The non-compete clause has practically become an indispensable part of employment agreements today. However, very often we encounter situations where it is not drafted in accordance with the law, or it is not sufficiently precise, which affects its enforceability. This is often only discovered when a dispute arises, and employers or employees bring the agreement to a lawyer for analysis, only to be (negatively or positively) surprised to learn that their non-compete clause may not hold up in court. In this article, we will point out some of the characteristics of non-compete clauses in Serbian labor law, upon which depends whether your clause is applicable or not.
I. The non-compete clause must be agreed upon in the employment agreement
Although it may seem obvious at first glance, it is worth noting that the non-compete clause can only be agreed upon through the employment agreement. It is not possible to impose a non-compete obligation on employees through provisions of the Employment Rulebook or any other internal general act of the employer referred to in the employment agreement.
The Labor Law ("Law") establishes this rule in the very definition of the non-compete clause, as follows: "The employment agreement may determine the jobs that the employee cannot perform on their own behalf or for the account of another legal or natural person, without the consent of the employer with whom the employee is in an employment relationship (hereinafter: non-compete clause)."
The only exception applies to the territorial scope of the non-compete clause, which, according to the Law, can also be defined in the employer's general act.
II. The tasks that the employee is not allowed to perform without the employer's consent, must be precisely determined
As we have seen above, the Law prescribes that the non-compete clause must precisely determine the tasks "that the employee cannot perform on their own behalf or for the account of another legal or natural person, without the consent of the employer."
What is often encountered in practice is that employment agreements offered by employers, do not comply with this obligation in the manner prescribed by the Law - which is the precise definition of tasks whose performance by the employee violates the non-compete clause. Instead, employment agreements often contain generalized formulations such as "During the term of employment, the employee is not allowed to work for another employer" or "a competitor employer", or provisions copied from the Law: "During the term of employment, the employee cannot work on their own behalf or for the account of another legal or natural person, without the consent of the employer."
Such definitions are not sufficiently precise, thus rendering the clause unenforceable. For the clause to be enforceable, these tasks must be precisely and specifically defined; otherwise, the courts will not be able to apply them, as confirmed by case law in numerous cases.
III. The tasks performed by the employee must meet certain conditions for the clause to be permissible
Did you know that a non-compete clause cannot be included in every employment agreement, i.e., the tasks performed by the employee at the employer must meet certain conditions to justify the permissibility of contracting such a restriction? Many employers are unaware of this fact, and they conclude one model of employment agreement, with a generalized non-compete clause, with all employees, only changing the job title or job description in the clause to which the prohibition applies. This, of course, is not sufficient, and such a clause will have no applicability in practice.
Namely, the Law provides that the non-compete clause can be agreed upon only if there are conditions for the employee to "acquire new, particularly important technological knowledge, a broad circle of business partners, or to obtain important business information and secrets" through work for the employer.
It is not sufficient to simply copy this entire provision or its part; it is necessary to explain in the clause how the employee can acquire new, particularly important technological knowledge through work for the employer or obtain business contacts or learn important information and secrets (since this is not true for every job position). For this reason, it is logical that the same non-compete clause cannot be agreed upon with, for example, a programmer and a marketing manager.
IV. It is essential to determine the territorial scope of the non-compete clause
As mentioned earlier, in the employment agreement or the employer's general act (to which the clause in the agreement will refer), it is necessary to determine the territorial scope of the non-compete clause. In this aspect, employers, in their desire for maximum protection, often tend to exaggerate the breadth of the territory covered by the clause, which may not be justified by the objective needs of the business, thus risking the applicability of the provision itself.
Namely, employers often set this parameter too broadly – if the employer operates only in the territory of Serbia, consider whether there is a need to agree to a non-compete clause for the territory of the "entire European Union, the United States, Asia," etc.? The territorial scope should apply to those territories where the employer can actually be competitive and where the employee can endanger that competitiveness. If the employer does not pay attention to this circumstance, the court will certainly do so in the judicial proceedings.
The law also warns that the territorial scope is determined depending on the type of work the employee does, and to which the prohibition applies. Therefore, in each specific case, the scope of the clause should be tailored not only to the employer's business but also to the circumstances of the work performed by the respective employee.
