What happens when an employee goes to another employer to do the same job?

It is a fact, and practice shows, that in most cases, an employee does not pay much attention to the provisions of the contract that do not relate to their material rights and other rights based on which they receive certain compensation when establishing an employment relationship. One of the provisions that both the employee and the employer should certainly pay attention to is the ‘contractual non-competition clause.’ Only when the employee is no longer satisfied with their work with the employer and finds another job does a conflict of interest arise between the employer and the employee, in which the provision from the Labor Law ‘On the prohibition of competition after the termination of the employment relationship’ can play a decisive role.

In many cases, the employee then seeks to invalidate the contractual non-competition clause, while the employer tries to prevent such employee aspirations by emphasizing the impact of the prohibition of working for another employer. Whether they will succeed depends on how the contractual non-competition clause is formulated in the employment contract or a separate agreement, or whether it is in accordance with the mandatory provisions of the Labor Law.

Side Jobs

Regardless of the type of work for which the employment contract is concluded, including managerial contracts, and regardless of the size of the employer and the market of their business, the Labor Law prescribes two types of prohibitions on competition between the employee and the employer. The first is the statutory prohibition of competition from Article 101 of the Labor Law, which prohibits the employee from entering into contracts related to the activities performed by the employer without the employer’s consent, for their own or someone else’s account. This is a generally accepted prohibition that protects the employer from unfair actions by the employee despite the established contractual relationship between the employer and the employee. If the employee acts contrary to the statutory prohibition of competition, the employer may seek compensation for the damage suffered or that the concluded contract be considered concluded for their account, or that the employee hands over the profit earned from such a contract or transfers the claim for profit from such a contract to them. Such a right of the employer is limited by a deadline as it expires within three months from the day the employer learned of the conclusion of the contract or five years from the day the contract was concluded.

However, the law also allows for the tacit repeal of the statutory prohibition of competition, but only in cases where the employer knew at the time of establishing the employment relationship that the employee was engaged in certain activities and did not require them to cease such activities. However, the employer is authorized at any time to revoke the approval given to the employee to enter into contracts related to the activities performed by the employer for their own or someone else’s account.

‘I Found a New Job’

However, the Labor Law also prescribes a second type of prohibition for the employee to compete with the employer, but this applies only if it is agreed upon, and exclusively in written form. The Labor Law defines it in Article 102 as a ‘contractual non-competition clause.’ Thus, the employer and the employee can agree in writing that for a certain period after the termination of the employment contract, the employee may not be employed by another person who is in market competition with the employer and that they may not enter into contracts for their own account or for the account of a third party that compete with the employer. Although the conjunction ‘and’ would suggest that these are cumulative conditions, practice has allowed that the contractual non-competition clause contains either one or both conditions.

If the employee were to violate the contractual non-competition clause, the employer would have the right to demand from them the fulfillment of the obligation (e.g., to terminate the employment contract concluded with the employer who is in market competition with them or to cease entering into contracts for their own account or for the account of a third party that compete with the employer) or compensation for damages. Since such a non-competition clause is considered a separate contract, it can also be an integral part of the employment contract, but it must not be concluded for a period longer than two years from the date of termination of the employment relationship.

Examples from Case Law

The contractual non-competition clause does not bind the employee even if its purpose is not to protect the legitimate business interests of the employer or if it disproportionately restricts the work and advancement of the employee, considering the area, time, and purpose of the prohibition in relation to the legitimate business interests of the employer. However, such exclusion from the binding nature of the contractual non-competition clause must be proven by the employee before the competent court; whether they will succeed depends on many elements that the court determines in each separate proceeding. For example, the Supreme Court in decision No. Revr 616/07-2 of May 28, 2008, determined that, considering the type and qualifications of the defendant, which do not allow easy employment with another employer in conditions of high unemployment, it is justified to conclude that the contractual non-competition clause for the longest legally permitted period of two years from the date of termination of the employment relationship disproportionately restricts the work of the defendant and therefore does not bind the defendant.

The County Court in Varaždin in decision No. Gž 249/11 of April 27, 2011, emphasized that the defendant was employed by an employer whose activity only partially overlaps with that of the plaintiff, that they were employed in another position that does not contain any powers or possibilities of influencing the conclusion of legal transactions for the purpose of selling goods, negotiating prices, or terms of sale, that the defendant has a secondary vocational education, that they were employed after two unsuccessful attempts to be employed by other employers, and that for all these reasons, the prohibition of employment during the maximum statutory period of two years, without the right to compensation during that time, greatly restricts their right to work. The non-competition contract is also null and void if concluded by a minor or an employee who, at the time of concluding that contract, receives a salary lower than the average salary in Croatia. However, the employer cannot invoke this nullity.

