In this article, we provide a brief overview of a non-competition provision in an employment agreement undertaken for a period after termination of the employment agreement, from the perspective of the currently applicable Labour Code and the new Labour Code entering into force on 1 July 2012.
Non-competition agreement under the current Labour Code
The current Labour Code provides that during the term of the employment relationship, employees may not engage in any conduct which jeopardizes the employer's rightful business interests, unless so authorized by specific law. Employees remain subject to this obligation following termination of the employment relationship only on the basis of an agreement concluded specifically for such a purpose, in exchange for appropriate consideration and for a maximum period of three years. The provisions of the Civil Code are applicable to such non-competition agreements.
A non-competition agreement may cover and typically covers e.g. the following restrictions:
- the employee may not work for a company that is a competitor of the employer;
- the employee may not start a business which would compete with the employer's business;
- the employee may not induce or attempt to induce any employee of the employer with a view to employing them;
- the employee may not induce or attempt to induce any customer or supplier of the employer to cease doing business with the employer.
Under the judicial practice, the scope of the non-competition undertaking must be specified precisely and may not be too restrictive, in a sense that the employee may not be prevented from being able to get a job. The agreement must precisely contain a description of the prohibited activities, the term of prohibition and also the geographical scope of the same. The amount of "appropriate consideration" is subject to the parties' agreement and may be paid in one lump sum upon termination of the employment or in monthly installments. However, the amount of appropriate consideration must properly compensate the employee for the prohibitions undertaken and take into account the extent of the prohibitions, i.e. to what extent the prohibitions prevent the employee from making a living and finding a job. Under the judicial practice, an amount equal to approximately 50% of the average salary (as at the time of termination) of the employee, payable for a period equal to the duration of the non-competition agreement, is regarded as appropriate consideration.
Non-competition agreement under the new Labour Code
The new Labour Code will enter into force on 1 July 2012 and provide as follows concerning non-competition agreements:
The new Labour Code provides that based on the agreement by the employer and the employee, an employee may - for a period of a maximum of two years after termination of the employment - not engage in any conduct which jeopardizes or intervenes with the employer's rightful business interests. The employer must pay appropriate consideration in exchange for the non-competition undertaking. When it comes to determining the amount of appropriate compensation, one must examine particularly the extent to which the non-competition agreement prevents the employee from getting a new job and also take into account his/her qualification and experience. The amount of appropriate compensation may not be less than one-third of the employee's basic wage, payable for a period equal to the length of the non-competition period.
In addition to the maximum period of a non-competition undertaking and the amount of appropriate compensation, the new Labour Code will also bring about an additional novelty. Namely, the employee may rescind (i.e. unilaterally terminate with retroactive effect) the non-competition undertaking if he/she terminates his/her employment with immediate effect by way of extraordinary termination notice. Under Hungarian law, an employer or employee may terminate an employment relationship by extraordinary termination notice in the event that the other party:
- willfully, or by gross negligence, commits a grave violation of a substantive obligation arising from the employment relationship; or
- otherwise engages in conduct rendering the maintenance of the employment relationship impossible.
Of course, the parties are free to grant rescission rights to each other in other cases too.
The new Labour Code makes it clear that in the event there is a legal succession on the employer's side, the rights and obligations of the employer concluding the non-competition agreement will pass on to the new employer. Including such a provision in the new Labour Code was necessary because judicial practice has not been authoritative as to whether the rights and obligations laid down in a non-competition agreement would pass on to a new employer that happens to be a legal successor of the former employer.
It is also worth noting that the new Labour Code does not stipulate that the non-competition agreement is subject to the provisions of the Civil Code. Therefore, such an agreement may not be challenged on grounds of the considerations being considerably disproportional. However, if the compensation paid as consideration for the non-competition undertaking is not appropriate, the agreement may be partially invalid. In this case, courts may either require the employer to pay to the employee an appropriate compensation in exchange for the non-competition undertaking, or declare that the entire agreement is null and void.
It is also worth noting that, under the new Labour Code, the employment agreements of executive employees (managing directors and those employees working under the direct control of the managing director who may partially or fully substitute the managing director) may deviate from the provisions governing employment relationships that are laid down in the new Labour Code, with the one exception being that they cannot deviate from the provision which provides that collective labour agreements are not applicable to executive employees. If a non-competition agreement is not regarded as part of the employment agreement, but rather as a separate agreement, the conclusion will most probably be that no deviation is allowed from the provisions governing non-competition agreements. If, however, the non-competition agreement is regarded as being part of the employment agreement, deviation is allowed. It seems that the question of whether the parties may deviate from the provisions of the new Labour Code governing non-competition agreements will need to be interpreted and decided by the court.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.