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Employment Newsletter 2/2014

15 October 2014
Employment Newsletter 2/2014

Welcome to Hannes Snellman's Employment Newsletter!

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Contents of the newsletter:

New restrictions on temporary agency work following the amendments to temporary agency work legislation in Russia as of January 2016

A brief comparison of the processing of residence and work permits between Finland, Sweden, and Russia

The possibilities of using non-compete clauses in Finland, Sweden, and Russia

New restrictions on temporary agency work following the amendments to temporary agency work legislation in Russia as of January 2016

As of 1 January 2016, temporary agency work will be subject to significant restrictions in Russia.

The law prohibits “temporary agency work” (Заемный труд) i.e. work performed by a temporary agency worker for an employer for the benefit and under the management and control of a so-called user company (i.e. any individual or legal entity for whom and under the supervision and direction of whom a temporary agency worker works temporarily). According to the law, temporary agency workers may be assigned to a user company only under a so-called contract on staff provision (Договор о предоставлении труда работников (персонала)). A contract on staff provision is a contract under which an employer may assign temporary agency workers (i.e. its employees) to provide services to a user company with the consent of the temporary agency workers.

As of 1 January 2016, only specific companies will be allowed to provide temporary agency workers:

  • private accredited employment agencies (Russian legal entities);
  • a legal entity (including a foreign legal entity) affiliated to the legal entity for whom the employee will perform the work (e.g. subsidiary, a company which has the same executive body or/and the same shareholder, etc.);
  • a legal entity that is party to a shareholders’ agreement will be allowed to provide personnel to the other party of the agreement.

Please note that the law also specifies a list of circumstances when it is illegal to assign temporary agency workers under a contract on staff provision (e.g. for the purpose of replacing employees who are on strike or for performing work during work stoppages, etc.).

A brief comparison of the processing of residence and work permits between Finland, Sweden, and Russia

Finland - combined title encompassing both residence and work permits

The Finnish legislation implementing the EU Single Permit Directive 2011/98/EU came into effect on 1 January 2014. As of the beginning of the ongoing year 2014, non-EU nationals have been able to apply in a single application procedure for a combined title encompassing both residence and work permits.

In order for a non-EU national to work in Finland, he/she must obtain a residence permit based on employment from a Finnish Embassy abroad. Depending on the position of the non-EU national, he/she will need either a residence permit for certain type of work (for example a specialist position or a member of top/middle management position) or a residence permit for an employed person. A residence permit or a visa granted by another Schengen country may be sufficient, and for specific categories of short-term assignments a permit may not be necessary.

EU nationals and citizens of Iceland, Liechtenstein, Norway, and Switzerland can freely work in Finland without a residence permit. However, where the duration exceeds three months (or six months as regards citizens of the Nordic countries) they must register their right to reside in Finland, but they do not need to apply for a residence permit.

Sweden – obligation to prove appropriate salary level of offered employment

As Sweden already had legislation in place corresponding to the above-mentioned EU Single Permit Directive, there was no need to implement any material changes.

Under Swedish law, a non-EEA citizen needs a working permit in order to work in Sweden. In order to obtain a work permit, the applicant must prove that e.g. he/she has been offered an employment with a salary corresponding to the levels of Swedish collective bargaining agreements and that the work offered will entitle the applicant to a monthly salary, currently amounting to at least SEK 13,000 (approx. EUR 1,400) before taxes. A non-EEA citizen who is granted a work permit is automatically also granted a residence permit.

EEA nationals can freely work in Sweden without a residence or working permit.

Contrary to the Finnish practice, citizens of Switzerland need a residence permit should they intend to work in Sweden for a period longer than three months.

Russia – new requirements related to knowledge of the Russian language, history, and legal framework

As of 1 January 2015, in order to obtain a work permit, a temporary residence permit, or a permanent residence permit in Russia, foreign citizens will be required to provide documentation confirming their knowledge of the Russian language, Russian history, and basic knowledge of the Russian legal framework.

