Post-termination non-compete clauses are routinely found in employment contracts, whereby neither employers nor employees properly consider its practical implications at the time of establishment of employment. The Labour Act of the Republic of Serbia prescribes that the non-compete restriction can apply for up to 2 years following the termination of employment, subject to compensation that must be defined by the employment contract.
In connection with this restriction, we are often asked (i) what is the minimum compensation that must be paid to the employee and (ii) is the employer entitled to unilaterally waive this post-termination restriction? We also hear other questions about this restriction, such as the situations in which it can even be stipulated at all, and manner in which the employer can monitor whether the employee adheres to the contracted restrictions, but we will not address these in this blog.
Business and judicial practice helped clarify some of the controversial issues (at least to some extent), but important questions remain as well as contradictory interpretations.
What is certain is that a post-termination non-compete restriction is null and void if the employee’s compensation is not defined in the employment contract (which, surprisingly, is still often overlooked in practice).
However, neither the law nor judicial practice determine what is the minimum adequate compensation which can agreed. Since this is the area of labour relations, the principle of contractual freedom cannot be completely relied upon. In business practice, the typical position is that the monthly compensation can amount to one half of the basic monthly salary from the employment contract.
Although this can serve as a solid guideline, the extent of the restrictions imposed on the employee should be also considered. Specifically, the notion of adequate compensation should have a different meaning in case of an employee who is de facto precluded from establishing employment in the field of his/her expertise (e.g. food technologist who is restricted from working for food production companies), as opposed to an employee who can still work in his/her field of expertise and is merely restricted from working for employer’s competitors (e.g. a lawyer precluded from working for food production companies).
Even more controversy surrounds the question of whether the employer can unilaterally release the employee from the post-termination non-compete restriction. Specifically, this restriction is routinely included in employment contracts, without considering if the employer has any actual interest in upholding it. Consequently, after the termination of employment, employers often want to waive the restriction to avoid unnecessary expenses. In the judicial practice of the Appellate Court in Belgrade there was previously a stance that the employer cannot do so without employee’s consent since this is a mutually binding provision, which argument is consistent with basic principles of contract law. What was not explicitly stated is whether the same holds even if in the employment contract explicitly states that the employer may release itself and the employee from this restriction at any time.
However, decision by the Commercial Appellate Court no. Pž 5978/2021 from September 2021, is based on a completely opposite interpretation of the law. Although the dispute was about a service provision agreement, the logic and the argumentation can by analogy be applied to non-compete restriction from the employment contract. Specifically, the court opined that the restriction was stipulated for the benefit of one party (the beneficiary of the services), which consequently can decide not to take advantage of it, subject to notification to the other party, resulting in release of both parties from their obligations.
This argumentation can be rightfully contested, since the non-compete restriction contains mutual rights and obligations (and not just rights for one party and obligations for the other), but an even bigger issue is the inconsistency of case law which creates considerable legal uncertainty in this area.
Meanwhile, employers should pay more attention when stipulating post-termination non-compete restrictions, and especially whether to include them in the contract at all, what compensation to stipulate to make sure that the clause will hold, to stipulate a sanction in case of breach of obligations by the employee (e.g. contractual penalty), as well as to include the option of unilateral waiver (although this does not guarantee that the waiver would be upheld at court). In addition, employers should stipulate deadlines for payment of compensation and adhere to them, as otherwise they will lose the right to invoke the post-termination non-compete restriction.
This text is for informational purposes only and is not legal advice. Feel free to contact us if you need additional information.
Damjan Despotović, partner
Srećko Vujaković, partner