How to conclude a valid Lithuanian non-competition agreement

Triniti

A non-competition agreement is an employee’s commitment not to compete with the employer during the employment contract period and/or the certain period following the termination of the employment contract. Such agreements are signed for the purpose of protection of the company’s confidential information, preventing the employee from pursuing similar activities and his participation in the activities of competitors, capable of inflicting damage to the employer.

Although non-competition agreements are not prohibited in Lithuania, there is no comprehensive regulation of this issue in the Lithuanian legislation. According to the settled case-law, a non-competition agreement is regarded as a civil transaction concerning a voluntary restriction of an employee’s right to work in a particular area. It may be either be a part of an employment contract or executed as a separate document.

In a non-competition agreement it is important to achieve a balance between the employer’s interests and the restrictions preventing the employee from engaging in a certain professional activity. In addition, these agreements are subject to a number of preconditions for legitimacy; for example, the prohibition to compete must be specific and clearly stated, the clause of non-competition must be limited in time and space, a fair compensation must be established for pursuing non-competition obligations. Compliance with the last precondition is noteworthy, as the methods for determining the amount of compensation for the non-competition obligation were not established for a long time. Recently, the Supreme Court by explaining the amount of compensation and the procedure of establishing thereof has finally drawn the guidelines.

Several rulings of the Supreme Court of Lithuania (hereinafter referred to as the SCL) over the last few months have helped to establish a case-law that should help companies to avoid mistakes, as well to minimize the risk of non-competition agreements being declared null and void when establishing the amount of compensation for non-competition and the payment procedure.

Importance of the balance between the parties’ interests

At the end of June, the SCL in one of its cases highlighted specific requirements applicable to compensation for non-competition agreements. The SCL has stated that in non-competition agreements the balance between the parties is of particular importance, i.e. the employer‘s interest shall be protected  by establishing minimum necessary restrictions on the employee’s activities and determining a reasonable and fair compensation payable to him.  A conclusion, if a non-competition agreement in each particular case and with a particular employee was possible, has to be reached on a case-by-case basis, by assessing the employee‘s duties and the particular features of his job, the amount of information used at work and its importance to the company‘s activities, as well the proportion of the employee‘s position-related activities compared to the total scope of activities of the company, importance of his acquired knowledge and skills, the impact on competitive performance, etc.

In this case, the compensation payable to the employee, which was equal to 9 percent of the average wage (which amounted to approximately € 90), was declared to be too small and not in compliance with the principles of fairness and justice; it was due to the fact that the scope of the restrictions established in the non-competition agreement was extremely wide: not to engage in any business competing with the employer, including carrying out works and providing services to its competitor. Thus, the SCL noted in its ruling, that non-competition agreements between the employer and the employee, which fail to establish a fair and equitable compensation to the employee shall be considered null and void.

At the beginning of July, the SCL supplemented the case-law on this matter by adopting its ruling. The court clarified, that since the non-competition agreement concluded between the employer and the employee is limiting the employee’s right under Article 48 (1) of the Constitution to freely choose his work or business in this particular field in which the employee is better qualified, as well is limiting his possibility to receive higher income in comparison to other fields, thus a fair compensation must be established in the non-competition agreement. The SCL also stated, that wages cannot be considered a compensation for anything else except the employee‘s labour. Hence the size and amount of the compensation for non-competition obligations must be clearly defined in the agreement, by separating the compensation from contractual payments for other purposes.

Insufficient compensation for non-competition

It follows from the case-law recently formed by the SCL, that the non-competition obligations of a broad scope, prohibiting a former employee from engaging in competing businesses in exchange for a compensation often amounting to a tiny fraction of his salary, may be the legal grounds behind the employee’s departure from the non-competition agreement, as such compensation may not be considered sufficient.

Considering the above, it is probably a good time to review your company’s non-competition agreement principles to ensure the signed agreements continue to be binding on the parties.

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