Non-Compete Clauses in Employment Relationships: Regulations and Conditions under the Working Environment Act

Introduction

Non-compete clauses are agreements between the employer and the employee that restrict the employee's ability to work for competitors or start their own business after the employment relationship has ended. The Working Environment Act Chapter 14 A contains detailed rules regarding such agreements, with strict requirements for content, validity, and compensation. This article provides a thorough review of the regulations for non-compete clauses, from definition and formal requirements to obligations for explanation and calculation of compensation.

What is a Non-Compete Clause?

The Working Environment Act § 14 A-1 (1) defines a non-compete clause as an "agreement between employer and employee that restricts the employee's access to take a position with another employer or start, run, or participate in another business after the termination of employment".

For an agreement to be considered as a non-compete clause, four criteria must be met:

1. The agreement must be entered into between the employer and the employee

2. The agreement must restrict the employee's freedom of action (either through prohibition or by making certain actions less attractive)

3. The restriction must concern access to take a position with another employer or the ability to start, run, or participate in another business

4. The agreement must regulate the relationship after the termination of employment

Restrictions on freedom of action include both direct prohibitions and agreements that make it less attractive for the employee to act in certain ways, for example by requiring compensation to the previous employer.

Formal Requirements for Non-Compete Clauses

For a non-compete clause to be valid, the Working Environment Act prescribes two formal requirements:

Requirement for Written Form

The non-compete clause must be made in writing, cf. Working Environment Act § 14 A-1 (3). This is a condition of validity, and the purpose is to ensure notoriety and predictability regarding the agreement.

Time Limitation

A non-compete clause can be enforced for a maximum of one year from the termination of employment, cf. Working Environment Act § 14 A-1 (2) second sentence. This period is commonly referred to as the quarantine period.

Basic Condition – Special Need for Protection Against Competition

Even if a non-compete clause is formally valid, it can only be enforced "as far as necessary to safeguard the employer's special need for protection against competition", cf. Working Environment Act § 14 A-1 (2).

This basic condition involves a two-part assessment:

1. Conditions of the employer's operation: There must be trade secrets or know-how that are worthy of protection.

2. Employee's insight: The employee must have actual knowledge of these conditions.

Worthy of Protection Conditions

It is primarily trade secrets and know-how that can form the basis for a non-compete clause. What qualifies as trade secrets and know-how must be determined based on law and case practice.

The Business Secrets Act § 2 defines a business secret as information that:

• Is secret (not commonly known or easily accessible)

• Has commercial value due to being secret

• The owner has taken reasonable measures to ensure it remains secret

Know-how is at the border between trade secrets and general knowledge. In Rt. 1964 s. 238 (Notflottør), the Supreme Court defined know-how as "the collection of technical details, knowledge, and experiences that collectively can be crucial for a company's competitiveness, but which individually may seem insignificant".

General knowledge that the employee has acquired through education and experience does not provide grounds for protection.

Employee's Actual Insight

It is the employee's actual knowledge of trade secrets and know-how that is decisive, not the title of the position or the level in the organization. Relevant assessment factors can include:

• Employee's position

• Length of employment

• Access to sensitive information

• Participation in development work

For employees with short-term employment relationships (six months or less), there will only exceptionally be grounds to enforce a non-compete clause.

Assessment of Necessity

The non-compete clause can only be enforced to the extent necessary to safeguard the employer's needs. This means that:

• The clause can only cover businesses that the employer actually competes with or that may become competitors in the near future

• The clause cannot extend over a longer time than the protection against competition dictates

A non-compete clause that is enforced to a greater extent than necessary may be wholly or partly voided (censored).

Employer's Duty to Explain

To ensure predictability for the employee and prevent the use of unnecessary clauses, the Working Environment Act § 14 A-2 imposes a duty to explain on the employer.

Timing of Explanation

• The employee can request a written explanation at any time as to whether the non-compete clause will be enforced

• The employer must provide the explanation within four weeks of a written request

• Upon termination of employment, special deadlines apply if an explanation has not already been given

Content of the Explanation

The explanation must include:

1. Whether and to what extent the non-compete clause will be enforced, including:

   • The duration of the clause

   • Geographical area of effect

   • Which business areas or types of business are covered

2. Which conditions justify that the employer has a special need for protection against competition

Binding Effect

The explanation is binding for the employer for three months from when the employee received the written explanation. If the employment relationship ends, the explanation is binding throughout the notice period.

The consequence of missing or late explanation is that the non-compete clause ceases to apply, cf. Working Environment Act § 14 A-1 (6).

Compensation for Non-Compete Clauses

The Working Environment Act § 14 A-3 requires the employer to pay the employee compensation during the quarantine period. This is meant to:

• Compensate the employee for restrictions on freedom of action

• Give the employer a financial incentive to carefully consider the need for the clause

• Prevent the costs of the non-compete clause from being shifted to the public sector in the form of unemployment benefits

Calculation of Compensation Basis

The basis for compensation is calculated based on "employment remuneration" that the employee has earned in the last twelve months before the notice or dismissal point.

The following are included in the compensation basis:

• Regular salary

• Overtime allowances

• Commissions

• Bonuses

• Holiday pay

The following may be excluded:

• Benefits in kind (free newspaper, phone, car)

• Expense coverage (car maintenance, travel, food, accommodation)

• Insurance premiums and pension contributions paid to third parties

Amount of Compensation

The compensation shall amount to:

• 100 percent of the compensation basis up to 8G (National Insurance base amount)

• 70 percent of the compensation basis exceeding 8G

Total compensation may be limited to 12G, but parties can agree on higher compensation.

Deduction for Other Income

The employer may deduct work remuneration or work income that the employee receives or earns during the quarantine period, but only up to half of the compensation. This gives the employee an incentive to seek income-generating work during the period.

To apply deductions, the employer can require the employee to disclose any income during the quarantine period.

Consequences of Breach of Non-Compete Clause

A non-compete clause is a mutually burdensome agreement. If the employee breaches the non-compete clause, the employer can, according to general contract law principles, withhold compensation.

If the employer unjustly withholds compensation, the employee can at some point declare themselves not bound by the agreement due to the employer's breach. Alternatively, the employee can maintain the claim for compensation, but this assumes that they themselves comply with the non-compete clause.

Summary

The regulations for non-compete clauses balance the employer's need for protection against competition with the employee's need to utilize their skills and work abilities. The key conditions for valid non-compete clauses are:

1. Written form

2. Time limitation (maximum one year)

3. Employer's special need for protection against competition

4. Employer's explanation

5. Compensation to the employee

These rules ensure that non-compete clauses are only used where there is a real need and that the employee is financially compensated for the restrictions imposed.