Restrictive covenants and competition clauses in European employment contracts: A hindrance or protection? The Dbriefs Employment Law series Fernando

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1 Restrictive covenants and competition clauses in European employment contracts: A hindrance or protection? The Dbriefs Employment Law series Fernando Bazan / Myriam Henderson / Petter Schjelderup / Tim Spellmann / Julia Torres 21 June 2017

2 Agenda Concept of restrictive covenant Types of restrictive covenants at European level Restrictive covenants in Germany Restrictive covenants in Norway Restrictive covenants in Spain Restrictive covenants in France Comparative chart among European jurisdictions (non-compete) Questions and answers 2

3 Restrictive covenants Concept Restrictive covenants are one of the only limitations to employees on the freedom to provide their services to employers. In order to keep such clauses valid and applicable, it is necessary to comply with a series of relevant legal requirements that may vary according to the jurisdiction in question The difference between the validity or invalidity of a clause may be motivated by failure to comply with legal and case law requirements 3

4 Restrictive covenants Types in use at EU level 4

5 Restrictive covenants Types Categories of restrictive covenants in use at EU level Non-compete Non-dealing Non-solicitation Non-poaching Exclusivity Permanence Garden-leave Non-disclosureof confidential information Assignment of property rights Preventing an employee from working for a competing employer for a stated period of time after leaving a job Preventing the departing employee from accepting business from current or former clients for a given time period Preventing an employee from contacting current or former clients Preventing an employee from soliciting former colleagues to join him in his new enterprise Preventing employee s performance in other business activities Preventing an employee from leaving the job before the agreed deadline Requiring the employee to spend all or part of the notice period (dismissal) at home whilst continuing to receive his usual salary and benefits Preventing an employee from disclosing confidential business-like information Preventing an employee from acquiring intellectual or industrial property rights when the latter develops inventions of possible value to the employer 5

6 Restrictive covenantsin Germany 6

7 Restrictive covenants in Germany General legal aspects Restrictions during the employment Restrictions after termination of the employment Applicable by law To be agreed on expressly No compensation required Compensation required Disciplinary sanctions Contractual penalty 7

8 Restrictions during the employment relationship Types of restrictions (not exhaustive) Non-competition obligation Prohibition of secondary activity Prohibition of any competing activity during the employment relationship without the employer s consent In case of violation, the employer may claim that the employee accepts that the transactions made by employee for his own account shall be considered as having been made for the employer s account and that the employee surrenders the remuneration received Prohibition of any secondary activity without the employer s consent (involves also non-competing activities) However, the prohibition is only legally valid if the secondary activity actually affects the employee s work performance or other interests of the employer in a negative way (e.g., exceedance of the allowed maximum daily working hours or physical overload) Obligation to maintain strict confidentiality with regard to all confidential matters, notably trade, and business secrets Secrecy obligation Upon a corresponding contractual agreement, the secrecy obligation may also apply post-contractually - blurred lines to post-contractual non-competition obligation 8

9 Restrictions after termination of the employment relationship Types of restrictions (not exhaustive) Post-contractual non-competition obligation Prohibition of a specific competing activity for a limited duration after the termination of the employment relationship Most relevant restriction in practice, detailed overview to follow Prohibition of hiring former colleagues Post-contractual non-solicitation obligation Post-contractual customer protection Legally unenforceable by law Prohibition of enticing away former colleagues Requirements of a post-contractual non-competition obligation apply, unless the employee is only restricted from enticing away employees for the benefit of another employer (and not for his own) Prohibition of entering into business relationships with customers of the employer Generally, the requirements of a post-contractual noncompetition obligation apply 9

10 Post-contractual non-competition obligation Legal basis Secs. 74 ff. German Commercial Code (not applicable to post-contractual non-competition agreements with managing directors and board members) Form requirements Written form (signed by both parties) + handing over of originally signed agreement document to employee Practical advice: confirmation of receipt to be signed by employee 10

