Guido Brandt, 6 June 2024

The non-competetion clause – Special clauses in the employment agreement

An employment agreement sets out essential terms such as the position, salary and holiday and sick leave rights. In addition, provisions are often included on, for example, probationary periods and joining a competitor after termination of the employment relationship. Separate different requirements apply to these ‘special clauses’, both legally and developed in case law. In this series, we discuss the most common special clauses. In this episode: the non-competition clause.

Background

The non-competition clause restricts an employee after termination of employment from performing work that competes with the former employer’s business. The purpose of the non-competition clause is to protect an employer’s market position. After all, an employee may use business-sensitive information at a competitor, potentially causing damages tothe former employer. The clause is explicitly not meant to bind employee. At play here is the fact that restricting work is contrary to the fundamental right to free choice of employment. For this reason, the non-competition clause is subject to strict requirements.

Non-competition clause requirements

First, a non-competition clause must be included in writing in the employment agreement. It is also sufficient that an employment agreement or letter refers to the non-competition clause in attached terms and conditions of employment, as long as an employee has signed the employment agreementor letter.

Second, a non-competition clause is only valid in an employment agreement for an indefinite period of time. The non-competition clause in a fixed-term contract is null and void in principle, unless an employer motivates that the clause is necessary because of important business interests. An employer must justify which business interests justify use of the clause, but also why the non-competition clause is necessary for the specific employee.

Furthermore, both indefinite and fixed-term agreements should specify the duration of the restriction and the geographical scope of the non-competition clause. Although this is not a legal requirement, case law shows that violation of this can be grounds to annul the clause in whole or in part.

Finally, the non-competition clause must be re-agreed if the non-competition clause has become significantly more onerous because of a (major) job change. This may be the case if an employee has been promoted to a significantly higher position. An employee must then again be given the opportunity to properly consider the consequences of the clause.

Validly agreed, now what?

If a non-competition clause is validly agreed in an employment agreement, an employer can claim that an employee complies with the non-competition clause. This is regularly accompanied by a penalty clause in the employment contract that serves as an incentive not to breach the clause. Conversely, an employee can claim (partial) annulment or suspension of the clause if he is unfairly disadvantaged by use of the non-competition clause. This is the case if an employee’s interest in being employed elsewhere, given the circumstances, outweighs the employer’s interest in binding the employee to the non-competition clause. Missing out on a higher salary elsewhere or better career prospects might be a factor in this. To accommodate each other’s mutual interests, parties can also agree to different arrangements regarding the non-competition clause in a settlement agreement.

Possible new requirements

Relatively recently, Social Affairs and Employment Minister van Gennip expressed her intention to tighten the requirements of the non-competition clause. Proposals include a limitation of duration and introduction of a fixed penalty. We previously wrote extensively about this bill.

Conclusion

We regularly help entrepreneurs and employees draft and assess non-competition clauses. Are you in doubt (following the above) about the validity and effect of your non-competition clause? Feel free to contact us, it is our pleasure to assist you.

Questions?