How Far Does the Employee’s Non-Compete Obligation Extend?
How Far Does the Employee’s Non-Compete Obligation Extend?
November 2024
Nino Bostic Sluga, Attorney at Law
Selih & partnerji
One of the essential obligations of an employee towards his employer is that, in view of the nature of the work performed for the employer, the employee refrains from conduct which materially or morally harms or is likely to harm the employer’s business interests (Article 37 of the Employment Relationships Act (the “Act”)).
Such obligations include the non-compete obligation laid down in Article 39 of the Act. During the employment relationship, the employee may not, without the written consent of the employer, carry out work or enter into transactions on the employee’s own or another person’s behalf which fall within the scope of the activity actually carried on by the employer and which constitute or could constitute competition for the employer.
On 20 August 2024, the Supreme Court of the Republic of Slovenia issued an important judgment in this area in Case VIII Ips 4/2024, which further developed the previous position of the case law on the contentious nature of certain conduct of employees from the point of view of the non-competition prohibition.
Background of the case: The employer gave the employee an extraordinary termination of the employment contract because the employee had established a “competing” company, registered (inter alia) for the same activity as the employer, and had taken over as its legal representative without the employer’s consent and despite its express objections. The employee brought an action for a declaration that termination was unlawful, but the Court of First Instance dismissed his claim, finding that his conduct constituted a breach of the non-competition obligation. The employee appealed against the judgment and succeeded. The High Court upheld the employee’s claim, holding that only directly concluded competitive transactions could constitute a breach of the non-competition clause and that neither the employee nor the “competing” company had concluded any such transactions during the relevant period.
The employer file a request for revision against the High Court’s decision, which the Supreme Court upheld and annulled the decision of the Higher Court. In its reasoning, the Supreme Court explained that the employee’s non-compete obligation includes not only acts already performed or directly entered into in competition, but also acts or transactions which could potentially constitute competition and thereby harm the employer’s business interests. It is not necessary that such conduct has already caused damage – the potential harmfulness of such conduct is sufficient.
Employer must be able to prevent potentially harmful actions (e.g., by terminating employment contracts) that originate in the sphere of its employees. It is incorrect to interpret that, unless there is a risk of direct competitive action and, therefore, the possibility of harm, the employer cannot take appropriate action at all, but should wait until the other company has actually concluded or carried out the transaction. The mere taking up of a directorship in a “competing company” without the employer’s consent implies that the employee is performing work or concluding transactions for the employee’s own or another person’s account, which corresponds to the concept of non-competition referred to in Article 39(1) of the Act. This is the case even if the employee, as a director, has not yet concluded any business during the period.
We believe that the Supreme Court’s position is correct, as it emphasizes the principle of the employee’s loyalty and, at the same time, allows the employer to take appropriate action before actual damage occurs. It should be borne in mind that in many cases it is also difficult for the employer to obtain information as to whether the employee has, in fact, engaged in competitive transactions.
November 2024
Nino Bostic Sluga, Attorney at Law
Selih & partnerji
One of the essential obligations of an employee towards his employer is that, in view of the nature of the work performed for the employer, the employee refrains from conduct which materially or morally harms or is likely to harm the employer’s business interests (Article 37 of the Employment Relationships Act (the “Act”)).
Such obligations include the non-compete obligation laid down in Article 39 of the Act. During the employment relationship, the employee may not, without the written consent of the employer, carry out work or enter into transactions on the employee’s own or another person’s behalf which fall within the scope of the activity actually carried on by the employer and which constitute or could constitute competition for the employer.
On 20 August 2024, the Supreme Court of the Republic of Slovenia issued an important judgment in this area in Case VIII Ips 4/2024, which further developed the previous position of the case law on the contentious nature of certain conduct of employees from the point of view of the non-competition prohibition.
Background of the case: The employer gave the employee an extraordinary termination of the employment contract because the employee had established a “competing” company, registered (inter alia) for the same activity as the employer, and had taken over as its legal representative without the employer’s consent and despite its express objections. The employee brought an action for a declaration that termination was unlawful, but the Court of First Instance dismissed his claim, finding that his conduct constituted a breach of the non-competition obligation. The employee appealed against the judgment and succeeded. The High Court upheld the employee’s claim, holding that only directly concluded competitive transactions could constitute a breach of the non-competition clause and that neither the employee nor the “competing” company had concluded any such transactions during the relevant period.
The employer file a request for revision against the High Court’s decision, which the Supreme Court upheld and annulled the decision of the Higher Court. In its reasoning, the Supreme Court explained that the employee’s non-compete obligation includes not only acts already performed or directly entered into in competition, but also acts or transactions which could potentially constitute competition and thereby harm the employer’s business interests. It is not necessary that such conduct has already caused damage – the potential harmfulness of such conduct is sufficient.
Employer must be able to prevent potentially harmful actions (e.g., by terminating employment contracts) that originate in the sphere of its employees. It is incorrect to interpret that, unless there is a risk of direct competitive action and, therefore, the possibility of harm, the employer cannot take appropriate action at all, but should wait until the other company has actually concluded or carried out the transaction. The mere taking up of a directorship in a “competing company” without the employer’s consent implies that the employee is performing work or concluding transactions for the employee’s own or another person’s account, which corresponds to the concept of non-competition referred to in Article 39(1) of the Act. This is the case even if the employee, as a director, has not yet concluded any business during the period.
We believe that the Supreme Court’s position is correct, as it emphasizes the principle of the employee’s loyalty and, at the same time, allows the employer to take appropriate action before actual damage occurs. It should be borne in mind that in many cases it is also difficult for the employer to obtain information as to whether the employee has, in fact, engaged in competitive transactions.
