According to the Labour Code in Hungary, a non-compete clause is valid only if it is for a maximum period of two years and the employer pays at least one-third of the employee’s base wage during its term as compensation. However, employment contract of executive employees is subject to more flexible regulations. One of the decisions of the Supreme Court of Hungary took a stand on how ‘flexible’ an executive’s non-compete clause may be.
The decision of the Supreme Court was based on a dispute between the employer as defendant and the plaintiff who was employed as managing director by the defendant. The employment agreement concluded by the parties stipulated that the employee may only maintain business relationship with the competitors and/or partners of the employer (as well as their majority owners) with the consent of the employer for three years after the termination of the agreement and in return for this obligation the parties did not set any compensation.
The parties have explicitly stated that this clause deviates from the provisions of the Labour Code concerning non-compete agreements. The deviation was on one hand that the term of the clause exceeded the two-year maximum required by law and, on the other hand, there was no compensation specified as opposed to the statutory minimum required by the Labour Code.
The plaintiff argued that a non-compete agreement is a reciprocal transfer and the Labour Code expressly prescribes the necessity of determining adequate compensation and therefore, given that the clause does not contain any compensation, it is null and void for breach of law.
The defendant, on the other hand, argued that, for executives, such as the plaintiff, the Labour Code specifies all provisions where no derogation is allowed. As the provisions of the non-compete agreement are not specified as mandatory provisions, stipulating no compensation is lawful.
The Court explained that unless the employee is required by law to protect the employer’s legitimate economic interest for the period following the termination of his employment, such obligation arises only under a non-compete agreement. An essential condition of a non-compete clause is that the employer shall pay consideration in return for the obligation of the employee, and this includes executive employees. The consideration is an essential element of the agreement because the agreement prevents the employee from entering into a new employment relationship, and the consideration is intended to compensate them for this constraint. The Supreme Court ruled that any non-compete clause without consideration is null and void, even in case of executive employees.