Transfer of Undertakings in Poland – Do Non-Competition Covenants Transfer With Employee?
Earlier this spring the Polish Supreme Court decided that a company taking over a business is not bound by the non-competition covenant entered into by the previous employer. Normally you would expect the incoming employer to want the covenant to remain in force. However, to enforce a post-termination non-competition clause in Poland requires the employer to pay the employee over its duration. This helps focus the employer’s mind on whether it really needs the restraint badly enough to be willing to pay for it, which is obviously a good thing. On the other hand, it can leave an incoming employer saddled with a liability it does not feel it needs.
There was no certainty to be taken from the Court’s approach so far on similar cases. Depending on the type of transaction there may be good business reasons to uphold the non-competition covenants post transfer, in particular if a whole business is transferred and no changes are required in the description of competitive activity, competitors remain the same and so do the interests to protect. There were less doubts about whether the covenants transfer if a corporate transaction took place at the same time which included the enterprise as a whole or a merger. Then commercial regulations allow the transfer of other rights and obligations as well as merely employment. In other situations, including when non-competes are poorly drafted and so potentially not enforceable anyway, despite the employer’s payment, the new employer could be more than interested in waiver of them.
The February decision was widely commented on in the Polish press. According to media, there is nothing extraordinary in the facts of the case. An assistant to the Board of directors was employed by the company for a number of years. Her contract contained a non-compete covenant post-employment. The agreement was changed over the years as far as the position held and salary were concerned but no changes were made to the initial non-competition clause – either before nor after the transfer to the new employer under art. 23(1) of the Polish Labour Code (ARD implementation in Poland). After the transfer the employer and the employee decided to part. The only dispute between them was whether the new employer had any obligation to pay compensation for the period of the non-compete.
The courts of first and second instance ruled in favor of the employee. The Supreme Court ruled however that the non-compete agreement is in fact a separate agreement between the parties and does not form an integral part of the employment relationship. Therefore, there was no reason for the agreement to bind the new employer as art. 23 of the Labour Code relates to the transfer only of the core terms of employment relationship and not to other related agreements. While the Supreme Court’s decision is very clear in what it says, it remains to be seen what the facts of the case were and how they may change the understanding of the decision.
Interestingly, another case of a similar nature was filed with the Supreme Court in February as well. The major question in this case is again whether a non-competition covenant entered into with the former employer is binding on a new employer which took over the employees as part of a transfer of an undertaking. There is an expectation that the decision in this case will reinforce the ruling above and will set a new line of jurisprudence for the coming years. The new case is to be heard at the beginning of May and we will be monitoring the outcome.