Three Questions About Non-Competition Clauses in Sweden
Introduction
This article is the third part of a series dedicated to exploring restrictive covenants in employment agreements under Swedish law. The series aims to provide a comprehensive overview of key considerations when drafting employment agreements in Sweden, focusing on specific clauses that protect employers' interests while ensuring compliance with Swedish legal standards.
In this article, we will provide a concise overview of non-competition clauses in employment relationships. These clauses are intended to prevent employees from participating in competing activities after their employment with the employer has concluded. Although such restrictions are enforceable under Swedish law, they must satisfy specific criteria and comply with legal standards to ensure fairness and legality. The purpose of this article is to explain what non-competition clauses are, why they are important, and key considerations for drafting enforceable clauses under Swedish law.
Non-competition clauses are not explicitly regulated by law, but their validity and reasonableness are instead assessed based on market practice, case law, and general contract law. The framework surrounding these restrictions in Sweden has largely been shaped by a collective bargaining agreement from 1969, entered into between the labour market parties regarding non-competition clauses. This agreement was later replaced by the 2015 collective bargaining agreement concerning non-competition clauses, which forms the basis of current practice in this area.
*The information provided should not be considered exhaustive or advisory in specific cases.
What are non-competition clauses?
Non-competition clauses are contractual provisions that restrict an employee from engaging in competing activities under a certain period after having left their employment with the company. This mainly concerns prohibiting the employee from taking up new employment, or in any other way, engaging with a company which conducts competing business activities.
In Sweden, the employment relationship entails an inherent obligation for all employees to observe loyalty towards their employer. This fiduciary duty of loyalty binds the employee during the employment, prohibiting them from engaging in competing activities. However, since this duty expires upon the termination of the employment agreement, it is sometimes essential for employers to have employees commit to a non-competition obligation if there is a need for the employees' continued obligation of non-competition beyond the expiry of employment.
Non-competition clauses are generally valid under Swedish law; however, their use is restricted due to their impact on an employee’s ability to seek new employment within the same industry. In Sweden, the enforceability of non-competition clauses is governed by general contract law, which deems such clauses invalid if they extend beyond what is reasonable. To be enforceable, such clauses must meet specific criteria and avoid imposing excessive limitations on employees. The reasonableness of a clause is assessed based on factors such as the scope of the restriction, its duration, the employee’s role, and whether the employer provides compensation during the restricted period. Additionally, collective bargaining agreements and case law offer further guidance, emphasizing the need for a balance between protecting the employer’s interests and ensuring the employee’s freedom to pursue their profession. If challenged in court, there is a risk that a non-competition clause may be deemed null and void if it is unreasonably burdensome to the employee. Therefore, it is essential for employers to ensure that the clause is reasonable, balanced, and fairly protects both the company’s interests while not excessively limiting the employee's freedom to pursue new opportunities.
Why are non-competition clauses important?
Non-competition clauses serve as a critical tool for employers to safeguard their legitimate business interests and serve several key purposes. The primary purpose of these clauses is to protect the employer’s legitimate business interests, such as trade secrets, customer relationships, and market position, by preventing former employees from engaging in competing activities for a certain period after their employment with the company.
Non-competition clauses are particularly relevant when employees have access to sensitive information, which could be exploited by competitors if the employee transitions to a rival company. Employees typically gain a competitive advantage through their employment at the company, having access and insight into critical information related to the company’s business and operations, such as trade secrets, customer relationships, or proprietary knowledge. This sensitive information is in many cases integral to the company’s success and competitive edge and due to the sensitive nature of this information, it should not be used in a competing business as doing so could cause damage to the company. Non-competition clauses ensure that departing employees do not leverage their knowledge of the employer’s business operations to benefit competitors or establish competing businesses, making such clauses essential to prevent the exploitation of such knowledge and unfair competition. This is particularly relevant in industries where proprietary information is critical to maintaining a competitive edge.
Further, they preserve established customer relationships, which are often built through significant effort and investment by the employer. These clauses ensure that departing employees do not exploit these relationships to divert business to competitors. Also, non-competition clauses maintain the employer’s market position. In competitive industries, the departure of key employees to rival firms can significantly impact an employer’s market position. These clauses mitigate this risk by restricting employees from joining competitors or starting competing businesses within a defined geographical area and timeframe.
Key considerations when drafting a non-competition clause
A well-drafted non-competition clause must consider several key criteria to ensure its enforceability and full protection for the company. When assessing the suitability and reasonableness of including a non-competition clause in an employment agreement, the employer's interest in retaining business secrets within the company and ensuring they do not come to use outside of the company or by a competitor should be weighed against the employee's interest in freely using their knowledge and skills and the inconvenience that a non-compete clause entails. Therefore, it is crucial for employers to ensure that their non-competition clauses are balanced and fairly protect both the company’s interests and the employee's freedom to pursue new opportunities. In the balancing of interests, consideration should be given to the employer's field of activity and industry, as well as the employee's duties, education and experience, areas of responsibility, position, etc.
