Definition and Types of Restrictive Covenants
In Hungary, it is possible to restrict an employee’s activities during and after the employment relationship, subject to specific conditions and legal provisions.
Types of Restrictive Covenants
During employment, restrictions are typically derived from the Labour Code and are often reinforced by employment contracts. The Labour Code prohibits employees from harming the lawful economic interests of their employer, which provides a general basis for restricting certain activities. Employers may also prohibit or regulate secondary employment. In most cases, the standard practice is to require employees to report any secondary employment, planned work-related activities, or business interests at the beginning of their employment and throughout the employment relationship. These activities are typically subject to the employer’s approval.
Non-compete clauses are commonly applied after employment, particularly for senior staff. Such restrictions can extend up to 24 months following the termination of the employment relationship. The terms of these clauses, such as geographic scope and prohibited activities, must be reasonable and proportionate.
Compensation for post-employment non-compete clauses is mandatory. Employers must provide the former employee with consideration equivalent to at least one-third of their salary during the restricted period. The specific amount depends on the scope and severity of the restrictions imposed by the non-compete clause. Employers also have the right, if contractually agreed, to rescind or modify the non-compete agreement, including shortening its duration. Such decisions must be made at the time of termination.
According to a typical non-compete clause, a former employee may be prohibited from working for or establishing a legal relationship for work purposes (such as through a service agreement) with any company that operates in the same line of business as their former employer or provides advisory services to such competing businesses. They may also be restricted from engaging in business activities on their behalf or on behalf of others that compete with the employer’s business. Additionally, non-compete clauses frequently prohibit former employees from negotiating with or offering contracts to employees, agents, contractors, suppliers, or advisors of their former employer or its affiliated companies. Employees are also typically barred from acquiring shares in competing businesses or companies providing advisory services to such businesses, except acquiring stocks in publicly traded companies.
Enforcement of Restrictive Covenants – Process and Remedies
It is generally accepted that a party failing to fulfil its contractual obligations cannot demand performance from the other party. This principle applies to non-compete agreements, which, while considered civil law agreements related to employment, are enforceable before labour courts. If the employer fails to fulfil its obligation to pay the agreed compensation under a non-compete agreement, the restrictions imposed by the agreement no longer bind the employee. Conversely, if the employee breaches the obligations of the non-compete agreement, they forfeit their right to compensation. In such cases, the employer may reclaim any compensation already paid or withhold future payments that would otherwise have been due under the agreement.
In addition to these remedies, either party may seek damages arising from the breach of a non-compete agreement. The agreement may also include a flat penalty clause for such breaches. However, if the penalty amount is excessive, the court may reduce it upon request.
Regarding damages caused to the employer by the employee’s breach of a non-compete obligation, judicial practice establishes that unfair competition acts proven against the company on behalf of the competing party provide sufficient grounds for a claim by the employer. However, a damages claim is valid only if the breaching party’s liability is established under the general rules for damages, which require proof of the harm suffered. If the parties agree to damages instead of a penalty clause, the provisions of the Labour Code regarding liability for damages will apply. Consequently, without proof of damages, the claim cannot be enforced.
Use and Limitations of Garden Leave
Garden leave is not a legal institution with a separate name under Hungarian law. However, there are rules that resemble it:
Under Hungarian law, employers must release employees from work for half of the notice period if they terminate employment for organisational reasons.
In case of any kind of termination, the employer may release the employee from work for the whole notice period, thereby preventing the employee from accessing further sensitive employer information.
The employee should remember that they are also obliged to protect the employer’s legitimate economic interests during this period. In other words, during the period of employment, the employee must not take up a job or engage in any business activity that could jeopardise the employer’s legitimate economic interests, must not contact competitors for such purposes, must not store data, information or documents for their own use, and must safeguard the employer’s data files, information security systems and market reputation. Employers often include these obligations as a heads-up in the termination or the separation agreement when releasing the employee from work.