Compensation for the Prohibition

It is necessary for the contractual non-competition clause to be prescribed in written form because any other form of contracting is invalid. Thus, even a written confirmation from the employer about the concluded employment contract that would contain a contractual non-competition clause would be invalid because such a confirmation is considered a unilateral act of the employer that is not a contract. In addition to the indicated cases in which it is considered that the contract establishing such a non-competition clause was not concluded, the Labor Law recognizes one more case. Namely, according to Article 103 of the Labor Law, the contractual non-competition clause binds the employee only if the employer has undertaken the obligation in the contract to pay the employee compensation during the duration of the prohibition of at least half of the average salary that was paid to them in the three months before the termination of the employment contract.

Thus, in these cases, despite the employee’s violation of the contractual non-competition clause, the conditions for the employer’s claim for damages would not be met. This legal position, which is entirely correct and generally accepted, has been expressed since the decision of the County Court in Zagreb No. Gž-276/02 of May 14, 2002. However, it is still not as clear as it seems because the employer retains the right to demand from the employee a contractual penalty if it is indicated in the employment contract or a separate agreement, regardless of the fact that the employer has not undertaken the obligation to pay compensation during the duration of the contractual non-competition clause. The employer is obliged to pay compensation even if the employee is employed by another employer, but that employer, as already mentioned, must not be in market competition with the employer who pays the compensation.

Damages to the Employer

The contractual non-competition clause applies to any job with a competing employer, all to avoid abuses of its binding nature. In practice, there are also situations where the employee is ‘formally’ employed by a competing employer in another position and for performing tasks that they did not perform with the previous employer, claiming that they are not performing any competitive work even though they work for a competing employer. In such cases, the court has recently not accepted these claims as exculpatory reasons for the validity of the contractual non-competition clause.

It is permissible for the employer and the employee to agree on a contractual penalty in the event of non-compliance with the contractual non-competition clause, leaving it to the contracting parties to agree on the amount of the contractual penalty. In that case, the employer can only demand payment of that penalty from the employee, in accordance with the general provisions of mandatory law, but not the fulfillment of the obligation or compensation for greater damages. However, Article 106, paragraph 3 of the Labor Law prescribes the illogicality that a contractual penalty can be agreed upon even if the employer does not undertake the obligation to pay salary compensation during the duration of the contractual non-competition clause, but only if at the time of concluding such a contract the employee was receiving a salary higher than the average salary in the Republic of Croatia.

The consequence of this will be that the employer will have an interest in maintaining the contractual non-competition clause in its maximum duration of two years, and the employee who was receiving a salary higher than the average salary in the Republic of Croatia at the time of concluding such a contract will be obliged to pay the employer the contractual penalty in full if they are employed by another person who is in market competition with the employer during that period or if they enter into contracts for their own account or for the account of a third party that compete with the employer, regardless of the fact that the employer has not undertaken the obligation to pay compensation during the duration of the contractual non-competition clause.

What is ‘Market Competition’

For the competent court to determine in proceedings for violation of the contractual non-competition clause that the employee has indeed violated the contractual non-competition clause by working for another employer, the employer must first prove, and the court must establish, that the employee has been employed by a competing employer who is in market competition with the previous employer. For example, the Supreme Court in a decision from 2011 pointed out that for the existence of market competition, it is important whether the company where the employee previously worked and the company with which the employee concluded a new employment contract offer the same products and services in the market and thus compete in the market.

According to court decisions, it is legally decisive whether the new and former employer offer the same products and services in the market, whereby only the registration of identical activities in the commercial register is not decisive, but the actual state of providing the same products and services in the market of those activities from which it would arise whether those companies are in market competition. The fact that they only partially perform the same activity does not mean that they are in market competition.

Termination and Withdrawal

The Labor Law also regulates cases of termination and withdrawal from the contractual non-competition clause at the will of one of the contracting parties. Thus, in the event that the employee terminates the employment contract with extraordinary termination because the employer has seriously violated the obligation from the employment contract, the contractual non-competition clause ceases to be valid, but under the additional condition that within one month from the date of termination of the employment contract, the employee states in writing that they do not consider themselves bound by that contract (Article 104, paragraph 1 of the Labor Law). The contractual non-competition clause also ceases to be valid when the employer terminates the employment contract without a justified reason under the law, unless within fifteen days from the termination they notify the employee that they will pay them the previously agreed or legally determined compensation during the duration of the non-competition clause.

The Labor Law contains a provision that allows the employer to withdraw from the contractual non-competition clause at any time, but on the condition that they notify the employee in writing. In that case, the employer is not obliged to pay the previously agreed or legally determined compensation after the expiration of three months from the date of delivery of the written notice of withdrawal from the contractual non-competition clause to the employee.