Hint: non-competition clause and contractual penalty

Employment Law /

It is a very well-known dilemma of employers regarding training of their employees: “A: What will happen if we educate employees and they leave? B: What will happen if we do not educate them and they stay?” An area where employers wish to have more comfort is typically the protection of technical or business knowledge and business connections, which employees obtain through their position. It is a reasonable wish of an employer that the worker is not allowed to share this knowledge with its competitors during the time of the employment relationship and after it.

Slovenian labour legislation permits the use of non-competition clauses. Such a clause prohibits conducting competing business activities after termination of the employment contract. Non-competition clauses can be binding on an employee for up to two years after the termination of the employment contract. If the non-competition clause prevents the employee from earning an amount comparable to his previous salary, the employer is obliged for the duration of the non-competition clause to pay monthly compensation in the amount of at least one third of the employee’s previous average monthly salary.

It is legally permissible to define a contractual penalty for case of breach of non-competition clause in an employment contract. Contractual penalty means that the employee is obliged in case he breaches the non-competition clause to pay a fixed amount to the employer, regardless of the amount of damage caused. The purpose of the contractual penalty is two-fold:

  • preventive function: the threat of a contractual penalty deters employees from breaching the non-competition clauses;
  • proving: in case of breach, the employer is in a much better position because it does not need to prove all the elements of liability for damages.

Slovenian legislation does not determine whether contractual penalties for breaches of non-competition clauses in employment relationships are legal. Slovenian courts (including the Supreme Court) have however ruled in favour of the contractual penalties for breaches of non-competition clauses within the scope of employment contracts.

The contractual penalty is consequently a strong and permissible weapon in the hands of employers. In case of a breach of the non-competition clause, the employer is not required to prove the existence and value of damage, but the mere fact that a breach has occurred.