Non-Compete Clause in Employment Relationships: Can the Validity of the Clause be Terminated Unilaterally by the Employer?

An employer who has, by a decision on the termination of employment, released the employee from the obligation to comply with the prohibition of competition clause, which was established by the Employment Contract, is not obliged to pay the employee the compensation that was agreed upon in relation to the obligation to comply with the said clause.

This position is particularly interesting because it represents a significant shift in judicial practice.

Namely, until the issuance of the Judgment, the courts’ practice was that this clause is regulated by the employment contract and that all amendments, especially regarding the termination of the validity of the clause, must be an expression of the consensual wills of the contracting parties, the employer and the employee.

However, with the Judgment, this stance has been completely changed.

Below we analyze the reasoning of the Judgment.

Case Analysis

The facts of the specific case are as follows:

• The employment contract obligated the employee to comply with the prohibition of competition clause after the termination of the employment relationship (“the Clause“), and the employer to pay the agreed compensation for complying with the Clause.
• By the employer’s decision, the employee’s employment was terminated and the employee was released from the obligation to comply with the Clause.
• After the termination of employment with the employer, the employee comply with the Clause during the agreed period.
• The employer did not pay the employee compensation for comply with the Clause after the termination of employment.
• The employee filed a claim against the employer for the payment of compensation for complying with the Clause.

Court Positions

1. First-Instance Judgment

Regarding the stated facts, and in accordance with the then-current practice, the first-instance court finds the plaintiff’s claim justified, explaining as follows:

• According to the provisions of the Labor Law, the provisions of the employment contract can only be amended by an annex with a reasoned offer (in accordance with the provisions of Articles 171-174 of the Labor Law), that is, in the same form in which the employment contract was concluded. Only with the employee’s consent to the delivered offer can the original conditions stipulated in the employment contract be changed.
• Moreover, the employment contract is a formal legal act concluded in writing between the employer and the employee and binds the contracting parties by its content until the parties agree to change that content. Therefore, the employer cannot be released from the obligation to pay compensation for the Clause by a unilateral act.
• Accordingly, the court considers that, in the specific case, on the one hand, we have a bilateral legal act, the Employment Contract, and on the other hand, a unilateral individual legal act, the employer’s decision on the termination of employment which released the employee from observing the Clause. Given the aforementioned, the provisions of the employment contract, i.e., the provisions of the Clause from the said employment contract, are binding on the contracting parties, so the employer as a contracting party was obliged to adhere to the conditions stipulated in the contract, that is, to pay the agreed compensation for the Clause upon termination of employment.

1. Judgment

However, the second-instance court in the Judgment finds that the first-instance court incorrectly applied the substantive law, thereby reversing the first-instance judgment.

Namely, referring to the provision of Article 162 of the Labor Law, the court states that when contracting the Clause, the agreement on the payment of monetary compensation in the agreed amount aims to compensate for the damage suffered by the employee because, during a certain period, they cannot enter into an employment relationship or apply acquired knowledge. This obligation matures on the day of termination of employment, that is, that is when the Clause takes effect.

Since the employer released the employee from the obligation to comply with the Clause by the decision on termination of employment relationship, and considering that the employee did not suffer any damage as a result, the employer was not obliged to pay compensation, whose purpose is to compensate for presumed damage.

Namely, the court states that the employment contract may stipulate the jobs that the employee cannot perform in their own name and for their own account, as well as in the name and for the account of another legal or natural person, even after the termination of the employment relationship, without the consent of the employer with whom they are in an employment relationship.

From this, it follows that this prohibition is not absolute and that the jobs covered by the prohibition of competition clause can be performed with the employer’s consent, in which case the clause becomes ineffective.

Finally, the court considers that this consent must be in written form, as is the specific case, as evidenced by the decision on the termination of employment, which the employee did not challenge.

Conclusion

Therefore, according to the Judgment, for the termination of the validity of the agreed Clause, the mutual consent of the contracting parties is not necessary; it can terminate based on a written, unilateral act of the employer.

This stance is supported by the very wording of Article 161, paragraph 1 of the Labor Law, which states that the employment contract may stipulate the jobs that the employee cannot perform in their own name and for their own account, as well as in the name and for the account of another legal or natural person, without the consent of the employer with whom they are in an employment relationship. This applies both to the clause agreed upon during the employment relationship and the one agreed upon after its termination, as Article 162, which regulates the latter, refers to Article 161.

Since, according to the aforementioned, this prohibition of performing certain jobs is linked to the employer’s consent, unilateral release from the Clause by the employer’s act (decision, order, or other written act) actually represents consent to the performance of the said jobs.

Consequently, the result is the termination of the validity of the Clause and the automatic termination of the employer’s obligation to pay compensation to the employee for observing the Clause, as the purpose of the compensation is lost.

As we noted above, this position significantly changes judicial practice. However, we must continue to monitor the further practice of the Supreme Court, as the highest instance in the Republic of Serbia, on this issue.

This article is for informational purposes only and does not constitute legal advice. If you need further information, please feel free to contact us.

By Borinka Dobrnjac, Senior Associate, PR Legal