In Estonia, as in many other EU countries, an employer and an employee may sign non-compete agreements both during and after the termination of employment.
These agreements are governed by both labour law and general principles of civil law. The Estonian Employment Contracts Act (§ 23 p 3) specifically provides that restrictions on competition after the termination of employment must be delimited reasonably and recognisably for the employee in terms of space, time and objects. Accordingly, such agreements can only be considered justified subject to certain conditions:
At first glance, the legal requirements may seem clear and well-defined, but their practical application often raises many questions and leads to legal disputes.
How to balance the interests of the parties and protection of the right to work under the Constitution of the Republic of Estonia, which provides that Estonian citizens have the right to freely choose their area of activity, occupation and employment (The Constitution of the Republic of Estonia § 29).
How to protect the employer’s commercial interests while also safeguarding the employee whose professional activity may involve specialised skills that make it difficult to find work in other fields without additional training and retraining. This category primarily includes employees in radio and television, healthcare, finance and banking, legal- and IT sectors.
To address these questions, we will examine each legal provision separately.
Under § 23 p 1 of the Employment Contracts Act, the agreement must primarily protect the employer's legitimate commercial interests. Let’s examine what constitutes the employer’s commercial interests and refer to the court practice.
The Supreme Court notes that “the employer and employee must agree on who constitutes a competitor to the employer and on the scope of the competitive activity that may harm the employer. As the restriction must be proportionate to the employer's protected interests (the reasonableness criterion), it is important to establish that the competitor operates in virtually the same sector as the employer (10 July 2023, Case No. 2-20-11960, p. 12.2).
It is also essential to establish that the employee’s work for the competitor is substantively linked to the former employer’s competitive activities. This means that an employee cannot be prohibited from working for any competitor, but only from activities that may impact the former employer’s economic interests (Supreme Court Case of 12 March 2019 No. 2-15-16682/73, p. 16).
Therefore, for a violation of the employer's commercial interests to be established, the following conditions must be met:
The time limits of the non-compete agreement are strictly regulated by law. According to the Employment Contracts Act, a non-compete agreement that applies after the termination of employment can be set for a period not exceeding 12 months. This limit is intended to protect the employee’s rights and prevent excessive hindrance to their future employment opportunities. If the duration of the agreement exceeds 12 months, such an agreement may be deemed invalid.
As mentioned earlier, a non-compete agreement can be concluded if it is necessary to protect a specific economic interest of the employer. The agreement must be made in writing, and its terms must be clear to the employee. It is important, however, to consider the conditions and specifics of determining the compensation amount. Thus, during the employment relationship, compensation to the employee is not obligatory, and the salary typically covers the non-competition obligation.
However, the employer is obliged to pay reasonable monthly compensation after the termination of the employment contract. The law defines the amount of compensation as “reasonable” and does not provide a clear definition or calculation criteria. The determination of “reasonable compensation” remains the responsibility of both the employer and the employee. The calculation of compensation may be based on the nature of the work, potential harm to the employer, the employee's losses and risks in refraining from certain activities, the consequences of halting professional activities, and other circumstances.
In conclusion, let us return to the questions raised, namely how to maintain balance, set boundaries, and whether it is possible to restrict an employee’s professional activity within the framework of a non-compete agreement.
Restrictions on an employee’s professional activity may be permissible if they are justified, proportionate, and clearly defined.
An employee cannot be prohibited from any work with a competitor, but only from activities that may impact the former employer’s economic activities.
Regarding the specifics of concluding an agreement after the termination of employment, it should be noted that the restrictions must be proportionate to the risks of halting or limiting professional activity and non-competition. This means that to protect commercial interests, the employer must avoid excessive restrictions that could hinder the employee in finding new employment, while at the same time paying reasonable compensation, which would allow the employee to recover, among other things, certain financial losses.
It is also important to note that a non-compete agreement after the termination of employment is a bilateral agreement and requires the consent of both parties.
