Non-compete clauses are a common tool employers use to protect their business interests by restricting employees from engaging in competing activities. However, their enforceability and scope must align with Serbian labor laws and court practice.
Recent case law has introduced additional aspects and interpretations of non-compete clauses, which could pose challenges for employers in enforcing them effectively.
These new judicial perspectives may create uncertainties in practice, making it more difficult to apply non-compete restrictions as intended.
In this article, we explore the key aspects of non-compete clauses in employment agreements, their validity, duration, and conditions under which they can be agreed upon – both during and after employment. We also analyze the latest court decisions to highlight potential risks and challenges employers should consider when drafting and enforcing non-compete obligations.
How to implement a non-compete clause?
A non-compete clause can be included in the employment agreement, which stipulates that the employee, without the employer’s consent, cannot perform certain activities for their own account or on behalf of another individual or legal entity. The non-compete clause can be agreed upon to be effective during the employment relationship, as well as after the termination of the employment relationship, for a maximum of two years after termination.
There is no obstacle to including the clause even after the conclusion of the employment agreement or during the course of the employment relationship through an annex to the employment agreement.
Conditions for the Non-Compete Clause to Be Validly Agreed Upon
The non-compete clause is used when there is a possibility that the employee may gain:
- New, particularly valuable technological knowledge;
- A wide range of business partners;
- Or access to important business information and secrets.
A business secret is considered any information or data whose unauthorized disclosure to third parties could harm the interests of the business entity or benefit the competition. This encompasses discussions and negotiations with business partners, along with the strategic business plans of the company. However, protection is granted exclusively to information that is unique, proprietary, or not generally accessible to the public, ensuring that only confidential and non-public data is safeguarded.
Duration of a Non-Compete Clause
The non-compete clause can be included in the employment relationship in the following ways:
1. During the course of the employment relationship;
2. For a period after the termination of the employment relationship.
For the non-compete clause to be valid during the employment relationship, no additional conditions need to be met other than the fact that it must be explicitly stated in the employment agreement.
On the other hand, if the employer wishes to extend the validity of the clause beyond the termination of the employment relationship, this is only possible under the following conditions:
- The non-compete prohibition cannot last longer than two years from the date of termination;
- The employer is required to pay the employee special compensation.
The amount of this compensation is not legally specified, but it must be paid for the entire duration of the non-compete period. The payment can be made as a lump sum or in installments on a monthly basis.
This means that if the employer fails to fulfill the obligation of compensation payment, the non-compete clause will have no legal effect and will not prevent the employee from engaging in activities as stipulated in the clause.
On the other hand, if the employee breaches the non-compete clause, the employer has the right to seek compensation for damages. However, in practice, proving damages can be quite challenging. The employer must demonstrate not only that damages were suffered but also establish a clear causal link between the employee’s breach and the damages incurred, as well as quantify the exact amount of those damages. This evidentiary burden often makes enforcing non-compete clauses through damage claims difficult in practice.
Territorial Scope of the Non-Compete Clause
Regarding the territorial aspect, both the employee and employer are free to agree on the territory where the non-compete clause will apply. A common mistake in practice is when the employer and employee agree that the non-compete clause applies worldwide. Such a provision would likely lead to the invalidity of the non-compete clause. In contrast, the more precisely and narrowly the territorial limitation is defined, the higher the likelihood that the clause will be considered valid and enforceable.
Other Important Considerations for Formulating a Non-Compete Clause
To ensure the enforceability of a non-compete clause, it is essential that the specific job roles and activities the employee is prohibited from performing are clearly defined in the employment agreement. These restricted activities should directly relate to the work the employee performs for the employer and the specialized knowledge and skills they acquire in the process. The underlying principle is that the employee benefits from the employer’s resources and expertise and allowing them to immediately leverage these advantages for another employer or personal gain without restrictions would be unfair.
For this reason, careful drafting of the non-compete clause is crucial. One of its key conditions is that the prohibition applies only in the absence of explicit employer consent for the employee to engage in the specified activities.
While Serbian labor law provides only a general framework for non-compete clauses, further clarification and practical application can be found in court decisions. Although case law is not a formally binding source of law in Serbia, it serves as a valuable reference for interpreting and enforcing non-compete obligations in practice.
When is the Non-Compete Clause No Longer Binding?
A recent ruling by the Supreme Court of Serbia confirms that a non-compete clause becomes ineffective if the employer, in writing, releases the employee from this obligation when terminating their employment.
Since a non-compete clause is a contractual obligation within an employment agreement, which must be in writing, the employer’s consent to waive it must also be in writing. In the case reviewed by the court, the employer explicitly stated in the termination decision that the employee was no longer bound by the non-compete clause. The employee did not challenge this in court, making the waiver legally valid.
This ruling reinforces a key principle: a non-compete clause takes effect from the day employment ends. However, if the employer formally releases the employee from this restriction, the employee is free to work elsewhere without limitation. Consequently, the employer is not required to pay compensation for the non-compete period.
We find this approach fair and logical – when an employee is free to work without restrictions, there is no reason for the employer to pay for a non-compete obligation that no longer applies.
Non-Compete Compensation Cannot Be Included in Basic Salary
A recent court decision clarifies that financial compensation for complying with a non-compete clause must be separately agreed upon and cannot be included in an employee’s basic salary.
Serbian Labor Law strictly defines what qualifies as basic salary, and payments related to a non-compete restriction do not fall under this category. Instead, compensation for the non-compete period must be negotiated and specified as a separate financial obligation in the employment agreement.
This ruling ensures transparency and prevents employers from disguising non-compete compensation as part of regular wages, reinforcing the importance of clear contractual terms.
Training Costs Are Not Considered Employer Damages in Non-Compete Violations
A recent court decision states that if an employee violates a non-compete clause, the employer cannot claim reimbursement for the costs of training that employee as damages.
The reason behind this ruling is that training expenses occur before the non-compete violation, not because of it. Since there is no direct link between the breach and the employer’s prior training investment, these costs cannot be used to calculate damages.
However, we believe that applying this rule rigidly – without considering specific case circumstances – could be problematic for employers. For instance, if an employee completes employer-funded training and immediately resigns to join a competitor, this could be an abuse of the system. In such cases, there may be grounds for arguing that the employer suffered damages directly related to the training costs.
This ruling highlights the importance of carefully structuring employment agreements, particularly in industries where specialized training is a significant investment.
How to Draft a Strong Non-Compete Clause That Holds Up in Court
Serbian courts have consistently ruled that a non-compete clause cannot completely prevent an employee from accepting a new job or any other form of engagement with another company. However, it can restrict them from performing specific tasks they previously carried out for their former employer.
This distinction is crucial. If a non-compete clause is too broad or vaguely worded, it may not provide the employer with any real protection.
For example, in one of the most recent cases, the Serbian Supreme Court ruled that a clause preventing an employee from working for any company in the same industry for one year after leaving the employer was not a valid non-compete clause. The court reasoned that such a restriction was too general because it focused on where the employee could work rather than what tasks they were prohibited from performing.
To be enforceable, a non-compete clause must clearly define:
- The specific tasks the employee is restricted from performing
- These tasks involve access to critical business information, technological knowledge, or key business relationships
If a clause is too broad, it risks being struck down by the courts, leaving the employer without any protection. That’s why it is essential to draft the non-compete clause in a precise and well-structured manner, ensuring it safeguards the employer’s business interests while remaining legally enforceable.
