Following the latest case law of the Supreme Court of Lithuania, it is not enough to state that an employee cannot work for a competitor during their employment. It is necessary to pay compensation in order for the noncompete obligation to be legally enforceable, because of the onerous nature of the obligation.
The employee in this case was dismissed because he had used his company car on behalf of his wife’s employer. This was in breach of his contract, which (a) required him to devote all his working time to his employer, (b) prohibited him from performing work for any one other than his employer during working hours and (c) prohibited him from performing work, directly or indirectly, for third parties without his employer’s permission. The court of first and second instance held that, although the employee had breached provisions (a) and (b), the breach was insufficiently serious to justify dismissal. They declared the dismissal to be invalid. The employer appealed to the Supreme Court.
The Supreme Court upheld the lower courts’ decision. With regard to provision (c), the Supreme Court started by reiterating its existing doctrine that the parties to an employment contract may enter into a non-compete agreement that is effective both during employment and afterwards. The Supreme Court stressed that a noncompete agreement restricts the constitutional right of an employee to choose a job, and therefore the restriction must be limited in time and adequate compensation must be paid.
The Supreme Court disagreed with the employer’s interpretation of its doctrine, being that compensation in consideration of a non-compete obligation is required only inasmuch as the employee’s freedom is restricted after termination of the contract, and that compensation is therefore not necessary for restricting competition during employment. By contrast, the court emphasized that the amount and purpose of non-compete compensation must be clearly specified and distinguished from other payments and it must be paid to employees even during their employment. On these grounds the Supreme Court affirmed the lower courts’ decision that the dismissal was unlawful. It ruled that in the absence of compensation, a non-compete clause in an employment contract is contrary to law and therefore void.
Non-compete agreements are not regulated by statute in Lithuania. The rules governing such agreements are entirely judge-made. Previously, the Supreme Court had clarified that a former employee must be paid compensation if the former employer is to be able to enforce a contractual non-compete obligation. The judgment reported above has made it clear that such compensation must be paid during the employment as well as following termination. In a way, this is a little strange, because the Labour Code of Lithuania requires both employers and employees to comply with the law, respect the rules of communal life, act in good faith and adhere to the principles of reasonableness, equity and fairness. One would think that not competing against one’s employer would be covered by these general obligations. Further, employees are under an obligation not to act in a way that could damage the employer’s interests. In practice, most companies have employment contracts or policies which prohibit employees from working for competitors or being engaged in the same activity as their employer during employment. However, separate compensation for this is not paid, the idea being that the salary paid to the employee covers this, in other words it is deemed adequate consideration for the non-compete agreement. Following this judgment, the message to
business seems to be that employers must clearly provide for non-compete compensation either in the employment contract or in a separate non-compete agreement in order to protect the business from unfair competition. Failing this, the employer may have a noncompete clause that is unenforceable. On the other hand, a well-drafted non-compete agreement with clearly distinguished consideration could prove harm has been caused following a breach. If it is hard to assess damage meaningfully, a claim for unfair competition may be refused by the court – or the employer may simply not think it is worth making a claim. But an employer’s investment in its employees, commercial relations, trade secrets and confidential information is too valuable to leave exposed to unfair competition.
There is also a practical difficulty. Lithuanian law does not allow employers to amend terms of employment unilaterally. Many employers will likely want to do just that in order to be able to enforce ‘during employment’ non-compete clauses in their employment contracts. This means that they will have to ask each individual employee to sign a new contract or an amendment to their contract. Will all employees agreed to do so? And how much should the compensation be? Some employees may be tempted to draw a parallel with compensation for non-compete agreements that apply after termination of the contract. Such compensation varies widely, but is rarely below 20% of last-earned salary for as long as the employer wishes to enforce the non-compete clause. It is hard to imagine employers either offering their staff a 20% pay raise or accepting that their noncompete clauses are unenforceable. There may well be employers who propose something like the follow: your current salary is 100, so let’s amend it to state that your salary from now on is 80 and that you will be paid a monthly bonus of 20 in consideration of your non-compete obligation. Of course, it is far from certain that such an attempt would survive a legal challenge.
On 24 March 2016, the Supreme Court delivered a similar judgment to the one described here – indicating just how seriously it takes the need to compensate employees for restricting their constitutional freedom to choose a job.
The article was published in the European Employment Law Cases (EELC) 2016 (2) magazine.