The competition clause. Think before you stipulate.

Almost everyone has one in their employment contract: the non-compete clause. In most employment contracts, it is somewhere at the back. Often, it is a standard clause that employers do not even question whether it should be included in a new employment contract. Perhaps it is because of its name: "Competition clause? Of course it should be included, I want to avoid competition if at all possible!" Employees themselves often also do not consider the consequences of a non-compete clause. Makes sense too. Think of the employment contract as a marriage. A young and in love newlywed couple would also rather not think about the possibility of divorce. The same applies to an employee. The happy employee who just received an offer for a new job obviously does not yet think about a possible next job and the obstacle that a non-competition clause may pose then.

It often happens that an employee comes to us with an offer from a potential new employer and questions whether he should really turn down that offer because of that one article in the employment contract he signed  many years ago. On the other hand, many employers also know how to find BASE when they find out that a former employee has suddenly taken a job with a competitor: 'You can't just do that, can you?'

The non-compete clause: the requirements

First things first, when can a non-competition clause be agreed? The law (Section 7:653 of the Civil Code) sets a number of requirements, distinguishing between employment contracts for an indefinite period and for a definite period. For employment contracts for an indefinite period of time, the first rule is that the clause must be agreed in writing. In practice, this usually means that the clause is included in the employment contract, but it is also possible for a non-competition clause to be agreed on only later and/or in a separate document such as an employment conditions scheme. In the latter case, however, that employment conditions regulation must be referred to in the employment contract the employee signs. And the employment conditions agreement must be attached to the employment contract as an annex. Secondly, it is only possible to agree a non-competition clause with an employee who is of age.

It works slightly differently for fixed-term employment contracts. The rationale behind this distinction is that an employee with a fixed-term employment contract suffers a double disadvantage: his contract is already limited in duration and the employee would also be prevented from entering into employment elsewhere after the employment. Since 2015, the basic principle has therefore been that a non-competition clause may not be agreed in a fixed-term employment contract unless the following requirements are met. Again, the requirement of written form applies, but this is only met if the clause is in the employment contract itself. In addition, a non-competition clause may now only be entered into through a fixed-term employment contract if the clause is motivated in writing and if the motivation shows that the non-competition clause is necessary because of important business or service interests. I regularly speak to employers who do not realise how important this justification is. It requires very specific justification. The employer must weigh up and motivate in each specific case what compelling business or service interests justify the non-competition clause for that particular employee. And this is where I often see things go wrong. Employers copy the non-competition clause from a previous employment contract into a new one without giving it too much thought. When the court is then asked to rule on such a non-competition clause, the judge often dismisses it. The reason? Worded too generally, so it cannot be seen as 'necessary due to important business or service interests'.

A question we often hear is what about a non-competition clause and its written justification if the fixed-term employment contract is renewed tacitly. In the case of tacit renewal, the non-competition clause need not be re-agreed. But beware! If the employment contract is extended explicitly, the non-competition clause does have to be re-agreed in the new employment contract to be concluded.

A legally valid non-compete clause, and then what?

OK, suppose the above requirements are all met and there is a validly agreed non-competition clause. Might the employee then still be able to join a competitor? Or can the employer sit back and relax? In principle, of course, the employee must comply with the non-competition clause, but he is not empty-handed. That makes the non-competition clause unpredictable sometimes, and thus extra interesting for BASE to advise on.

If the employee's position has changed significantly since he signed the non-competition clause, that employee may first of all take the position that the non-competition clause has started to "weigh significantly more heavily" on him through time. This may happen, for example, because the employee has been promoted (which was not expected beforehand). In that case, the employer should actually have concluded a new non-competition clause with the employee. If this has not been done, the original non-competition clause is deemed to have lapsed because it has become significantly more onerous. The employer can then no longer invoke the clause and the employee is free to join a competitor.