Certain categories of foreign citizens (e.g. highly qualified specialists, men over the age of 65, women over the age of 60, etc.) are exempt from the obligation to provide such documentation. Foreign citizens can obtain a work permit as a highly qualified specialist in case the applicant receives salary paid locally in Russia of at least RUB 2,000,000 (approx. EUR 40,000) per annum.

Knowledge of the Russian language, Russian history, and basic knowledge of the Russian legal framework can be confirmed by:

  • a special certificate to be issued for the period of five years by an organisation accredited under a special procedure;
  • state documentation on education issued by an educational institution of a state that was part of the USSR before 1 September 1991; or
  • documentation on education and/or on qualifications issued to foreign citizens who after 1 September 1991 have passed the final state attestation in the Russian Federation.

The possibilities of using non-compete clauses in Finland, Sweden, and Russia

Finland

The Finnish Employment Contracts Act (työsopimuslaki, hereinafter the “ECA”) has separate rules regarding a non-compete clause which is binding during the employment contract period (“non-compete clause during employment”) and a non-compete clause which is binding after the employment contract period has ended (“non-compete contract”).

Non-compete clause during employment

According to the ECA, an employee shall not work for another party or engage in such activity that would, taking into account the nature of the work and the individual employee's position, cause apparent detriment to their employer as a competing activity contrary to fair employment practices.

Since the so-called fair employment practice varies among different branches of business, a non-compete clause during employment is usually defined more thoroughly in an employment agreement. However, even though agreed otherwise, in order to breach a non-compete clause during an employment relationship in accordance with the formulation of the ECA, the employee's competing action has to cause apparent detriment to the employer. In other words, the employee's competing action must have a noticeable correlation to the damage, direct or indirect, that the employer has suffered.

Post-contractual non-compete obligations

Pursuant to the ECA, an employer may, for a particularly weighty reason related to the operations of the employer in the employment relationship, limit the employee's right to conclude an employment agreement regarding work to begin after the employment relationship has ceased with an employer that engages in operations competing with the first mentioned employer, and also the employee's right to engage in such operations on his/her own account, i.e. competing entrepreneurship. According to the ECA, if particularly weighty reasons exist, the main rule is that a non-compete contract may bind the employee for a maximum of six months. In addition, if a contractual penalty fee is included as a sanction to the breach of the non-compete contract, in general, the amount of the contractual penalty fee may not exceed the pay received by the employee for the six months preceding the end of the employee's employment relationship.

When assessing the particularly weighty reason, the criteria taken into account must include, e.g. the nature of the employer's operations and the need for protection related to keeping a business or trade secret, as well as the employee's status and duties.

The level for the particularly weighty reason is set relatively high in recent case law. According to the Finnish Supreme Court (KKO 2014:50), a non-compete contract entered into between an employer that manufactured robot automation software and an employee who worked for the employer as a software engineer was deemed void since the employer had not had a particularly weighty reason for the non-compete contract. According to the Finnish Supreme Court, the weighty reason was not at hand due to e.g. the following grounds:

  • the employee did not have any subordinates;
  • the employer and employee had agreed upon a non-disclosure agreement which adequately protected the employer's trade secrets; and
  • the employee did not take part in the employer's sales activities during his employment relationship period.

Sweden

Non-compete clause during employment

During the term of employment, an employee is bound by a loyalty obligation towards the employer. This loyalty obligation implies that e.g. the employee in general is not allowed, without the employer’s consent, to dedicate him/herself to activities competing with the employer’s business.
An employer obtains certain protection against competition from an employee or a former employee in accordance with the Swedish Act on Protection of Trade Secrets. In accordance with said Act, unauthorised use of a trade secret is prohibited. However, in order for certain information to be considered a “trade secret” under the Act, the information must concern business or industrial relations, must be kept as a secret by the employer (e.g. only a limited number of persons have been entrusted with the information or the information has been kept in a safe to which only a few persons have the key) and the disclosure of it must cause damage to the employer from a competition perspective. Consequently, the Act does not provide for a general non-compete obligation but such undertaking must be expressly agreed on by the employer and the employee.

