Employees are the foundation of every company and they directly influence the development of the company and the achievement of goals. Through work, employees acquire certain knowledge that is afterwards highly wanted on the competitive market or a wide circle of acquaintances that can contribute to the further development of the company, and by their transfer to competing companies, the previous employer risks less favorable results on the market, the discovery of previously hidden innovative approaches, knowledge, methods work etc.

The institute of “prohibition of competition” in labor law arose out of the need to protect the company’s values, on which rests the essence of business, and which employees necessarily encounter during work.

The scope of application of the prohibition of competition clause

The Labor Law has certain limitations when contracting a prohibition of competition clause.

Legal conditions for contracting the clause

The ban on an employee to perform certain tasks on his own behalf and for his own account, as well as on behalf of and for the account of another entity, without the consent of the employer, is reserved exclusively for jobs where the employee can acquire new, particularly important technological know-how, a wide circle of business partners or to comes to know significant business information and secrets. In the event that the stated conditions are not met, the employer does not have a legal mechanism to limit the employee’s work in terms of the prohibition of competition.

Exclusively contractual institute

The prohibition of competition clause is stipulated in the employment contract with each employee individually and cannot be reserved only for the general act of the employer, that is, it cannot be unilaterally determined by the employer.

Territorially, temporally and personally limited institute

The application of the prohibition of competition clause can be tied to a certain territory, as it can be freely limited to the “prohibition” of work only for certain categories of companies and persons. When it comes to the time limit, the Law leaves the possibility that this clause is valid for the duration of the employment contract, as well as a maximum of two years after the termination of the employee’s work.

Compensation amount

Our Law does not regulate the minimum or maximum amount of compensation, leaving the employer and the employee to jointly agree on it when concluding the employment contract. The question can be raised whether, in this sense, there is equality of the contracting parties, and it would be useful for future regulations to also regulate this sensitive issue.

Certainly, when agreeing on the amount of compensation, general principles must be taken into account, and this compensation should justify its purpose, and not just fill in the form.

What if the employer does not pay the agreed compensation?

As one of the frequent questions in this area is the question of what happens if the employer contracts a prohibiton of competition clause that is valid for two years after the end of the employment relationship, and does not pay the employee compensation or prescribes that it is included in the basic salary for the duration of the employment relationship?

The position of our judicial practice in this situation is unequivocal – in the case of non-payment of the agreed compensation or in the event that it is omitted in the employment contract, the employer will not have the right to demand compensation of damages from the employee in the event that the employee after the termination of the employment relationship establishes a new  one  on competitive jobs.

In the case of a partial payment, it is assessed in each specific situation whether the purpose of the paid amount has been achieved or not, where the institute and its interpretation is certainly more favorable to the employee, i.e. to a former employee.

Can the employer waive the clause?

In practice, the question arose as to what happens to the prohibition of competition clause in the event that it is contracted for a period of two years after the termination of the employment relationship, and the employer has no interest in it after the termination of the employment relationship or simply wants to waive the clause? Can the employer waive it on his own initiative?

Although the Labor Law does not regulate this issue, by applying the general principles of contract law, the position can be taken that the employer cannot on his own initiative change the provision, which is prescribed by the employment contract as a consent of the will of the two contracting parties, but that it can be changed by an annex to the contract on work while the employment relationship lasts or by a certain type of agreement after the termination of the employment relationship.

In order to overcome the above-mentioned problem, in practice it is resorted to a more skillful formulation of the provisions that regulate this institute in the employment contract itself, which would give the employer a greater opportunity to decide later whether he wants to use this opportunity or not.

Vujinović & Partners has a developed practice in the field of labor law and advises domestic and foreign clients in all aspects of labor and immigration law. For all questions related to labor law, you can contact us at employment@vujinovicpartners.rs.