Justice for All: The Best is a Precise Contract Prohibiting Employee Transfers to Competitors

A reader asked me to comment on the situation with an employer with whom he signed a non-compete agreement. This means that an employee in the company cannot engage in business that competes with the employer for their own account or for the account of a competing company.

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The reader is a technologist in the food industry, and in the event of leaving the company, according to the Labor Law, he should not work for two years in a competing company based on such a contract. However, the reader, who is employed as a technologist in the meat industry, would like to move to a fish processing company and is unclear whether this is considered competition since both the meat industry and fish processing are formally included in the production of food products (according to NKD).

I must admit that I was not informed about this, but I asked labor law expert Prof. Dr. Željko Potočnjak to guide me on how to resolve this. Even the esteemed professor was not sure and said that it would all depend on what the court would decide. However, he notes that in such cases, it is best to define as precisely as possible in the contract what kind of competition is involved.

Nullity of the Contract

– Recently, I was an arbitrator in a case where it was detailed what is considered competition, even defining what type of cakes the competition is not allowed to produce in order to protect the employer – says Professor Potočnjak.

By the way, the non-compete agreement is embedded in the Labor Law to protect the employer because the employee (in this case, the technologist) gains information during their work in the company that they could misuse by entering into contracts with customers themselves or sharing their knowledge with a future employer in the same field.

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However, in this case, at first glance, there are no such dangers since it involves two separate industries. Admittedly, a chocolate manufacturer can always develop beverage production as well, but in such cases, as Professor Potočnjak said, the court decides. Namely, it can rule that the purpose of the agreed non-competition ban is not to protect the legitimate business interests of the employer (Article 102, paragraph 5 of the Labor Law), which is assessed in each case individually, so if the court considers that this is not a matter of competition, regardless of the fact that the contract between the employer and the technologist did not specify what a competitive product is, it can state that in this case there is no employment with the competition and that the technologist can move to another employer in the food industry.

Clarifying the Contract

In addition, this provision also states that the contract is null and void if the employer ‘unreasonably restricts the work and advancement of the employee’, and Article 102, paragraph 6 states: ‘The contract from paragraph 1 of this article is null and void if it is concluded by a minor or an employee who, at the time of concluding this contract, receives a salary lower than the average salary in the Republic of Croatia.’

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The technologist who wants to move to another company told me that at the time of concluding the contract with the current employer, he had a net salary above the Croatian average, but that under current circumstances (when there is an increasing shortage of skilled labor), another employer is offering him a significantly higher salary. This means that he would not be able to move to a competing company unless the court determines, as I mentioned, that there is no competitive production in the future company.

For employers, this instrument, besides protecting business secrets, has gained additional value because they can at least limit the increasingly frequent transfer of skilled personnel from their company to competitors. However, besides being good for workers, we also want to advise entrepreneurs to define as precisely as possible what kind of competitive products are involved because in the case of litigation, there is a real risk that the court will rule in favor of the workers.

POST SCRIPTUM Recently, we wrote about the shortcomings of the Communal Economy Act. I thank the readers for their reactions. Since communal companies have become competitors to funeral homes, one reader forwarded me a letter he sent to the Ministry of Economy (and others) in which he asked: ‘Why has no city/JLS ever announced a public tender for the maintenance of cemeteries and funeral services on them so that we entrepreneurs can compete, but has automatically given those jobs to its communal company?’ We hope he will receive an answer.