08. Restrictive Covenants

Definition and Types of Restrictive Covenants

Restrictive covenants are types of contractual arrangements between an employee and an employer. The content of such an agreement is the employee’s refraining from certain activities, which may be financially compensated by the employer.

Types of Restrictive Covenants

The best known and most frequently used in the Czech Republic is the non-compete clause. Other arrangements used in the Czech Republic are non-disclosure agreements, a non-solicitation clause and a garden leave clause.

Non-Compete Clauses

The non-compete clause is regulated in the Labour Code. It is a type of agreement between an employee and an employer. The content of the agreement is the employee’s obligation that for a certain period of time (maximum 1 year) after the termination of the employment, the employee will refrain from performing a gainful activity that would be the same as the subject of the employer’s activity or would have a competitive nature in relation to it. The employer must provide financial compensation in the amount of at least ½ employee’s average (monthly) earnings compensation for the limitation of the employee’s future employment opportunities.

A contractual penalty may be agreed in the non-compete clause. The employee is obliged to pay the penalty in the event of a breach of the obligation set down in the non-compete clause.

A non-compete clause cannot be concluded with every employee. It is possible to conclude a non-compete clause only with an employee from whom it can be fairly demanded, considering the nature of the information, knowledge, knowledge of working and technological procedures, which he/she acquired during his/her employment with the employer. The withdrawal from the non-compete clause must be in writing and has to be done before the termination of employment.

Non-Solicitation of Customers/Employees

The Czech legal system does not know the definition of a non-solicitation agreement. However, a non-solicitation agreement can be characterised as a clause or a contract in which the employee undertakes to refrain from acquiring the employer’s employees, customers or suppliers for the agreed period. The non- compete clause does not regulate the acquisition of employees, customers or suppliers in any way. For these situations, it is appropriate to use a non-solicitation agreement.

In the case of a non-solicitation agreement, it is not possible to agree on a contractual penalty. According to the Labour Code, a contractual penalty is possible only for non-compete clauses.

Non-Disclosure Agreement

The Labour Code does not establish an explicit duty of confidentiality for all persons in an employment relationship. The obligation of confidentiality applies only to employees in the public administration, thus other employees have only limited obligation of confidentiality arising directly from the law.

The NDA must be in writing and can be part of the employment contract or as a separate agreement. The range of information and persons to whom confidentiality applies must be precisely defined. In the case of an NDA, it is not possible to agree on a contractual penalty.

Enforcement of Restrictive Covenants – Process and Remedies

If the employee violates the obligation from the non-compete clause, the employee must pay a contractual penalty if it was agreed in the agreement on the non-compete clause. By paying the contractual penalty, the obligation from the non-compete clause ceases. Payment of the contractual penalty can be enforced in court.

Unfortunately, due to the complete absence of legal regulation of non-solicitation agreements, it is still a fundamental question what the possible real enforceability of the clause is, and whether the clause would be recognised by the court as valid in the event of a lawsuit.

Use and Limitations of Garden Leave

Garden leave is a situation in which an employee no longer comes to the workplace and does not perform work during the notice period, although he/she is paid for this time. The institute is usually used to prevent an employee from using sensitive information when they leave their current employer, especially when they are very likely to join a competitor.

In practice, it is most often agreed upon in connection with termination of employment. Although the Czech legal system does not explicitly regulate this institute, “garden leave” is possible. In this case, the employee is entitled to salary compensation in the amount of his/her average (monthly) earnings for the duration of the obstacles at work.