Non-Compete Clause in Employment Law

The non-compete clause is common in employment contracts in the Republic of Serbia.

However, this does not mean that all employers and employees who sign contracts containing a non-compete clause fully understand its meaning and have devoted attention to its definition.

On the contrary, it means that employers generally have generic employment contracts that they sign with all employees. This is how non-compete clauses, trade secrets, and other employment law institutes end up in contracts based on the principle “better to include it than not, and we’ll see in practice whether it was necessary.”

The non-compete provision is significant and serves a very clear purpose when properly formulated.

In this text, we will show how to ensure that the non-compete clause in the contract is not just a dead letter on paper.

Non-Compete Clause Through the Eyes of the Employment Act

The Employment Act dedicates several articles to the non-compete clause, providing guidelines on how it should be regulated.

Specifically, the Act states: the employment contract may specify work that the employee cannot perform in their own name and for their own account, as well as in the name and for the account of another legal or natural person, without the consent of the employer with whom they are in an employment relationship.

For the non-compete clause to gain significance, the Employment Act emphasizes that if the employee violates the non-compete prohibition, the employer has the right to demand compensation for damages from the employee.

However, this non-compete prohibition does not make sense for all employees and for any type of work.

The non-compete prohibition can only be established if conditions exist for the employee to acquire new, particularly important technological knowledge through work with the employer, develop a wide circle of business partners, or gain access to important business information and secrets.

Therefore, if someone works, for example, as a salesperson in a retail store of one retail chain, there is little chance that they will acquire new, particularly important technological knowledge, develop a wide circle of business partners, or gain access to important business information and secrets, so it makes no sense to prohibit them from being employed in a competing chain. However, if that person is, say, highly ranked in the procurement sector and has significant contacts, insight into procurement prices, discounts, payment methods, and similar, they could be an employee for whom a non-compete clause makes sense.

Furthermore, the Employment Act expects that the internal Labor Rulebook and employment contract also determine the territorial scope of the non-compete prohibition, depending on the type of work to which the prohibition relates, as the justification for such a prohibition can also be questioned in this context.

In addition to prohibiting the employee from working for a competitor while in an employment relationship with one employer, the employer and employee may also agree on conditions for non-compete prohibition after termination of the employment relationship, for a period that cannot be longer than two years after termination of the employment relationship.

It is important to note here that this non-compete prohibition will not produce any legal effect—simply put, it is not valid—unless the employer undertakes in the employment contract to pay the employee monetary compensation in the agreed amount.

Non-Compete Prohibition During the Employment Relationship

Laws in the Republic of Serbia do not restrict employees from working additionally for others while in an employment relationship with one employer, establishing their own companies, providing services on a fee basis, and so forth. Therefore, employers cannot prohibit this without a concrete, very precise reason.

Justified reasons for an employer to oppose an employee working other jobs in a competing activity would exist if the employee, through work with them:

• acquires new, particularly important technological knowledge,
• develops a wide circle of business partners, or
• gains access to important business information and secrets.

Therefore, if the objective, factual situation is such that the employee gains truly specific knowledge, contacts, or secrets from the employer, they cannot, without the employer’s consent:

• perform work from the employer’s field of activity for their own or another’s account
• conclude deals from the activity performed by the employer
• be a founder or owner of shares in a competing legal entity

An employee who violates this prohibition may be sued by their employer for damages, and what kind and how much damage to the employer occurs through this means is determined in each specific case.

The question arises whether it is sufficient to include articles 161 and 162 of the Employment Act in the employment contract for the employer to be able to invoke violation of the non-compete prohibition and seek damages from the employee.

The answer is: no, that is not sufficient.

Namely, the Employment Act insists that the internal Labor Rulebook, and even better the employment contract itself with the employee, define in detail:

• what are those new, particularly important technological knowledge that the employee could acquire precisely through work with the employer, and not in other ways (e.g., through self-improvement and education);
• through whose merit the employee gains access to a wide circle of business partners—for example, by the employer’s marketing team providing a large number of contacts or the employee coming to that position as an exceptionally communicative and capable person who establishes a large number of contacts thanks to personal skills
• how the employee can gain access to important business information and secrets.

It is clear that this is not easy to define in an employment contract, especially since we are talking about future events, jobs, knowledge, contacts, and similar, but it is not impossible either.

With the help of a skilled lawyer, the employer could better assess and regulate in detail, either in the employment contract itself or later in a contract amendment, the work that the employee cannot perform for another without their consent.

Regarding the territorial scope of the non-compete clause, considering multinational companies and internet-based business that can be conducted anywhere on the planet, many employers include a non-compete clause “for all countries of the world.”

