Duty of Loyalty and Non-Compete Agreements – Rules Before and After Termination of Employment

The duty of loyalty is a fundamental element in employment relationships. It means that both the employer and employee are obliged to act loyally towards each other and take reasonable consideration of the other party's interests. This article highlights the content and scope of the duty of loyalty, with particular focus on non-compete agreements that can be made to extend and strengthen the employee's obligations even after the end of the employment relationship.

The legal basis for the duty of loyalty

The duty of loyalty in employment relationships has its legal basis in the employment contract. The Supreme Court in Rt. 1990 p. 607 (Saga Data) established that there is a "general and unwritten duty of loyalty and fidelity in employment relationships". The duty of loyalty is mutual, but in practice, it is most often the employee's duty of loyalty that becomes relevant.

The duty of loyalty is particularly important in employment relationships because:

• The employment contract is long-term

• The employment relationship requires cooperation between the parties

• The employment relationship presupposes a special trust relationship

The employee's duty of loyalty

General aspects of the duty

The employee's duty of loyalty has both a negative and a positive side:

• The negative side entails a duty to refrain from actions that harm the employer's interests

• The positive side entails a duty to actively safeguard the employer's interests

The duty of loyalty varies with the employee's position. Employees in senior positions are subject to a stricter duty of loyalty, which relates to the employer's greater need for trust in such employees.

The duty of loyalty also applies:

• During periods when the employee is exempt from work duties (leave, layoff)

• Outside working hours

Gifts and remuneration

An aspect of the duty of loyalty is that, as a general rule, employees cannot receive gifts, remuneration, or other benefits from the company's customers, suppliers, or other business connections without informing the employer. This is justified by:

1. The fact that such benefits can create doubt as to whether the employee’s work performance is influenced against the employer's interest

2. The employer's right to the advantages that constitute the result of the employee’s work performance

An exception applies to gifts customarily given as a token of appreciation for a service already provided, such as tips to waiters.

Side jobs and other work during free time

In principle, an employee can freely dispose of their own free time, including taking on side jobs. However, the duty of loyalty sets certain limits:

1. The employee cannot perform work that results in such a heavy burden that it affects their performance of work for the employer

2. The employee cannot perform work that undermines trust in the performance of work for the employer

These limitations are particularly relevant in competitive businesses.

Competition with the employer

During the employment relationship

It is considered a breach of the duty of loyalty if an employee engages in competitive actions as long as the employment relationship persists. This also applies during the notice period.

The key assessment criterion is whether the employee's actions harm the employer's interests. An employee can prepare to start a competing business after the end of the employment relationship, but cannot:

• Make preparation actions visible in the market

• Contact the employer's customers or suppliers to attract them to a competing business

• Use the employer's trade secrets

The consequences of illegal competitive actions can be:

• Dismissal or termination

• Liability for economic loss incurred by the employer

• Liability for the company benefiting from the disloyal behavior (cf. Marketing Act § 25)

After the end of the employment relationship

The starting point is that the employee is free to engage in activities that compete with the former employer after the employment relationship ends. The duty of loyalty no longer imposes significant restrictions on the employee's freedom of action.

This freedom can, however, be limited through:

1. Legislation (Trade Secrets Act, Quarantine Act)

2. Non-compete agreements

Non-compete agreements under the Working Environment Act

The Working Environment Act Chapter 14 A regulates three types of non-compete agreements:

1. Non-compete clauses: Agreements that limit the employee's access to take up a position with another employer or start, run, or participate in another business

2. Customer clauses: Agreements that limit the employee's access to contact the employer’s customers

3. Recruitment clauses: Agreements between the employer and other companies that prevent or limit the employee's ability to take employment with another company

Scope

The rules on non-compete and customer clauses apply to agreements between the employer and employee entered into during the employment relationship. The agreement must be entered into either:

• At the establishment of the employment relationship

• While the employment relationship is ongoing

• In connection with the termination of the employment relationship

The company's chief executive can, under certain conditions, be exempted from the rules, provided that a written agreement is made about this before departure and that the executive is entitled to severance pay.

Limitations based on the grounds for termination

The employer’s right to enforce non-compete or customer clauses is limited in the following situations:

1. Upon termination by the employer, unless the termination is justifiably based on the employee's conduct

2. When the employee themselves terminates the employment relationship, if:

   • The employer has breached their obligations in the employment relationship

   • The breach has given the employee reasonable grounds to terminate the employment relationship

Legal regulation of non-compete clauses

The Working Environment Act sets several requirements for a non-compete clause to be valid:

1. Special need: The employer must have a special need for protection against competition

2. Written form: The non-compete clause must be made in writing

3. Time limitation: The non-compete clause cannot be enforced longer than one year after the end of the employment relationship

4. Compensation: The employee is entitled to compensation when the non-compete clause comes into effect

5. Statement: The employer must provide a written statement on whether and to what extent the clause will be enforced

These rules help to balance the employer's legitimate need for protection against the employee's need to freely utilize their skills and work ability after the end of the employment relationship.

Conclusion

The duty of loyalty in employment relationships sets important boundaries for both the employee and employer. For the employee, the duty particularly imposes restrictions on the ability to engage in competing business while the employment relationship exists. After the relationship ends, non-compete agreements can extend these restrictions, but the Working Environment Act imposes strict requirements on such agreements to ensure they are not unduly burdensome for the employee.