How to protect yourself against an employee moving to a competitor? 

Noncompete agreements are standard in many companies for employees at higher management levels or those particularly valuable to the employer for other reasons. This is not always an ideal solution that properly protects the employer’s interests.

What is a noncompete agreement? 

According to Article 101(1) §1 of the Labour Code, within the scope defined in a separate agreement, an employee may not, during employment, engage in activities that compete with the employer, nor provide work – whether under an employment relationship or on another legal basis – for an entity conducting competitive business. Concluding such an agreement (commonly called a loyalty agreement) allows the employer to impose restrictions on the employee regarding other professional activities contrary to the employer’s interests and enables verification of compliance with the noncompete clause, e.g., through an obligation to report additional professional activities. Although a noncompete agreement may be a document separate from the employment contract (though often incorporated into it), it is so closely linked to the employment relationship that, in certain circumstances, refusal to sign it may justify the employer’s refusal to hire or constitute grounds for terminating employment.

A separate type of noncompete agreements are those intended to apply after termination of employment (Article 101(2) §1 of the Labour Code). Such an agreement must provide for compensation for complying with the restriction, amounting to at least 25% of the employee’s last remuneration.

As a rule, a postemployment noncompete may be concluded only with an employee who has access to particularly important information, the disclosure of which could harm the employer. Although the employer assesses which information is particularly important, proposing a noncompete to someone who does not have such information is pointless and exposes the employer to paying compensation throughout the duration of the restriction without a real need to maintain such a clause.

The fact that an employee holds a high position in the corporate hierarchy does not necessarily mean they have access to important information, as valuable knowledge (e.g., IT system security, production technology) is often held by lowerlevel employees. An employer’s incorrect assessment of whether a noncompete is justified cannot be a basis for avoiding the legal effects of the agreement, unless early termination mechanisms were explicitly included in the agreement. The same applies to the employee – they cannot unilaterally decide that they do not have access to particularly important information and therefore are not bound by the noncompete agreement they have signed.

A noncompete agreement after a short employment period 

A common problem for employers who conclude a noncompete simultaneously with the employment contract is having to pay compensation for a disproportionately long period compared to the actual duration of employment (e.g., if employment ends after a probationary period but the restriction lasts six months). In such a situation, the noncompete remains in force for the entire agreed period, with all consequences, unless the parties have expressly allowed early termination under specific grounds.

When employment ends after a short period, determining the amount of compensation may also be problematic. As a general rule, the basis for calculating compensation is the period of employment corresponding to the length of the noncompete obligation. However, it would be incorrect to determine the compensation amount solely based on the remuneration actually paid (as per the literal wording of Article 101(2) §3). If the employee worked for less time than the duration of the noncompete, the employer must estimate the remuneration the employee would have earned had they worked for a period analogous to the noncompete.

Given these consequences, the duration of a postemployment noncompete must be carefully determined. It is possible, for example, to introduce a mechanism under which the restriction period increases proportionally with the employee’s length of service (up to a defined maximum).

Noncompete clauses in the event of employer restructuring 

As a rule, a postemployment noncompete agreement does not automatically transfer to a new employer when a business is taken over. This can lead to unexpected consequences.

Companies undergoing organisational changes (e.g., transferring part of the business as a contribution to another entity) often trigger the automatic transfer of employees under Article 23(1) of the Labour Code.

Under this provision, the new employer becomes party to existing employment relationships, which means they must respect employment contracts and associated rights. There is no doubt that a transfer includes noncompete agreements during employment. However, significant uncertainty existed regarding the validity of postemployment noncompetes after such a transfer. The key issue is that agreements under Article 101(2) §1 are civillaw agreements and not considered part of the employment relationship.

Case law ultimately resolved this by recognizing that postemployment noncompetes do not transfer to the new employer under Article 231 of the Labour Code.

Tax implications of noncompete clauses 

Because the employer must pay compensation for a postemployment noncompete, tax implications must be considered – specifically whether such compensation is taxable.

Under Article 12(1) of the PIT Act, all types of monetary payments and cash benefits arising from employment are subject to taxation. Although the provision does not explicitly mention noncompete compensation, the list is not exhaustive, meaning such compensation can be considered employment income. Any doubts are clarified by Article 21(1)(3) of the PIT Act, which explicitly states that compensation for a noncompete is not taxexempt.

Noncompete clauses in civillaw contracts 

The above considerations relate only to employment relationships. In civillaw relationships (e.g., mandate agreements or B2B contracts), the principle of freedom of contract applies (Article 353¹ of the Civil Code). The parties may introduce restrictions on competitive activity essentially without limitation unless specific provisions prohibit such restrictions (e.g., antitrust rules). The parties also freely decide whether compensation is payable for compliance with the noncompete and in what amount or frequency – including setting it at zero.

Summary 

Noncompete agreements can be an effective tool to protect against an employee moving to a competitor, but their use must be wellconsidered. Properly determining the duration, compensation, and scope of the restriction is essential to ensure both the protection of the employer’s interests and compliance with labour law.

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