Finally, even if the non-compete clause was clearly defined, this still does not mean that the employer will automatically receive damages from the employee who violated such a prohibition.

Namely:

• The burden of proof is always on the employer, so they must prove that the employee caused them damage by not respecting the non-compete prohibition (and we have mentioned several times above the necessity of defining in the employment contract on what basis exactly damage can be caused)
• To what extent the damage occurred. It cannot be abstract, but very exact. Even if the employer and employee specified damages in some amount in the contract, the actual damage to the employer could still be determined in court in litigation proceedings.

Example from Practice:

An employee in the position of sales manager at a pharmaceutical company established their own pharmaceutical distribution company without the employer’s knowledge. The employer sues them for violating the non-compete clause.

Although at first glance the violation of the non-compete prohibition seems unambiguous, here it can still be determined in litigation whether the knowledge and contacts they acquired from the employer correlate with their activity or whether the pharmaceutical activity is broad enough that their activities are not in any conflict of interest.

Even if it were proven that the non-compete prohibition was indeed violated, what kind and how much damage occurred would still be determined based on facts.

Non-Compete Prohibition After Termination of Employment Relationship

While the non-compete prohibition during the employment relationship is somewhat assumed without the employer’s explicit consent, the non-compete prohibition after termination of the employment relationship must be very precisely agreed upon.

The conditions imposed on the employee are the same: if the employee acquires new, particularly important technological knowledge, develops a wide circle of business partners, or gains access to important business information and secrets through work with the employer, they cannot work in their own name and for their own account, nor in the name and for the account of another legal or natural person, without the employer’s consent, even after termination of the employment contract.

But for this clause to be valid, it must be known at the time of concluding the contract itself (or accompanying amendment) what work the employee cannot perform given that they acquired new, particularly important technological knowledge, developed a wide circle of business partners, or gained access to important business information and secrets from the employer, as well as the duration of the non-compete prohibition, provided that it cannot be longer than two years after termination of the employment relationship.

In addition, it is necessary for the employer to undertake in the employment contract to pay the employee monetary compensation in the agreed amount and agreed duration. If not agreed upon in this way, the non-compete clause produces no effects on the employee.

Even when all these mentioned conditions are met, we must keep in mind that employees are considered the weaker party in the contractual relationship between them and employers. This means that an employee who considers the agreed compensation (so they won’t go to a competitor) disproportionately small and unfair can initiate legal proceedings and prove that they suffer damage due to the non-compete clause.

Therefore, for the non-compete clause to be valid:

• The prohibition can be agreed upon for a maximum duration of two years after termination of the employment relationship
• There must be agreed adequate monetary compensation for the employee
• The prohibition must be related to work that the employee performed with the employer and through which they acquired new, particularly important technological knowledge, developed a wide circle of business partners, or gained access to important business information and secrets

The non-compete clause is agreed upon to protect the employer’s business interests. If they give the necessary consent for the former employee to engage in competing activities, they practically waive it, as if it were never agreed upon.

Example from Practice:

An employer included a non-compete clause in the employment contract with their employee—an engineer—for a duration of two years after termination of the employment relationship for a specific amount. In the decision on termination of the employment relationship, the employer declares that they release the employee from the obligation to respect the non-compete clause and that they will not pay the agreed compensation for respecting that clause.

The engineer sues the former employer and demands payment of the agreed compensation, because they will respect the clause, so they expect the former employer to respect it as well. The former employer argues that they give their consent for the employee to be employed in a competing activity and that they will not seek damages.

The example is inspired by a judgment of the Supreme Court of Cassation which you can read here.

Damages Due to Non-Compliance with Non-Compete Clause

Court practice in the area of damages due to violations of non-compete clauses in our judiciary is not extensive, but there is enough to draw certain conclusions.

Namely, the success rate in these disputes is directly related to the precision and quality of the formulation expressing the non-compete clause. Therefore, engaging experts when drafting employment contracts for employees whose position is particularly sensitive is of invaluable importance. A carefully formulated non-compete clause can prevent later disputes or significantly increase chances of success in case of a dispute.

Conclusion

The non-compete clause is an important tool for protecting the employer’s legitimate business interests. However, its effectiveness largely depends on how it is formulated in the employment contract. An overly broad prohibition may be declared null and void, while unclear provisions may make it difficult to prove violation and collect damages.

For this reason, generic employment contracts for all employees are not good practice. Due to the complexity of this clause, it is advised that when drafting employment contracts containing non-compete provisions, an expert in employment law should be consulted.

A well-drafted contract with precisely defined non-compete provisions not only provides legal security to the employer but also gives the employee clear guidelines about which behaviors are permitted in a healthy business relationship.

Law Firm Petrović Mojsić & Partners