Croatia: validity of restrictive post-employment non-compete covenants

May 2018 | EXPERT BRIEFING | LABOUR & EMPLOYMENT

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There are many ways employers may protect themselves and their legitimate business interests against employees leaving. This issue becomes more important when it comes to key employees who were entrusted with confidential information such as business plans and trade secrets or who have had an immediate access to privileged information, as is the case with customer databases, pricing policies, patents, etc.

There is a whole array of legal instruments that employers may utilise to protect their legitimate interests when terminating employment. Some of these include applying clauses regulating non-competition, non-dealing or non-solicitation in respect of existing and prospective customers and employees. But employers may also impose indirect restrictions, such as incentive arrangements (e.g., garden leave).

With Croatian companies, however, the most frequently agreed employer-exercised restrictive covenant is a non-competition clause in the form of a post-employment contractual prohibition of competition, which is regulated under employment law. Employer and employee may stipulate that, for a certain time after the termination of the employment contract, the employee must not enter into employment with another entity which competes with the employer.

Furthermore, the employee must not conclude business transactions that constitute competition with the employer, either for his or her benefit or the benefit of another. Such a contract must last for no longer than two years after the date of termination of employment. However, the contract is not binding if it does not aim to protect legitimate business interests or disproportionately limits an ex-employee’s work opportunities elsewhere.

In practice, a post-employment non-competition clause is commonly included in employment contracts. It is also possible to agree on such a restriction in the form of a separate agreement which, in order to be enforceable, must be in writing. Because a restrictive non-competition covenant is valid only if agreed by consensus, it would be deemed invalid if unilaterally imposed by the employer. A typical example would be where an employer includes a non-competition clause as part of termination of employment.

Employers must be cautious when trying to impose a restrictive covenant in the form of a non-competition clause as not every employee may be subject to post-employment restrictions. The concluded non-competition contract will be considered null and void if it is agreed with a minor employee or by an employee who, at the time the contract is concluded, is receiving a wage amounting to less than the average wage in the Republic of Croatia.

As a general rule, the contractual prohibition of competition is binding on an employee only if the employer has undertaken a contractual obligation to pay compensation to the employee for the duration of the prohibition. This should amount to at least half of the average wage paid to the employee in the three-month period prior to termination of the employment contract. The employer may withdraw the post-employment prohibition of competition and discontinue paying the agreed compensation upon expiry of the three-month period.

The employer may be exempt from an obligation to pay an employee compensation during contractual prohibition of competition only if there is a breach of the non-competition clause and parties have agreed that the contractual penalty is a single sanction. In that case, an employer would have a limited right to enforce a claim.

If an employee breaches agreed post-employment prohibition of competition and engages in activities that violate employer rights, depending on the content and the scope of the restrictive arrangement, the employer may: (i) impose an injunction against the employee to cease competitive activities; (ii) claim damages, in which case it needs to prove actual accrued damages; and (iii) impose a contractual penalty, which a court has the right to modify. In this instance, the existence of a penalty clause only prevents an employer enforcing the non-compete clause by any means other than the penalty.

In practice, by agreeing to the statutory maximum two years and extending the application of post-employment prohibition of competition to the whole of Croatia, employers put themselves at risk of losing a court case if they decide to enforce such a clause. Even though Croatia does not recognise the doctrine of precedents, in that court rulings may not be considered a direct source of law, in practice, when it comes to employment disputes, the court has decisive effect, particularly in matters relating to the interpretation of employment law provisions, including applicable statutes.

This statement was upheld in a dispute involving an employee who was employed as a salesman and was subject to post-employment prohibition of competition for the maximum period of two years across the entire Croatian territory. In this case, the Croatian Supreme Court ruled the clause to be null and void, stating that the employee’s job as a salesman, which did not include being entrusted with the duties of a key employee, was disproportionately being restricted by the covenant and limited professional advancement.

This makes it clear that upon entering into employment relationships, employers should pay particular attention to the content and scope of the restrictive non-compete covenant drawn up. This includes the scope and application of the covenant, which is dependent on the employee’s position within the company and the importance of the tasks and duties with which he or she was entrusted.

Hrvoje Vidan is founder and a partner at Vidan Law Office. He can be contacted on +385 (1) 48 54 070 or by email: hrvoje.vidan@vidan-law.hr.

Hrvoje Vidan

Vidan Law Office