Employer and Employee may agree that for a certain period of time after the termination of employment contract, the Employee may not be employed by another entity competing with the Employer and may not enter into transactions, for his own account or for the account of a third party, which represent competition for the Employer. If parties agree that the non-compete clause is to be in force for more than two years, the contractual prohibition would bind the contracting parties for only two years, and the part of contractual provision contracting a period longer than two years would be null and void.
When is it not binding on the employee
The contractual prohibition of competition does not bind the employee if its purpose is not to protect the justified interests of the employer or if they, considering the scope, period and purpose of the prohibition, and in relation to justified business interests of the employer, disproportionately limit the work and progress of the employee. The aim is not to prevent the employee from working, but only to work with the employer who is a competition for the previous employer.
Compensation
The contractual prohibition of competition is binding for the employee only if the employer has undertaken to pay the employee compensation of at least half of the average salary paid to the employee in the three months before the termination of employment contract. The employer is obliged to pay the compensation no later than the fifteenth of the month for the previous month. In practice, the question has appeared as to whether an employer is obliged to pay wage compensation if an employee is employed by an employer who is not in competition with the previous employer during the period of non-competition. The answer is that in that case the Employer is obliged to pay compensation. It is considered that if an employee is bound by the prohibition of competition, this does not mean that he must be unemployed during the period of validity of the prohibition.
Contractual penalty
The contract may provide for a penalty for the employee who violates the prohibition of competition, i.e. who is employed by an employer whom the former employer considers to be his competition on the market or if the employee establishes his own company with the same or similar activities. The penalty is set at a specific amount, i.e. in the amount of several salaries that the employee earned with the former employer. Pursuant to Article 106 of the Labour Law, a contractual penalty may also be agreed in the event that the employer does not undertake to pay salary compensation during the contractual prohibition of competition, if at the time of concluding such a contract the employee received salary higher than the average salary in Croatia. In that case, if only contractual penalty is provided for in the event of non-compliance with the contractual prohibition of competition, the employer may, in accordance with the general rules of the law of obligations, demand only payment of that penalty and not the fulfilment of obligations or compensation for major damage.
Competitive activity
Answer to this question in a specific case will be given by the court before which the proceedings are conducted. The prohibition can refer only to other companies, i.e. business entities that represent real competition for the current employer. It is important to establish whether the new and the former employer offer the same products and services on the market, where the real situation is the decisive factor, and not the one according to the court register.
Difference between statutory prohibition and contractual prohibition of competition
Statutory prohibition of competition lasts for the duration of the employment relationship, while the contractual prohibition of competition is valid only after the termination of employment contract. Statutory prohibition of competition refers to every employment relationship without the need for special contracting, and the contractual prohibition of competition must be explicitly agreed.
What to pay attention to
If an employment contract is concluded and it contains a contractual prohibition of competition, the amount of compensation to be paid by the former employer during the period of prohibition of competition may be negotiated. The law prescribes a minimum amount of compensation, but there is no obstacle to contracting that amount in a significantly higher amount through negotiations.
It is possible to negotiate a contractual penalty in case of violation of the prohibition of competition, and its amount, and it can be negotiated to not have the contractual penalty as part of the contract.
It is also good to determine in advance who actually represents competitors to the employer.