The Supreme Court of Estonia rules: specific regulations for the restriction of competition in labour agreement
In Estonia, a construction company brought an action against a former employee for payment of a contractual penalty for infringing the non-compete clause agreed between them. According to the clause, the employee may not work for another employer in the construction sector or be self-employed in the construction sector for the duration of the employment contract without the employer’s prior written consent. The ban was supposed to be valid worldwide. Upon termination of the employment contract, the employer had learned that the employee had performed construction work through his own company outside Estonia, namely in Norway, and had also worked there for other employers.
According to the Estonian Employment Contract Act, a restriction of competition must be limited in terms of territory, time and content and must be comprehensible to the employee. The parties must define the restriction of competition in such a way that it is clear who the employer’s competitor is and which competing activities would harm the employer. Since the restriction must be proportionate to the interest protected by the employer (criterion of proportionality of the restriction), the competitor must essentially be active in the same field as the employer. The essential activities of the two companies must therefore be comparable, which would be the case, for example, if the same product group were sold. The employee’s work for the competitor must be essentially related to the competing activities of the former employer. This means that the employee cannot be excluded from any job with the competitor if his activity there is different.
The right to a contractual penalty is justified only if all conditions of the restriction of competition in the Employment Contract Act are fulfilled. The Supreme Court confirms that the parties have the right to agree on a worldwide restriction of competition. However, as this is a very extensive restriction for the employee, the employer must prove a concrete, particularly vulnerable economic interest.
Source: Decision of Estonian Supreme Court 12.03.2019