New provisions on restrictive covenants in employment contracts
Since 1 January 2016, new provisions on agreements to restrict competition in employment contracts have been in force in Norway. The Working Environment Act (WEA) contains a new chapter which includes these detailed provisions.
Transitional rules apply for employment contracts with restrictive covenants that were entered into before the new law came into force. All existing employment contracts with restrictive covenants must be adapted in accordance with the new provisions by 1 January 2017.
Types of restrictive covenants affected
Non-compete clauses allow the employer to place restrictions on employees working in similar employment for a competitor when they leave the company.
Such a clause may only be invoked if the employer can convince a court it has a “particular need” for protection against competition. Whether the basic requirement of “particular need” is met will be determined on the facts of the case. Factors such as the employee’s knowledge of business secrets and other confidential information relating to the employer are also considered.
In brief, the following conditions apply with regard to non-compete clauses in the new chapter of the WEA:
- The restriction on competition must be in writing in the employment contract or an additional contract entered into during employment.
- The duration of the restriction cannot be for more than one year from termination of employment.
- The clause must state that the employee is entitled to full compensation for income of up to 8 times G (Norway’s National Insurance Basic Amount). Currently the Basic Amount (1 G) is the equivalent of NOK 90 068. The compensation is based on the employee’s salary earned during the last 12 months before termination of employment. Compensation on salaries between 8 and 12 G can be limited to 70%, while salaries exceeding 12 G do not require compensation. If the non-compete clause is invoked, the employee will be entitled to the compensation. However, if the employee receives other income during this restriction period, the employer may deduct up to half of the compensation entitled.
- On termination of employment, the employer must provide the employee with a written statement on whether, and to what extent, the covenant will be invoked. If the procedural regulations on this point are not followed, the non-compete clause will be invalid.
- During the employment relationship, the employer may waive a non-compete clause at any time before the employee has been given notice of termination. If an employee’s contract is terminated due to circumstances relating to an undertaking (such as a reorganisation of the company, etc.), a non-compete clause cannot be enforced.
The conditions stated above, except those relating to compensation, also apply to clauses which prevent a former employee from dealing with the employer’s customers/clients after their employment has been terminated. This type of clause can only apply to customers, clients or suppliers whom the employee has had contact with, or been responsible for in the past year. The written statement required by law to invoke such a clause, must contain an inclusive list of all the customers/clients the employee has dealt with. It must further be stated which of the customers/clients the departing employee cannot deal with under the covenant.
A recruitment clause is an agreement between the employer and other businesses which prevents or restricts an employee’s ability to take employment with another business. Under the new legislation, employers can no longer agree on recruitment clauses amongst themselves, except in relation to business transfers (change of ownership).
In business transfers a recruitment clause can be invoked during the negotiations process and up to six months after the end of negotiations.
Please note that recruitment clauses between an employer and an employee are not covered by the new legislation and remain permissible.
The CEO of the undertaking may be exempt from the new rules on restrictive covenants, if they have waived their rights against severance pay within the WEA. This is possible in addition to the option for a CEO to waive his/her job protection against dismissal. The waiving of rights to severance pay under the WEA must be made explicitly by the CEO. The wider limits for competition clauses in the Contract Act (test of unreasonableness) still apply even if the protection under Chapter 14 A is waived, but restrictive covenants of a longer duration and wider scope may still be valid as long as they are not deemed ‘unreasonable’.
How will this affect my business?
The new provisions clarify an important area of protection within employment relationships. In several ways the employers’ opportunity to enter into restrictive covenants are more limited than before.
As a consequence it is essential to establish good procedures for monitoring termination of employment, especially where restrictive covenants have been agreed upon. For instance, if the procedural requirements concerning written statements are not met, the covenant will be void.
There is reason to believe that a significant number of existing employment contracts with non-compete clauses do not comply with the new rules and must be revised during the transitional period (before 1 January 2017). For the benefit of both parties, it is recommended that the necessary review and revision of employment contracts commences as soon as possible.
If you would like more information on how Haavind can help with reviewing and revising employment contracts with restrictive covenants, please contact Sten Foyn on +47 928 35 278 or Rajvinder Bains on+47 988 37 360, Haavind.
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