Non-competition in IT contracts
IT companies, due to the huge competition for every specialist on the market try to protect themselves in various ways already at the stage of negotiating the conditions and signing the contract. One of these ways are complex regulations on establishing a non-competition agreement. In my article I will describe, among other things, what a non-competition agreement is, what is considered as a competitive activity, how the non-competition agreement looks like in specific contracts, and how the issue of remuneration for inclusion in the non-competition agreement is regulated.
Non-competition is probably one of the hottest topics discussed by developers on the web. On one hand, it’s hardly surprising – no one likes their ability to provide their services being restricted. On the other hand, it is hardly surprising of “employers” – the IT market is very competitive and software developers compete for every specialist. And those, given the market demand, are in short supply. To simplify this article, by “employee” I mean not only an employee as defined by the Labour Code, but also a co-worker acting under a cooperative agreement, a contractor, and a contractor working under a specific work contract.
Non-competition agreement in IT
The current market situation often forces software houses to use non-competition clauses in agreements concluded with employees and co-workers. Although, at least in theory, the subject is not complex, it is important to analyse it from several perspectives. This article will address the issues raised in the first point.
What is prohibition of competition?
Prohibition of competition can assume many different forms. Most often, it is an obligation of an employee to refrain from performing work for an entity running business competitive to their employer. In addition, an employee bound by a prohibition of competition is often required to refrain from independently offering services or products that are identical or similar to those of the employer. Simply put, under a prohibition of competition:
- an employee must not work for their employer’s competitors,
- an employee must not operate a business that competes with their employer’s business and they must not be a shareholder in such a business.
Additional obligations of an employee
The above obligations are the primary obligations stemming from prohibition of competition. But they do not exhaust the subject. A total prohibition of competition might include, for example, prohibition of:
- conducting, directly or indirectly, a competitive business activity for one’s own account in the form of an individual business or as a partner in a civil or commercial partnership or as a member of a cooperative;
- performing, directly or indirectly, work under a contract of employment or providing services under a contract of mandate or under another legal relationship, for the benefit of an entity conducting a competitive activity;
- acquiring or taking up shares and participating in companies, cooperatives, associations, foundations and other types of legal entities conducting competitive activities, with the exception of acquiring blocks of shares not exceeding 5% in publicly traded companies;
- holding positions in managing, supervising or controlling bodies of commercial companies, cooperatives or other entities conducting competitive activity;
- acting as a proxy or performing any other similar role for the account of an entity conducting competitive activity.
What is competitive activity?
Properly defining “competitive activity” poses many challenges. In my practice, I have observed a tendency for employers to have a very broad understanding of this concept.
Competitive activity is usually considered to be such an activity carried out by the employee or by others, whereby they introduce or may introduce or purchase or may purchase, at the same time and in the same market, goods (services) the same as the employer’s goods (services) or others, if, by their recipients, these goods (services) are considered to be substitutes. Translating this to the IT industry, a broad prohibition of competition can lead to a complete prohibition of cooperation with other entities providing programming, IT or IT consulting services.
Limitations in a non-competition agreement with a software developer
In practice, competitive activity can be limited in various ways. For example, it can be restricted to companies that develop software in specific technologies, operate in a specific geographic market, or to companies named in an employee’s contract. However, this does not affect the most important matter. For the activity of a third party or an employee to be considered as competitive, it must overlap with the employer’s actual activities.
In order for a particular type of activity to be considered competitive, there must be a real threat to the employer’s interests. Only activity that violates the employer’s interests, i.e., activity that creates an actual threat to the employer’s interests, can be considered to meet these criteria.
Prohibition of competition during employment
In the first part of my article on prohibition of competition in IT contracts, I touched upon what prohibition of competition is, what constitutes competitive activity and what an employee is obligated to do under a non-competition agreement. In this part of the article you will learn how to apply prohibition of competition in different forms of employment. We will deal with employment contracts, contracts of mandate, specific work contracts and cooperation agreements (so-called B2B cooperation).
First of all, you need to know that the types of contracts indicated above can be divided into two groups. The first group is the contract regulated by the Labour Code, i.e. the employment contract. The second group consists of contracts regulated by the Civil Code, i.e. a contract of mandate, a specific work contract and and cooperation contract (a so-called “service contract” in the Civil Code).
Non-competition agreement in a contract of employment
Prohibition of competition is most complex in the case of a contract of employment. Refraining from certain activities or providing work for specific companies by an employee is strictly regulated by the Labour Code. The exact provisions governing this area can be found in Articles 1011 – 1014 of the Labour Code. So, let me just cite the points that are most important for you.
Firstly, if an employee works under an contract of employment, a non-competition agreement must be concluded by means of a separate document. In practice, this means that an employment agreement and a non-competition agreement must be executed separately. A non-competition agreement is usually concluded for the duration of the contract of employment. However, if the employee has access to information of particular importance to the employer, the disclosure of which could expose the employer to harm, the non-competition agreement may be extended beyond the termination of the employment.
