In Polish legal transactions “prohibition of competition after termination of the employment relationship” is one of the most difficult contracts to construct. Many entrepreneurs treat it as a free scare. This is a mistake that could cost you a fortune. Labor law does not abolish free restrictions on professional freedom. As a legal advisor, I analyze HR documents every day and I can honestly say that most of them do competition bans in the SME sector is invalid or ineffective. Here’s why.
No compensation
This is the most common mistake, resulting from not understanding the difference between a ban in progress work and after its completion. You can prohibit it during your employment employee earning extra money from competitors for free (without additional remuneration). After termination of employment, in accordance with Art. 101 (2) § 1 of the Labor Code, the non-competition agreement must specify the compensation that you will pay to the former employee throughout the duration of the ban.
The rule is absolute. If the contract does not contain a provision on compensation or (worse still) there is a provision that the prohibition is free of charge, this clause is invalid.
How much do you have to pay? The law specifies the minimum. Compensation cannot be lower than 25% of remuneration received by employee before the termination of the employment relationship for a period corresponding to the period of validity of the ban. You can pay more, but never less.
Risk No. 1: “Double loss” for the employer
Many employers he thinks that since they didn’t enter the compensation, the contract doesn’t work, so they just won’t pay and the case is over. Nothing could be further from the truth. You run the risk of losing your coverage and paying anyway. The prevailing view in the jurisprudence of the Supreme Court is that if an employee refrained from working for a competitor despite the lack of a compensation provision, he or she may sue you for payment of the statutory 25% of the remuneration due to him or her!
It’s a paradox. You have a contract that does not protect your interests, but forces you to pay compensation for its validity non-competition.
Risk No. 2: Abusive clause and “contractual penalty” only for one party.
A common mistake is to enter high contractual penalties for employee for violating the prohibition, while failing to precisely define the obligations employers.
If your contract prohibits the employee from “any professional activity” (too broad a scope), does not precisely define what constitutes competition (e.g. prohibits work in the entire IT industry, even though the company deals only with specific niche software), sets a contractual penalty that is grossly higher than the compensation paid (e.g. you pay the employee PLN 1,000 a month and expect a penalty of PLN 100,000), you risk that the court will find the contract contrary to the principles of social coexistence. Effect? Complete ineffectiveness of the security.
When does the non-competition clause cease to apply?
Article 101 (2) § 2 of the Code of Criminal Procedure states that the prohibition ceases to apply when the reasons justifying such a prohibition cease to exist or when employer fails to fulfill the payment obligation compensation.
All you need to do is be late with one compensation installment, and… employee becomes free from all limitations. He can move to a competitor, and you are still obliged to pay him the remaining compensation installments (as a form of compensation for the damage for the period during which he was bound by the contract).
A good non-competition agreement should provide for the procedure for terminating the non-competition clause and for possible refund of amounts paid in the event of a violation.
What does a non-compete clause look like in a B2B contract?
If you work with freelancers on contracts B2Byou are not subject to the Labor Code. The principle of freedom of contract prevails here. In theory, you can sign a free non-compete clause. However, be careful. Courts increasingly often apply provisions on competition protection and principles of social coexistence in addition. If “loyal” on B2B is extremely one-sided and free of charge, the court may consider it invalid, finding that it violates the balance of the parties and prevents the contractor from earning money.
How to build a safe non-compete clause?
Professional “loyal” requires considerable precision. To be effective, it must contain at least:
- A precise definition of competitive activity (e.g. PKD codes or description of services).
- Clearly defined compensation (min. 25% and method of payment).
- Duration and geographical area.
- Right to terminate the contract. If you dismiss an employee and decide that his knowledge is no longer dangerous, you must have the right to terminate the loyalty agreement so as not to pay him for anything for the next 2 years.
Can you afford a void contract?
Never mind loyalty agreement it’s not just a waste of money. This is a real threat to your know-how and market position. If your contracts were thoughtlessly copied from the Internet or prepared years ago, they almost certainly need updating. As a legal advisor specializing in court disputes and business protection, I regularly advise my clients on audits loyalty agreements and checking whether their provisions are valid and protect the client’s interests.
Ultimately, it is worth preparing a strategy for exiting the contract if the employee does not engage in competitive activity or entering into a dispute and enforcing a contractual penalty if the employee violates the prohibition. To determine whether an employee complies with the non-competition clause, it is worth using the help of a legal advisor and a detective agency. Some findings can be made using OSINT tools (so-called white intelligence).
Don’t let your secrets pass on to your competitors along with your employee.