Therefore, following the termination of employment, the employee is free to compete with the former employer’s business unless otherwise expressly agreed between the parties.

Post-contractual non-compete obligations

In order for a non-compete obligation to be valid, the employer must have a justified reason to prevent the employee from taking up employment with a competitor or start a competing business following the termination of employment. Hence, not all employees may be subject to non-compete restrictions, but an assessment must be made in each specific situation where e.g. the employee’s position, his/her knowledge of the company’s know-how and whether such know-how is deemed worthy of being protected should be considered.

Employers that are members of the Confederation of Swedish Enterprise (Svenskt Näringsliv) are bound to apply the agreement between said confederation and certain trade unions regarding non-compete restrictions (the so-called Agreement of 1969). The Agreement of 1969 contains certain restrictions in relation to non-compete clauses. However, even if the employer is not a member of the Confederation of Swedish Enterprise, the Swedish Labour Court often takes the agreement of 1969 into account when assessing whether a certain non-compete clause is to be considered reasonable or not.

Irrespective of whether the employer is a member of the Confederation of Swedish Enterprise and shall observe the restrictions set forth in the Agreement of 1969, the following examples ought to be taken into consideration when a non-compete obligation is considered to be included in an employment agreement (not an exhaustive list):

  • The relevant employee must have knowledge of the company’s know-how. The know-how should, from a general point of view, be regarded as being “worthy of protection”.
  • The intention of the non-compete restrictions must be to protect the company’s know-how held by the employee, rather than to prevent market competition.
  • In general, a non-compete restriction may not exceed two years in duration.
  • The geographic scope of the non-compete restriction should be limited in order to avoid it being considered unreasonable.
  • The employer is obliged to compensate the employee for the inconvenience of the non-compete restriction. Such compensation must amount to the difference between the employee’s fixed monthly salary at the time of termination of the employment and any lower income that the employee subsequently earns in a new employment or business. However, the compensation is limited to a maximum of 60 per cent of the employee’s fixed monthly salary (unless otherwise agreed with the employee).

Furthermore, a non-compete obligation should not, by default, be considered equal to a post-contractual non-solicitation obligation, under which an employee is restricted to solicit any of the employer’s customers/clients for a period of time following the termination of employment. A separate assessment is concluded in order to evaluate whether such restrictions are reasonable. In general, a non-solicitation obligation is only valid towards key employees with thorough knowledge about the customers, their preferences, etc., which is considered an advantage on the market. Further, as opposed to the non-compete clause, the employer is not obliged to compensate the employee for a non-solicitation obligation. However, depending on the relevant type of business and the size of the market, a non-solicitation obligation may in certain situations have the same result in practice as a non-compete obligation and must in such a case also be treated as one.

Russia

Non-competition restrictions are contrary to the principle of freedom of labour provided for by the Russian Constitution and the Russian Labour Code and, therefore, are not enforceable in Russia. Such clauses have only moral effect over employees.

In case of a dispute, it would not be possible to hold the employee liable for competing and the court would recognise such provisions as being invalid.

Despite the fact that non-compete obligations are unenforceable in Russia, employers may use various indirect means of protecting their interests. Companies should, for example, ensure that their trade secret policies are up-to-date and separate confidentiality agreements may be signed with the employees. Obligations under such agreements may continue even after termination of the employment. Moreover, the working hours of an employee may be strictly regulated, which in practice impedes the employee from having a secondary employment. In addition, the Russian Labour Code provides certain means of protecting a company’s interests by providing that the head of the company (Managing Director) must obtain prior consent from an authorised body of the company in order to have a secondary occupation with another company.

Disclaimer: Hannes Snellman Employment Newsletter is intended for information purposes only. It should not be relied upon as legal advice nor should it be used as a basis for any action or final decision without specifically verifying the applicability and relevant issues on their merits in each individual case.