11 Post-contractual non-competition obligation (Cont d) Content requirements Abstract Restriction needs to be justified by a reasonable business interest of the employer and may not unreasonably limit the professional advancement of the employee in terms of content, place, and duration Practical Reasonable interests - e.g., secrecy of internal know-how (etc., formulas, manufacturing techniques, marketing strategies) or protection of customers and distributors, not abstract intention of the employer to just ban a skilled worker for competing employers Geographical limitation - generally limited to areas where the employer actually operates business Duration limitation - maximum term of 2 years Reasonableness to be assessed in the individual case, if unreasonable: choice of the employee whether to adhere to the restriction or whether to waive it 11

12 Post-contractual non-competition obligation (Cont d) Compensation Mandatory compensation during the restriction in the amount of at least 50% of the most recent contractual remuneration (including fixed and variable elements such as fixed salary, bonus, benefits in kind etc.) If compensation falls short of 50% - restriction not binding for the employee, choice of the employee whether to adhere to the restriction (receiving only the lower compensation) or to waive the restriction (receiving no compensation at all) If there is no compensation at all - restriction null and void (no choice) Crediting of other income earned during restriction period if other income + compensation exceeds the most recent contractual remuneration by 10% (resp. 25% if the employee was forced to transfer his place of residence due to the restriction) Information entitlement of the employer vis-à-vis the employee in terms of the amount of other income earned 12

13 Post-contractual non-competition obligation (Cont d) Contractual penalty Waiver Strongly recommended to agree on in order to safeguard the adherence No determination of the maximum permissible penalty amount by law, in practice often times 1 monthly gross salary per violation, limited to 6 monthly gross salaries in total Employer may unilaterally waive the restriction during the existing employment relationship by means of a written declaration Declaration of the waiver results in an immediate release of the employee from the restriction whereas the employer s compensation obligation only ends after 12 further months If the waiver is declared at least 12 months prior to the effective termination of the employment contract, no compensation has to be paid If the waiver is declared later, compensation has to be paid at least partly 13

14 Restrictive covenantsin Norway 14

15 Restrictive covenants in Norway General legal aspects Restrictions during the employment Restrictions after termination of the employment General duty of loyalty To be agreed on expressively No compensation required Compensation required Disciplinary sanctions Contractual penalty 15

16 Restrictions during the employment relationship Types of restrictions (not exhaustive) Non-competition obligation Prohibition of any competing activity during the employment relationship without the employer s consent Prohibition of secondary activity (exclusivity) Prohibition of any secondary activity without the employer s consent (involves also non-competing activities) Secrecy obligations Restrict the use or disclosure of confidential information such as know-how and business secrets 16

17 Restrictions after termination of the employment relationship Common restrictions (not exhaustive) Post-employment non-competition clauses Prohibition of competing activity for a limited duration after the termination of the employment relationship Post-employment non-solicitation clauses Prohibition of soliciting and / or enticing away former customer s and client s of the employer Post-employment non-poaching clauses Prohibition of soliciting and / or enticing away former colleagues of the employer 17

18 Post-employment non-compete clauses Legal basis New regulation regulating non-compete clauses in employment relationship was introduced in the Norwegian Working Environment Act chapter 14-A in 2016 Requirements A non-compete clause must be entered into in writing and may not exceed a maximum duration of 12 months after the termination of the employment The employer must have a particular need for protection against competition at the time of enforcement of the non-compete clause The employee must receive a financial compensation in return during the whole non-compete period 100% of the employees salary up to 8 times the National Insurance basic amount (G) and 70% of the salary between 8 and 12 G (per May 2017, 1 G = EUR 9,850) Deductions equal to a maximum of half the compensation may be made in respect of salary or income received or earned by the employee during the period the non-compete clause is in effect 18

19 Non-compete clauses Formalization The employer must provide a written statement of the necessity of enforcing the clause upon the employee s request, or automatically when the employee resigns / is dismissed Such a statement is binding for the employer for 3 months or during the notice period Waiver The employer is entitled to waive the non-compete clause at any time, except during periods for which a binding, written statement has been given concerning the basis for the non-compete clause Remedies in case of breach Employee s breach: obtain a ruling from the court on the cessation of the competitive work, compensation for damages, contractual penalty, etc. Employer s breach: the employee may be entitled to compensation for damages for the period the agreement was in force 19

20 Non-compete clauses (Cont d) Non-enforcement and grounds of invalidity A non-compete clause may not be invoked on dismissal by the employer unless the dismissal is objectively justified on the basis of circumstances relating to the employee The same applies if the employer owing to breach of obligations in the employment relationship has given the employee reasonable grounds to terminate the employment Lack of written agreement Lack of written statement Lack of compensation 20

