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Does the duty of loyalty apply during temporary layoffs?

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Legal news
calendar 09 April 2021
globus Norway

Many employees are currently either fully or partly temporarily laid off from their positions as a direct consequence of coronavirus. For most, this means loss of income but also an obligation to seek employment elsewhere. But can employees seek a new position with a competitor during the period they are temporarily laid off without at the same time being in breach of their duty of loyalty or non-competition clauses?

Employees are subject to a duty of loyalty during their employment. The duty of loyalty means, among other things, that employees cannot be disloyal towards the company, for example by performing work for a competitor. Some employees are in addition hereto also covered by a non-competition clause. Non-competition clauses restricts employees from taking up employment with a competitor or conducting competitive activities during but also after termination of employment.

However, when employees are temporarily laid off, the employee’s obligation to work and the company’s obligation to pay are temporarily suspended, but the employment remains. While temporarily laid off, the main rule also is that employees must seek new employment, and this may conflict with the duty of loyalty, and for some, their non-competition clauses.

Unlikely that non-competition clauses apply during temporary layoffs

There are not yet any decisions from the Norwegian Supreme Court on whether employment with a competitor during the temporary layoff period, is in breach of the duty of loyalty or a non-competition clause.

Some guidance can be found in a case from 2012 by the Norwegian Court of Appeals. Here, the court concluded that an employee who was partly, temporarily laid off and had accepted work for a competitive company during the temporary layoff period, had not been in breach of his duty of loyalty. Among other things, the court emphasized the importance of the employee’s obligation to find other employment and being able to cover his loss of income. This must be seen in light of the fact that failure to seek other employment may directly affect the right to unemployment benefits. Also, the court emphasized that companies only can restrict employees from seeking other employment when temporarily laid off in very special circumstances.

In that same case from 2012, the employee was not covered by a non-competition clause. The question of to what extent temporarily laid off employees are restricted from seeking employment at a competitor while being subject to a non-competition clause is therefore still unanswered.

Nonetheless, it’s most likely that the Norwegian Court of Appeal’s reasoning would be the same here. Restricted access to seek other employment when temporarily laid off will result in loss of income and conflict with the employees’ obligation to find new employment during this period. This conclusion is supported by the fact that employees that are temporarily laid off also are entitled to a reduced 14-day notice period, which suggests that the intention is to obtain re-employment as far as possible.

Non-competition clauses only apply when an employee resigns or is terminated due to circumstances relating to the employee. Non-competition clauses will therefore not apply when an employee chooses to resign due to the company failing to meet obligations. As temporary layoffs only are justified due to company circumstances, non-competition clause would probably not apply in these circumstances.

IUNO’s opinion

When looking to previous case law, it is possible to conclude that the main rule must be that employees can seek other employment when temporarily laid off - even with a competitor. However, it is important to keep in mind that the duty of confidentiality regarding trade secrets and such of course will continue to apply.

IUNO recommends that companies carefully consider if key employees should be temporarily laid off during the selection process, in light of the risk that they may take other work in a competitive company under the temporary layoff period. Companies should also remind all employees who take other employment during their temporary layoff period of what duties and obligations continue to apply during this period, but also after termination of employment.

[Borgarting Court of Appeals in case RG-2012-374 of 16 March 2012]

Employees are subject to a duty of loyalty during their employment. The duty of loyalty means, among other things, that employees cannot be disloyal towards the company, for example by performing work for a competitor. Some employees are in addition hereto also covered by a non-competition clause. Non-competition clauses restricts employees from taking up employment with a competitor or conducting competitive activities during but also after termination of employment.

However, when employees are temporarily laid off, the employee’s obligation to work and the company’s obligation to pay are temporarily suspended, but the employment remains. While temporarily laid off, the main rule also is that employees must seek new employment, and this may conflict with the duty of loyalty, and for some, their non-competition clauses.

Unlikely that non-competition clauses apply during temporary layoffs

There are not yet any decisions from the Norwegian Supreme Court on whether employment with a competitor during the temporary layoff period, is in breach of the duty of loyalty or a non-competition clause.

Some guidance can be found in a case from 2012 by the Norwegian Court of Appeals. Here, the court concluded that an employee who was partly, temporarily laid off and had accepted work for a competitive company during the temporary layoff period, had not been in breach of his duty of loyalty. Among other things, the court emphasized the importance of the employee’s obligation to find other employment and being able to cover his loss of income. This must be seen in light of the fact that failure to seek other employment may directly affect the right to unemployment benefits. Also, the court emphasized that companies only can restrict employees from seeking other employment when temporarily laid off in very special circumstances.

In that same case from 2012, the employee was not covered by a non-competition clause. The question of to what extent temporarily laid off employees are restricted from seeking employment at a competitor while being subject to a non-competition clause is therefore still unanswered.

Nonetheless, it’s most likely that the Norwegian Court of Appeal’s reasoning would be the same here. Restricted access to seek other employment when temporarily laid off will result in loss of income and conflict with the employees’ obligation to find new employment during this period. This conclusion is supported by the fact that employees that are temporarily laid off also are entitled to a reduced 14-day notice period, which suggests that the intention is to obtain re-employment as far as possible.

Non-competition clauses only apply when an employee resigns or is terminated due to circumstances relating to the employee. Non-competition clauses will therefore not apply when an employee chooses to resign due to the company failing to meet obligations. As temporary layoffs only are justified due to company circumstances, non-competition clause would probably not apply in these circumstances.

IUNO’s opinion

When looking to previous case law, it is possible to conclude that the main rule must be that employees can seek other employment when temporarily laid off - even with a competitor. However, it is important to keep in mind that the duty of confidentiality regarding trade secrets and such of course will continue to apply.

IUNO recommends that companies carefully consider if key employees should be temporarily laid off during the selection process, in light of the risk that they may take other work in a competitive company under the temporary layoff period. Companies should also remind all employees who take other employment during their temporary layoff period of what duties and obligations continue to apply during this period, but also after termination of employment.

[Borgarting Court of Appeals in case RG-2012-374 of 16 March 2012]

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Anders

Etgen Reitz

Partner

Sofie

Aurora Braut Bache

Associate

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