In such a case, the employee is entitled to compensation for complying with the non-competition agreement after termination of the contract of employment. You can read more about this in the following article on prohibition of competition. It is also important to note that in the event that the reasons justifying the reasons for a prohibition of competition cease after the termination of the employment relationship, the non-competition agreement automatically ceases to apply.
A final point that is worth remembering is the form of a non-competition agreement. It must be concluded in writing under the pain of nullity. So, you have basically two options. You can conclude the agreement in written form or sign the agreement with a qualified electronic signature, which is equivalent to the traditional signature.
Prohibition of competition in contracts of mandate, specific work contracts and cooperation contracts
In the case of contracts governed by the Civil Code, the issue of non-competition is somewhat less complex. At least in terms of how prohibition of competition is imposed.
Additional clauses regarding prohibition of competition can successfully be introduced into a contract of mandate, a specific work contract and a cooperation contract. In this case, you are not required to sign a separate contract. All the provisions can be stipulated in a single document.
This is because the Civil Code does not regulate the matter of prohibition of competition, which distinguishes it from the Labour Code. In civil law, there is a principle of freedom of contract. If a matter has not been regulated in the Civil Code, contracting parties may arrange their legal relationship as they see fit, as long as the content or purpose of the relationship does not contradict the nature of the relationship, legal regulations or principles of social interaction (Article 3531 of the Civil Code).
Compensation for complying with a non-competition agreement
In the first part of my article on prohibition of competition in IT contracts, I defined prohibition of competition, I specified what constitutes competitive activity and outlined what an employee is required to do under a non-competition agreement. In the second part, I discussed how to implement prohibition of competition in various forms of employment, i.e. a contract of employment, a contract of mandate, a specific work contract and a contract for the provision of services (a so-called “B2B contract”).
In the third part, you will learn whether an employee is entitled to remuneration for complying with a non-competition agreement. I will divide this issue into an analysis on the contract of employment and an analysis on other civil contracts.
Remuneration for complying with a non-competition agreement
In the case of a contract of employment, the employee is absolutely entitled to remuneration for non-competition after termination of the employment. In the Labour Code, this remuneration is called “compensation” .The important point here is that the employer is not required to pay compensation for non-competition while the employee is employed. Such obligation arises only at the time of termination, e.g. after the expiry of the notice period or after termination of the contract of employment by mutual consent.
You must remember that compensation for non-competition after the termination of the employment cannot be set arbitrarily. According to the Labour Code, it must not be lower than 25% of the remuneration received by the employee before the termination of employment for the period corresponding to the duration of the prohibition of competition. Compensation may be paid in monthly installments.
Remuneration for complying with a non-competition agreement in civil-law contracts
In the case of civil-law contracts, such as contracts of mandate, specific work contracts or contracts for the provision of services (so-called “B2B contracts”), the question of remuneration is not regulated by law. In practice, there are various forms of prohibitions of competition in these contracts, providing both for remuneration for prohibition of competition after termination of the contract as well as those that do not grant the employee right to any remuneration. So, which option is correct and legal?
Since the regulations do not answer the above question, it is necessary to take a closer look at how this issue is perceived by courts.
One of the most important rulings concerning unpaid prohibition of competition in civil-law contracts is the decision of the Supreme Court of 11 September 2003 (case reference number III CKN 579/01). The court stated that the contractor may, under the principle of freedom of contract, undertake to the ordering party not to engage in competitive activities during the term of the contract. However, the obligation of the contractor not to engage in competitive activity for 3 years after termination of the contract, without any compensation, cannot be deemed to be in harmony with the principles of social intercourse.
What are the implications of this? The court has decided that a long prohibition of competition without any remuneration whatsoever may be declared null and void on the grounds that it is contrary to the principles of social intercourse.
Does the above mean that clauses stipulating unpaid prohibition of competition in civil-law contracts are always prohibited?
This means that stipulating a prohibition of competition you must consider whether it may violate standard market practice and principles of social conduct. However, this matter if often times vague and hard to determine. In addition, the Supreme Court in another of its decisions indicated (a judgement of December 5, 2013, case reference number V CSK 30/13) that:
- non-competition clauses may be included in civil law contracts and
- introducing in a contract for the provision of services a non-equivalent competition clause, subject to a contractual penalty for its breach, despite the lack of symmetry, is within the bounds of contractual freedom and does not violate the appropriateness of that legal relationship.
As you can see, in the case of civil-law contracts there is no clear answer as to whether the employee is entitled to compensation for non-competition after termination of the contract.
Non-competition agreement – a template
In my IT contracts store you will find a template of a non-competition agreement regulating non-competition in a way appropriate for contracts of employment and B2B contracts. The non-competition agreement has been annotated by me and is fully editable. Additionally, you will be granted access to any updates of this document.
The non-competition agreement is ready for immediate use and has been tested by dozens of our law firm’s clients. Please keep in mind that this is a standardized non-competition agreement templatethat may need to be modified to accommodate your specific situation. If you are interested in a tailor-made non-competition agreement, write to me at firstname.lastname@example.org or fill in the contact form on our law firm’s website.