The assessment of whether it is reasonable for the employee to be subject to such restriction should be assessed on a case-by-case basis. The assessment considers a variety of factors such as the duration and scope of the restriction, the company's field of activity and industry, the nature of trade secrets in the company, the market in which the company operates as well as the employee's position, experience and skills. Additionally, the wording and extent of the non-compete clause, including any geographic limitations, are also considered in the assessment. There must be a connection between the restriction and the employer’s business interests. In this regard, the company must also have a legitimate interest in maintaining the non-competition restriction, specifically in regard to the employee covered by the restriction. This interest must be justifiable and specific for each individual to ensure the clause is both fair and enforceable.
As a primary condition for implementing a non-compete clause, there must be company secrets within the employer’s operations and a risk that the employer would suffer competitive harm if these secrets were disclosed and used in a competing business. Additionally, the employee must have access to or knowledge of these company secrets within their role and possess the education or experience to use these secrets in a manner that could harm the employer competitively. Non-competition clauses should be used restrictively and not applied to employees who do not have the expertise and capability to utilize these company secrets. Typically, specific specialist knowledge or other decisive circumstances are required for a non-compete obligation to be reasonable for the employee in question. As a result, the range of employees for whom it is reasonable to include non-compete obligations is limited, meaning that restrictions on e.g. junior employees or employees in non-sensitive roles are less likely to be deemed reasonable.
The scope of the restriction should be clearly defined and limited to activities that genuinely pose a competitive threat to the employer, the scope should therefore outline the type of business activities that are prohibited and the geographical area where the restriction applies. It should also be ensured that the clause is transparent and comprehensible to the employee, as unclear or ambiguous or overly broad clauses are more likely to be challenged in court and deemed unreasonable and unenforceable.
The duration of the restriction is a key factor in determining its enforceability and should clearly define the period during which the restriction remains in effect. The length of the restricted term should be reasonable, which is mainly dependent on e.g. the industry, the employee's insights into business secrets, and the employee's position in the company. According to case law and market practice, the restricted term should typically not exceed 9 months to ensure it remains reasonable and enforceable. However, a longer duration may be justified depending on the circumstances of each case, including the employee's position, the nature of the trade secrets, the employee's knowledge, industry, and so on. For instance, if the production cycle is long and the trade secrets are considered to have a longer life cycle, the restricted term can extend up to 12 months, or in exceptional cases, even up to 18 months. The restricted period may also be longer for, e.g. the managing director and members of senior management, for whom a more extensive non-competition agreement can typically be justified. In cases where the restricted period is considered overly extensive, depending on the outcome of the balancing of interests, there is a risk that it may be reduced or adjusted, or even declared unenforceable in its entirety.
For a non-competition clause to be enforceable, the employee must also be compensated during the period where their ability to seek new employment is restricted. This compensation should reflect the economic impact of the restriction on the employee, meaning there must be a link between the non-competition clause and the reduction in the employee’s income. The employer is therefore not liable for compensation if it can be demonstrated that the lower income is not a result of the non-competition restriction. The amount of compensation should be proportionate to the scope and duration of the restriction. In Swedish practice, the compensation typically corresponds to the difference between the employee's average monthly income, calculated from their salary during the last year of employment, and the (lower) income they receive from a new employer. However, as a guiding principle, the compensation does not need to exceed 60% of the employee's average monthly income. This mechanism ensures that the non-competition clause does not impose an undue burden on the employee while providing a fair balance between the employer’s interests and the employee’s rights.
Lastly, the clause should outline the consequences of a breach. This typically involves combining the non-competition clause with a mechanism for liquidated damages, enabling the company to promptly claim damages for the breach and quantify and claim damages more efficiently. Including such a mechanism also serves as a deterrent, as the employee is made aware that there is no "price tag" for breaching the restrictive covenant. However, the amount of liquidated damages should be reasonable and proportionate to the harm caused by the breach. Additionally, given that actual damages caused by a breach may exceed the fixed amount of liquidated damages, the company should reserve the right to claim actual damages to seek full compensation if necessary.
In conclusion, non-competition clauses are an essential tool for protecting an employer's business interests in Sweden. However, their enforceability depends on careful drafting and adherence to legal standards. Employers must ensure that these clauses are reasonable in scope, duration, and compensation, and that they serve a legitimate business purpose. By incorporating these elements, employers can create non-competition clauses that are both effectively protecting their business interests and respecting the opportunities of former employees. If you have any questions regarding restrictive covenants or other employment law issues, please do not hesitate to contact our employment law practice group.
Authors: Eric Leijonhufvud and Jonas Lindskog.