In addition, the employee can ask the court to annul the non-competition clause. The court will do so if the employee is unfairly disadvantaged in relation to the employer's interest to be protected. And this brings us back to the beginning; this is where the non-competition clause goes to the heart of employment law. Even if competing work has been defined exactly according to the rules, it is still possible for the court to allow the employee to join a competitor (at shorter notice). This is because the employer's 'protectable interest' may only be to protect its so-called business flow. Business flow is that which makes a company valuable. Think of business-sensitive information, reputation or goodwill. Thus, an interest of the employer such as binding employees to the organisation or preventing an employee who has gained (general) knowledge and experience during the employment from transferring is, according to case law, not an interest that should be protected by the non-competition clause. That is not what the non-competition clause is for. For the employee, on the other hand, all interests play a role in the balancing of interests. For example, the fact that the employee can earn more with the new employer or earns a position improvement in some other way. We often see this disparity between the interests of employer and employee in employment law. Indeed, the employee is in many ways subordinate to and dependent on his employer. This gives the employer a powerful position. To restore the balance between employer and employee, we see the principle of inequality compensation in many employment law rules. In the specific case of the balancing of interests in the non-competition clause, this compensates the employee for the (far-reaching) infringement of his fundamental right to free choice of employment.

If the employee would like the court to rule on this balancing of interests at short notice, we can start summary proceedings. One of my first hearings was such an interlocutory procedure. And although a judge cannot give a final decision in summary proceedings (that requires proceedings on the merits), my experience is that a summary judgment often does lead to a final solution. After the judgment, parties often accept the outcome and we often assist in concluding a final settlement based on the judgment. Of course, we also regularly help employers when they are confronted with a former employee who is in breach of his non-competition clause, for example by initiating summary proceedings.

Incidentally, the employee can also ask the court to rule that the employer must pay the employee compensation for the duration that the employee is hindered to work elsewhere by the non-competition clause. This requires that the employee is substantially hindered from being employed elsewhere.

Summing everything up, it might seem that of all people it is the employer who is left completely empty-handed, even when a non-competition clause has been validly agreed upon. Yet that is certainly not the case. Usually, the employee owes a fine to the employer if he violates the non-competition clause. Of course, we always try to avoid going to court, but sometimes an employee does not want to pay the fine until the court obliges him to do so. For example, there was the case of the employee who had been hired to set up the employer's business abroad. Of course, a non-compete clause had been agreed, but instead of doing what he was supposed to do abroad, the employee decided to do the same work there but for his own newly set-up company. Although the court at first instance rejected the fine, in appeal we managed to get the employee to pay it.

If I can think along with my colleagues about a non-competition clause in agreements beforehand, it often saves hassle, time and money if the clause is invoked later. BASE is happy to help think about when and how to agree a non-competition clause. If a non-competition clause has already been agreed upon, we often also help find a practical solution that suits the specific case. There have been cases where I have advised on agreeing a new non-competition clause that is, for example, limited in geographical distance or time, but also cases where I have sat down with employer and employee to see if we can draw up a list of potential employers that the employee should not be allowed to be employed by together. By defining the heart of the problem, the non-competition clause can then be dropped and opportunities for a new challenge arise for the employee, while at the same time the employer is assured that no unwanted competition can be put to him.

A peek into the future

Earlier, I mentioned that since 2015, as a principle, it is no longer allowed to agree a non-competition clause in a fixed-term employment contract. That was not the only recent development. More recently, the competition clause becamea hot topic again. The Minister of Social Affairs and Employment recognized that non-competition clauses are often used as standard clauses, but she believes that is undesirable. According to the minister, it affects the proper functioning of the labour market. On the one hand, it is more difficult for employers to recruit staff because of the wide use of non-competition clauses. On the other hand, it restricts employees from changing jobs and working within their areas of expertise. The minister therefore plans to amend the legal regulation on the non-competition clause in several ways. For instance, the non-competition clause should be given a statutory maximum duration. It will also become mandatory to include and justify a geographical scope, if it is up to the minister. Furthermore, there are plans to require the presence of a weighty business or service interest in the employment contract for an indefinite period of time as well, and that this be motivated (this now only applies to fixed-term employment contracts). Finally, the minister wants to implement that if the employer invokes the clause, the employer must, in principle, pay compensation to the employee for doing so.

It is not yet clear if and when these changes will be implemented and what the new competition clause regime will look like. However, these changes will certainly have a big impact on the non-competition clause. I will closely follow what the (possible) consequences are for employer or employee and add those to this scenario. Want to know more already? Send me an email.