21 Non-solicitation of customers clauses Legal basis New regulation regulating non-solicitation clauses was introduced in the Norwegian Working Environment Act chapter 14-A in 2016 Requirements A non-solicitation clause must be entered into in writing and may not exceed a maximum duration of 12 months after the termination of the employment A non-solicitation clause may only apply to customers with whom the employee has had contact with or been responsible for during the year immediately prior to the statement of enforcement provided by the employer Unlike in the case of non-compete clauses, this restriction does not require any particular need for protection for the employer or compensation to the employee Formalization The employer must provide a written statement similar as for non-compete clauses and the statement must specify which customers the non-solicitation clause applies to 21

22 Non-solicitation of customers clauses (Cont d) Waiver The employer is entitled to waive the non-solicitation clause at any time, except during periods for which a binding, written statement has been given concerning the basis for the non-competition clause Remedies in case of breach Employee s breach: obtain a ruling from the court on the cessation of the competitive actions, compensation for damages, contractual penalty, etc. Grounds of invalidity Similar as for non-compete clauses except for the lack of compensation 22

23 Important exemption for the chief executive Provisions concerning non-compete and non-solicitation clauses does not apply to the undertaking s chief executive provided that Such rights is renounced in writing before termination of the employment Receives severance pay Other members of management or key employees will not be subject to this exemption 23

24 Non-poaching clauses Non-poaching of employees clauses entered into between an employer and another undertaking is prohibited by law in Norway, except in connection with negotiations on transfer of undertakings Non-poaching of employees clauses entered into between an employer and an employee is not regulated by statutory law in Norway Such clauses are valid to the extent that the clause is not deemed unreasonable or is in breach of good business practice 24

25 Restrictive covenantsin Spain 25

26 Restrictive covenants in Spain Overview Restrictions during the employment relationship Specific types of restrictions Exclusivity Permanence Garden leave Non-disclosure obligation Assignment of property rights Restrictions after termination of the employment relationship Specific types of restrictions Post-contractual non-competition obligation 26

27 Restrictions during the employment relationship Exclusivity Requirements Financial compensation (lump sum or periodic payments) Waiver Employee: written 30-day notice to rescind the agreement Remedies in case of breach Employee: loss of compensation and refund Employer: may require additional compensation for damages Exceptions Senior managers cannot be employed by other companies, unless expressly authorized by the employer or unless otherwise agreed in writing Sales representatives cannot provide services to competing companies Grounds of invalidity Lack of compensation, with no possible remedy from Court 27

28 Restrictions during the employment relationship Permanence Requirements Agreement must not exceed a 2-year period and must be in writing Training must entail substantial costs and professional specialization Special employment relationships Sport professionals: termination by the employee entails financial compensation from the latter Senior managers: no maximum permanence term Remedies in case of breach Employee must compensate the employer s investment costs Employee s dismissal entails the loss of his right to compensation Grounds of invalidity Lack of formalization in written form Non-compliance with the 2-year period (only for the exceeding term) 28

29 Restrictions during the employment relationship Others Garden leave No statutory provisions (must be agreed between employer and employee) Common practice: often used during an employee s notice period or during disciplinary procedures while the investigation takes place Non-disclosure agreement No statutory provisions, however, in certain cases it may constitute a criminal offence (Article 197 of the Spanish Criminal Code) Common practice: often used to prevent disclosure of business secrets and other confidential information Assignment of property rights Spanish Intellectual Property law (Article 51) Lack of written agreement implies the assignment of property rights to the employer by default 29

30 Restrictions after termination of the employment relationship Post-contractual non-competition obligation Requirements Must not exceed a 2-year period in case of technical experts (qualified employees) or a 6-month period for other employees Seeking protection of an actual business or commercial interest Employee must receive an adequate financial compensation in return Waiver No possibility of unilateral waiver from the agreement by neither party Remedies in case of breach Employee: proportional compensation for damages and refund Employer: employee may be entitled to compensation for damages for the period the agreement was in force Grounds of invalidity Lack of compensation Non-compliance with the 2-year term (only null for the exceeding time) 30

