How to effectively protect a company secret? – Employee non-competition clause and confidentiality obligation

Hardly anyone may need an explanation of how valuable information constituting a business secret is for each entrepreneur. Typically, they include the rules of company organisation and functioning, its commercial or marketing plans, business partners (including, in particular, suppliers and customers) or the legal and economic status. All this information is available – albeit to a different extent – to employees in connection with work performance. That is why it is vital to protect the entrepreneur against information disclosure by their personnel.

During the employment relationship, the employee confidentiality obligation derives from Art. 100 § 2 item 4 of the Labour Code, i.e. from the obligation to care for the welfare of the workplace. Per this provision, the employee shall care for the company's welfare, protect its property and keep all information secret that, when disclosed, could cause damage to the employer. It should be noted that the obligations referred to in Art. 100 of the Labour Code are considered as the so-called basic employee duties. Their culpable breach by an employee may result in termination of the employment relationship pursuant to Art. 52 § 1 item 1 of the Labour Code. It would seem, therefore, that there is no need to additionally manage this issue in internal statutes (e.g. work regulations) or contracts concluded with an employee. Nevertheless, I assume that instructing an employee that they are obliged to refrain from disclosing information regarding a company secret, as well as defining what such secret covers and what the consequences of the breach may be, is more than just educational value. It also helps to avoid the risk of exemption from liability of an employee who could claim, for example, that they were unaware that certain information was confidential and what value it had for the employer.

Concluding non-disclosure agreements or adding clauses regulating this issue to the employment contract is also significant for the period after employment termination. Employee's knowledge of company secrets has a particular value, which can survive the contract termination even for several years. It should be highlighted that a breach of the confidentiality obligation by a former employee after termination may be subject to a contractual penalty (as opposed to such a breach during the employment contract term). That is also important because, despite the possibly high value of information constituting a trade secret, in the event of its disclosure, the entrepreneur may find proving the damage amount uneasy. A possible loss of a contract or a client is not easy to demonstrate as resulting merely from former employee’s disclosure of information being a company secret.  

 The confidentiality obligation described above is not equivalent to the competition ban, i.e. the prohibition for an employee from engaging in competitive activities or participating in such operations carried out by other entities. The non-competition clause always restricts the employee's freedom of employment. Therefore, its effective implementation requires compliance with formal conditions – this prohibition cannot be derived from a general obligation to look after the workplace’s welfare.

According to the provisions of the Labour Code (Art. 1001-1004), the competition ban is introduced by way of a written agreement concluded with the employee. Therefore, only including this issue in the work regulations or other internal company document will not suffice. Furthermore, failure to keep the written form invalidates the non-competition agreement; therefore, it is worth noting that the written means the contract is signed by both parties.

The Labour Code separately regulates the prohibition of competition during the employment relationship and after its termination. An agreement introducing the ban during the employment relationship may be concluded with each employee and does not require an additional payment for limiting the employee's earning potential. However, it is crucial to define what constitutes an activity competitive to the employer’s, as it must be clear to the employee. Such explication is made on the one hand by listing exemplary activities that an employee is not allowed to undertake. These include, e.g. self-employed activities as part of a sole proprietorship, contractual employment, employment under a civil law contract or participation in other entities as a partner, body member or representative. Additionally, the type of activity competitive to the employer should be stated. As a rule, the activities defined by the PKD codes disclosed in the National Court Registry or CEiDG cannot be considered competitive as entrepreneurs often include more codes than the actual activities carried out. So, the non-competition clause may only apply to activities actually conducted by the employer and any planned activities that the employee knows about. Thus, an employee's activity may be considered competitive if the operations they undertake at least partially overlap with the scope of the employer's activity. For example, that may be the case for the production of goods or the provision of services of the same kind or ones which can replace them (of substitutable nature). The contract should specify the types of activity banned for the employee and the territory covered by this prohibition. They should be defined according to the employer's activity – actual or planned (as long as the employee knows these plans).

 The employee's breach of the non competition clause during the employment relationship may result in the their liability for damages. However, a contractual penalty cannot be validly stipulated.

Therefore, if the prohibition breach is culpable, it may also result in the termination of the employment contract without a notice period. However, it is necessary to inform the employee in advance (e.g. in the non-competition agreement itself) that this is one of their essential obligations, and its violation may have such an effect.

 It should be noted here that the employee's refusal to sign a non-competition agreement during the employment relationship may be the reason for the termination of a permanent employment contract.

 Contrary to the above-mentioned competition ban during the employment relationship, after the job is terminated, a prohibition agreement may only be concluded with an employee who had access to vital information whose disclosure could expose the employer to damage. Whether an employee has access to crucial data is decided by the employer. As a rule, employees cannot claim that they have no access to such information and assume the prohibition does not apply.

 Moreover, the competition ban after employment termination entails the necessity to pay the former employee compensation throughout the prohibition period. The parties may determine the payment amount. Yet, it must not be lower than 25% of the remuneration received by the employee before the termination in the period equal to the noncompetition clause duration. The purpose is clear – to compensate the worker for the lower earnings caused by inability to undertake any gainful activity within their field of expertise where they would have the best chance of finding a new job.

 At this point, it is worth noting that the competition ban and the related obligation to pay compensation are independent of the method of employment termination, as well as whether the employee has found a less-paid job after work cessation. The compensation can be paid one-off or in instalments. In practice, the latter option prevails.

The agreement concluded with the employee may contain a clause which will make the payment of the compensation instalment dependent on the employee's declaration that they refrain from running a business competitive with the former employer.

 The post-termination non-competition agreement must also specify the prohibition term. Such an agreement cannot be validly concluded for an indefinite period. The Labour Code states that the post-termination non-competition clause shall expire prematurely if the reasons for such prohibition cease to exist or if the employer fails to pay the compensation.

 It is recommended that the agreement includes a termination option for the employer so that they can unilaterally decide to end the prohibition in a situation where the former employee's refraining from a competitive activity is no longer critical for the entrepreneur.

Without introducing such a clause, the agreement is, in principle, interminable – unless both parties decide to end it by mutual agreement or a case provided for in the Act occurs. An exception in this respect is introduced in Art. 15gf of the Act of 2 March 2020 on special solutions related to the prevention, counteracting and combating COVID-19, other infectious diseases and emergencies caused by them. It introduces the right to terminate the non-competition agreement by 7-day notice after cessation of, among other things, employment relationship. However, this regulation is only valid during the period of the epidemic threat or epidemic state announced due to COVID-19

Author:

Dr. Iwona Więckiewicz-Szabłowska

attorney-at-law, Head of the Commercial Law Department, CHUDZIK i WSPÓLNICY Radcowie Prawni

This article comes from magazine:
FOCUS ON Business #6 September-October (5/2022)