In a recent decision the Czech Constitutional Court has held that the Supreme Court’s interpretation of the right for an employer to withdraw from a non-compete agreement, contained in an employment agreement, is not contrary to the Czech Constitution.
According to this interpretation of the law, an employer may only withdraw from a non-compete agreement if entitlement to such withdrawal was included in the agreement. In addition, the withdrawal must be based on a justified reason, defined in the non-compete agreement.
The decision brings an end to a period of uncertainty which started after the Supreme Court’s judgement of 2012. The analysis below applies only to employment non-compete clauses. Such regulation does not apply to non-compete clauses of members of bodies of companies, such as executive directors or board members.
Non-compete agreements under Czech law
Under Czech law, employers may conclude non-compete agreements with their employees in order to protect their business against competition from an “insider” after they leave the company. Such non-compete agreements may remain in force for up to 1 year following termination of employment and compensation of at least 50% of the individual’s average monthly earnings must be provided to the former employee during the term of non-compete. The restriction to work for a competitor can be further enforced by a penalty.
The Czech Labour Code stipulates that the employer can withdraw from the non-compete agreement prior to termination of the employment relationship. This has been widely interpreted as a general authorisation for employers to freely decide whether they enforce the agreement (and pay the related compensation) or not, as long as any withdrawal is delivered to the employee before the employment relationship comes to an end.
As a result of the decision of the Constitutional Court, the position of an employer at the point of termination of employment has weakened. Many non-compete agreements concluded prior to the decision do not contain appropriate language regarding the withdrawal rights of the employer. This results into a situation where a non-compete agreement can only be terminated based on a supplementary agreement between both the employer and the employee.
Such agreement may be difficult to achieve, especially in situations where the employee finds it easy to find a job which does not interfere with the non-compete undertakings. Employees will welcome the provision of non-compete compensation while concurrently having a different source of income.
In cases where the non-compete agreement already contains a withdrawal right, it is unclear which reasons for withdrawal will be considered valid. The relevant case law does not address this. According to the prevailing legal opinions, valid reasons for withdrawal can include, inter alia, change of business line of the employer as well as the fact that the employment relationship was terminated for certain reasons on the employee’s part (e.g. poor performance). The employer, however, always bears the risk that the reason for the withdrawal will be held to be unsatisfactory, and that the employee will be able to claim full non-compete compensation.