02 October 2019

Employers often use non-compete agreement in Hungary, but labour courts frequently declare them invalid. Can a training course serve as compensation of the agreement? Or what to do, if it turns out after years, that the leaving colleague does not mean a real and serious threat for your company? In its opinion published recently, the Hungarian Supreme Court gave a guidance on non-compete agreements, which we summarise in this article.

1. Definition of competitor

In a non-compete agreement, you should lay down who are the competitors, or which are the activities your employee should avoid after the termination of his employment.

If you want to prevent that your employee is hired by your biggest rivals in the market, it is also worth checking their activity registered in the commercial register, as it does not cover the real activity in case of many companies.

According to the judicial practice, there is a presumption, that the competitor carries the activity in registered in the commercial register, and it is the employer’s burden to rebut this. So, it is worth considering the related costs in advance, and carefully draft the non-competition clause.

2. Limits of the prohibition

After the termination of the employment relationship, you should not restrict unjustly and excessively the gainful activity of your previous employee in terms of time and geographic area l.

For instance, you can’t prohibit generally to carry out a certain activity on a “worldwide level”, but a restriction for a country or a bigger region within that may be less likely invalid.

When it comes to duration, the non-compete agreement can be valid for 2 (two) years maximum from the termination of the employment.

3. Appropriate compensation

The central element of the non-compete agreement is the “appropriate compensation”.

Firstly, it is worth bearing in mind, that the compensation can be only money, therefore payment in kind, for instance taking a programme course is not an appropriate compensation according to the case-law.

You can pay the financial consideration monthly or you can pay up front the entire amount, but the sum of it for the whole non-compete agreement cannot be less than one third of the basic salary for the same period.

In addition, the compensation should be proportional. Consequently, a two-year agreement for one third of the base salary with a worldwide scope will be less likely proportionate and therefore valid. At the same time, a one-year restriction for half of the base salary with a scope of one country or a region within that will be presumably appropriate.

4. Changed circumstances

Sometimes more years pass between the conclusion of the agreement and the departure of the employee.

Thus, it can happen that the colleague, with whom you concluded a non-compete agreement by reason of “high-risk”, after years, due to market situation or technological change, does not mean real and serious threat for your company.

Unfortunately, the changed circumstances are irrelevant in relation to non-compete agreement.

Therefore you, as an employer, are obliged to pay the money laid down in the agreement even if it turns out later, that due to his abilities or for other reasons he cannot violate or threaten your economic interest.

5. The solution: right of withdrawal

In order to avoid the above situation, it is worth stipulating the right of withdrawal in the non-competition agreement at the beginning, which allows you to unilaterally terminate the agreement when the employee leaves your company.

By stipulating the right of withdrawal, you can make the non-competition agreement more flexible and cost-effective, because you maintain the opportunity to terminate it later unilaterally.

6. Summary

Any restrictions against leaving employees can be enforced on the basis of a valid non-compete agreement, therefore it is important to consider the above opinion of the Curia. In addition, it is worth turning to a lawyer, specialised in labour and business law, who can draft a non-compete agreement, custom-tailored to your company.