22 November 2016

One of the largest business risk is an employee who leaves the company with the information and know how acquired during his employment. Business owners should think about protecting their business in advance, before it is too late. We summarize the key points of non-compete clauses under Hungarian law in this résumé.


The pros of a non-compete clause

As a business owner, or CEO, you should use non-compete clauses when you sign labour contract with your key staff members, because:

  • you can avoid losing key customers when an employee goes to a competitor or starts a competing firm;
  • high-performing employees would far less likely to put their skills at your competitor’s disposal in case of end of labour relationship;
  • your market is protected more effectively in this way;

The Labour Code provides low-level protection

According to the Hungarian Labour Code your employee can not compromise the employer’s business interests during the employment relationship. This means that your employee cannot work for your competitor, he cannot found a company with the same business activity, etc.

This is a general rule with a vague content, and the devil is always in the details: the Labour Code does not define who is your competitor, what is competing activity, and more importantly, what kind of sanctions can you use if your employer endangers the company’s business interest.

Practical advice: If you want to protect your business efficiently during employment and more importantly, after the labour relationship ends, you have to insert a specific non-compete clause into the labour contracts that defines the key elements of a non-competition obligation.

The key elements of a non-compete clause

The non-competition clause that you use should address at least the following issues:

  1. what is your business activity that you want to protect?
  2. what kind of activities do you want to be protected from?
  3. what is the time frame and territorial scope of the protection?
  4. what is the compensation for the non-compete obligation?
  5. what kind of sanctions can you use in case of infringement?

Practical advice: instead of using non-compete clause that binds excessively the employee, by prohibiting too wide range of activities for a quite long period, try to focus on the markets and activities that are really important for your business.

The business protected

The competitive business activity shall be defined precisely, since you cannot validly prohibit an engineer to work as an engineer at another construction firm or prevent a sales manager from selling every kind of goods.

In the meantime you can prohibit them for working for the firms that provide similar service for the same customers, or from being employed by the company that sells a competing product ,etc.

The territory protected

The non-compete agreement shall be reasonable in scope, that means that the geographic scope should not be broader than necessary to protect the company’s business. For some businesses a geographic scope that is countrywide may be reasonable, while for other business a one mile radius is all that is reasonable.

Period of protection

Under Hungarian Labour Code a non-compete clause can be concluded for fixed period, for no more than 2 years after the termination of employment. It is important that this period cannot be lengthened.

Compensation - proportionality

The compensation paid to the employee must be appropriate and proportional so that the non-compete clause to be legally valid and enforceable.

The compensation may not be less than the 33 % of the salary of the employee for the preceding period. In other words, in case you want to bind your employee for a 1-year-period after end of employment you can not pay less than 4 (four) months’ salary.

When it comes to the proportionality of the compensation, the length, the territorial scope and the range of prohibited activities comes into consideration. A 24 months’ non-competition clause with a worldwide territorial protection for the minimum 8 months’ salary is scarcely a valid agreement from legal point of view.

Practical advice: when calculating the compensation, all of the elements above shall be taken into account, and the golden rule “the less is more” applies.