NEGOTIATING A NON-COMPETE CLAUSE

In addition to the mandatory elements contained in an employment contract, it is almost unheard of in today’s world for such a contract not to include a non-compete clause and protection of trade secrets. A non-compete clause can be agreed upon when establishing an employment relationship, i.e., through an employment contract, but it can also be established later, in which case such a restriction would be agreed upon through an annex to the employment contract. The purpose of this provision is, in fact, to protect the innovative solutions and business contacts of the employer in relation to employees.

The non-compete restriction is regulated by Articles 161 and 162 of the Labor Law (hereinafter: the Law), while the protection of trade secrets is dedicated to a separate law – the Law on the Protection of Trade Secrets.

The author of this text pays special attention to the conditions that must be met to establish a non-compete restriction and the conditions for claiming damages from an employee in case of a breach of the contractual non-compete clause. Article 161, paragraph 2 of the Law provides that a non-compete restriction can only be established if there are conditions for the employee to gain new, particularly important technological knowledge, a wide range of business partners, or to acquire important business information and secrets while working for the employer. Based on the aforementioned provision of the Law, the inclusion of a non-compete clause is only possible if the conditions prescribed by the law for establishing such a clause are met.

Starting from Article 60, paragraph 1 of the Constitution of the Republic of Serbia, which guarantees the right to work in accordance with the Law, and paragraph 2 of the same article, which provides that everyone has the right to free choice of employment, any restriction on the right to work that is not in accordance with the provisions of the Law or with limitations prescribed by other laws would be unlawful. In this regard, the employee and the employer must stipulate, in the employment contract, the tasks (if the conditions prescribed by the Law for the inclusion of a non-compete clause are met) that the employee cannot perform on their own behalf and for their own account, as well as on behalf of and for the account of another legal or natural person, without the consent of the employer with whom they are in an employment relationship.

If the employee violates the non-compete clause, the employer has the right to demand compensation from them. If the employee breaches the non-compete clause, the employer has the option to file a lawsuit against the employee with the competent court for compensation for the violation. However, what poses the greatest challenge for the employer in practice is proving the specific damage suffered and its amount.

Due to this, it is not uncommon, in accordance with the provisions of the Law on Obligations, for a penalty clause to be included in the event of a breach of the non-compete clause. Therefore, in the event that the employee violates this clause, the contractual penalty clause is activated, and regardless of whether the employer has actually suffered damage or not, they have the right to demand compensation from the employee (or former employee) in the amount of the contractual penalty, which can be, for example, eight net salaries of the employee. If the employee refuses to pay the agreed amount, the employer will have to file a lawsuit against the employee, but they will not have to prove the damage and its amount, only that a breach has occurred and that a specific contractual penalty amount has been agreed upon.

Article 162 of the Law provides that the employee and the employer can also agree on the conditions of the non-compete clause in accordance with Article 161 upon the termination of the employment relationship, within a period not exceeding two years after the termination of the employment relationship. The inclusion of this restriction is conditional on the employer’s obligation, under the employment contract, to pay the employee a monetary compensation at the agreed-upon rate as a form of compensation for the damage realistically suffered by the employee because they cannot apply their acquired knowledge and perform certain tasks for another employer within a certain period. Therefore, the employer can only pay this monetary compensation to the employee upon the termination of the employment relationship, not during its duration. If this compensation is not agreed upon, the entire non-compete clause would be invalid because the compensation to the employee is a crucial element of the non-compete clause after the termination of the employment relationship.

Regarding the duration of the non-compete clause, the employer’s general act and the employment contract also determine its territorial scope, depending on the type of work to which the restriction applies (Article 161, paragraph 3 of the Law).