § 25 lg 1).
• „Töötaja ja tööandja võivad kokku leppida konkurentsipiirangu kohustuse rikkumise leppetrahvi.“ [8] (translation: the employee and the employer may agree on a contractual penalty for breach of the non-compete obligation; TLS § 26 lg 1) – a penalty must be agreed separately.

What to do

1. Find the non-compete agreement in the employment contract or a separate document and check whether the employer has informed you of its content in writing (TLS § 6 lg 3 and 9) [4].
2. Check whether the restriction protects a special economic interest of the employer and whether it is reasonably and recognisably limited in territory, time and subject matter (TLS § 23 lg 2 and 3) [1]. See whether it states who the competitor is and which activity is prohibited (RK 2-15-16682/73) [3].
3. If the restriction applies after the contract ends, check that it is in writing, lasts up to one year from the end of the contract and that compensation is paid monthly (TLS § 24 lg 1 and 3) [2].
4. If circumstances have changed so that the employer's interest is no longer reasonable, you may terminate the agreement with at least 15 calendar days' notice (TLS § 25 lg 2) [7].
5. If the employer claims a penalty, check whether it was agreed (TLS § 26 lg 1) [8], whether the breach was excusable (VÕS § 160) [11] and whether the amount is unreasonably high – if so, you may ask for a reduction before paying (VÕS § 162 lg 1 and 3) [10].

Frequently asked questions

Can the employer prohibit a second job?

Only on the basis of a non-compete agreement, and even then only work for a competitor of the employer or activity in the same economic or professional field as the employer; otherwise the employer may not prohibit the employee from working for another employer (TLS § 23 lg 1) [1].

How long can a non-compete apply after the employment ends?

Up to one year from the end of the employment contract (TLS § 24 lg 1 p 4) [2].

Does the employer have to pay for the restriction?

After the employment contract ends, yes: the employer pays reasonable monthly compensation, and without it the restriction is not valid (TLS § 24 lg 1 p 3 and lg 3) [2]. If the employee nevertheless complies with the agreement, the employer cannot rely on its invalidity (TLS § 24 lg 2) [2].

Can the employer withdraw from the agreement to avoid paying compensation?

The employer may terminate the agreement at any time but must give the employee at least 30 calendar days' notice (TLS § 25 lg 1) [7].

Do these rules apply to a management board member?

The provisions on employment contracts do not apply to the contract of a member of a legal person's management body (TLS § 1 lg 5) [13].