V. Contractual penalty cannot be stipulated for the breach of the non-compete clause
If an employee violates the non-compete clause, the employer can demand compensation for the damages suffered as a result. In this case, the employer must prove both the occurrence of the damage and its extent.
Although seeking damages may sometimes be a lengthy process for the employer, agreeing on a contractual penalty is not possible, as this institute is prohibited in labor law, as confirmed by the case law of the highest courts in the Republic of Serbia.
Additionally, most employers consider termination of the employment agreement as a consequence of the breach. However, the law does not recognize this violation as a ground for termination of the employment agreement, so employers may struggle to classify this breach under one of the other generalized reasons for termination, which is not always simple. For this reason, it is necessary for the employer to specify in the employment agreement or Employment rulebook, that the breach of the non-compete clause constitutes grounds for termination of the employment agreement.
VI. Special conditions for the validity of non-compete clause after the termination of employment
The law provides for the possibility that the non-compete clause may be valid even after termination of employment, which is logical considering that the employee can still influence the competitiveness of the employer - for example, by starting to work for a competitor after termination of employment. However, in this case, the law specifies special conditions for this option, since it affects the freedom of work of the employee. The conditions are the following:
a. The prohibition may last for a maximum of 2 years after termination of employment
Labor law has limited the duration of the non-compete clause to a maximum of two years after termination of employment. This means that the employment agreement can provide for a shorter duration of the prohibition (for example, 6 months or one year after termination of employment), but not longer than the statutory maximum.
b. The employer must pay compensation during the validity of the prohibition
In the event of the non-compete clause being valid after termination of employment, the employer is obliged to pay the employee a monetary compensation in the agreed amount – this can be a lump sum or be arranged in the form of monthly payments, or in some other dynamics.
The law does not prescribe a minimum amount of compensation, which causes issues with determining its amount in practice. Because of that, case law has determined that this compensation must not be insignificant, as the employee is deprived of the possibility of finding employment during a certain period, and the compensation should be proportional to this fact.
Therefore, the compensation will depend on the scope of the prohibition, i.e., circumstances such as whether the employee is deprived of the possibility of performing all the tasks for which they are qualified or only some tasks, whether the prohibition applies only to certain competitors or a wider range of employers (or all employers engaged in a specific activity), whether the territorial scope of the non-compete clause applies only to one city or to a country or region, etc.
c. Can the employer waive the non-compete clause?
When establishing the employment relationship, the parties do not know all the factors that may arise during its duration, and some of these factors play a role in deciding whether the non-compete clause will be necessary after termination of employment or not. Therefore, employers often reserve the right to waive the non-compete clause after termination of employment, i.e., to "release" the employee from the obligation to comply with this obligation after termination of employment, and themselves from the obligation to pay the agreed compensation. As the obligation of the (former) employee disappears, so does the correlative obligation of the employer to pay them compensation.
It is most often provided that the employer can do this at the time of termination of employment, through documentation on termination of employment (or possibly at some point after this moment). However, caution is advised if you plan to proceed in this way, as case law does not have a unanimous stance on these cases. What is clear for now, is that the employer's waiver would certainly not be allowed if such a possibility had not been previously provided for in the non-compete clause itself, while other responses depend on the circumstances of the specific case.
VII. Recommendation - Additional security through a Confidentiality Agreement
Employers protect their business and market advantage over competitors through non-compete clauses. However, it is important to keep in mind that this clause does not establish protection for confidentiality on its own and does not protect the employer's trade secrets and confidential information. Therefore, it is necessary to include a provision in the employment agreement that regulates these issues, or, preferably, to conclude a separate confidentiality agreement with the employee when establishing the employment relationship.
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If you are in the process of drafting employment agreements to be signed with employees, or if your existing employment agreements contain any of the errors we have pointed out, consider consulting a law office. They can carefully draft this clause or rectify any identified deficiencies by preparing an appropriate model employment agreement or by correcting the deficiencies through an annex to the existing employment agreement. On the other hand, if you are an employee with a non-compete clause in your employment agreement, these remarks can be of great help to ensure that you always know whether the clause in the agreement you've signed is valid and what your actual legal rights and obligations are regarding it.
f you have any questions that we haven't addressed, feel free to contact us at: office@r-legal.net.
Note: The information provided in this article is solely for informational purposes and does not constitute legal advice.
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