31 Restrictions after termination of the employment relationship Other restrictions within the scope of the non-compete obligation The following covenants are not particularly regulated under Spanish law. Instead, according to case law, the latter fall under the scope of the non-compete obligation Non-dealing Non-solicitation Non-poaching Still, as these covenants are ultimately a form of non-competition, they should comply with the same requirements established for non-competition (e.g., term, compensation, etc.) in order to avoid nullity from Courts 31

32 Restrictive covenantsin France 32

33 Restrictive covenants in France Overview Restrictions during the employment relationship Exclusivity clauses Mobility clauses Residence clauses Dress code clauses Work on call clauses Restrictions after termination of the employment relationship Non-compete clauses 33

34 Restrictions during the employment relationship Exclusivity clauses Definition Provision prohibiting the employee from performing any other professional activity, competing or otherwise, on his or her own behalf or that of another employer, during the performance of the employment contract Requirements In writing Indispensable for protecting the legitimate interests of the company Justified by the nature of the tasks to be performed Proportionate to the objectives sought Implementation Main interest: in case of part-time work The judges must determine whether the position held by the employee necessitates the prohibition to perform another professional activity. In practice, no situation has yet led a judge to accept such a restriction Careful: during a period of 1 year following the creation or the acquisition of a company by an employee, an employer cannot enforce an exclusivity clause 34

35 Restrictions during the employment relationship Mobility clauses Definition Contractual provision allowing the employer to modify the employee s place of work or any temporary mobility of the employee according to the company s needs Requirements Precise delimitation of the geographic zone of mobility Indispensable for protecting the legitimate interests of the employer Proportionate to the objective sought, given the position held and the work performed by the employee Justified by the nature of the tasks to be performed Unenforceability of future development clauses: in signing the mobility clause, the employee must know precisely to what he or she is committing him or herself Implementation An employer will be making an abusive use of the mobility clause if he / she employs it as a sanction in disguise or if he / she implements it without reasonable prior notice, determined on a case-by-case basis 35

36 Restrictions during the employment relationship Mobility clauses (Cont d) The employee s personal circumstances must be taken into account by the employer If the mobility clause is deemed valid, a change of workplace does not constitute a modification of the employment contract, but rather a mere change in working conditions which the employee can not decline without committing professional misconduct 36

37 Restrictions during the employment relationship Residence clauses Definition Provision imposing on the employee the obligation to elect a place of residence in proximity to the company s location Requirements Justified by the nature of the tasks to be performed Proportionate to the objectives sought Implementation The validity of residence clauses is not often recognized Although an employee may not have a particular place of residence imposed upon him or her, he or she must nevertheless elect a place of residence allowing him or her to devote proper time to his or her work 37

38 Restrictions during the employment relationship Dress code clauses Definition Provision by which the employer imposes the wearing of a uniform or a badge of office, or, on the contrary, prohibits certain attire or certain distinctive signs Requirements Freedom of dress is not a fundamental liberty and the employer may restrict it if such restrictions are Justified by the tasks to be performed Proportionate to the objective sought Implementation Dress constraints may be justified By the interests of the clientele or the image of the company brand Wearing a uniform allows clients to immediately identify personnel on the condition that the concerned personnel is in contact with the clientele On the other hand, an executive-level employee may not be reproached with having met with a client in jeans and boots when such attire is, in itself, currently and in the given context, in no way incongruous or inappropriate, but on the contrary remains perfectly appropriate, including for a design engineer, to the extent, at least, that she be otherwise presentable 38

39 Restrictions during the employment relationship Dress code clauses (Cont d) Implementation (Cont d) By the performance of certain functions Wearing Bermuda shorts may be incompatible with the duties and working conditions of an employee, even when worn under a work coat For reasons of safety or hygiene Wearing insulating clothing for the handling of dangerous products The issue of religious attire or distinctive signs: the line is often very fine between freedom of dress and the freedom to express religious convictions The by-laws of a nursery may legitimately require that the personnel in contact with families display a strict neutrality in terms of religion, which justifies the prohibition of religious attire or symbols A nurse in a public hospital can be prohibited from wearing a cross around her neck on the grounds of the health and safety of the patients 39

40 Restrictions during the employment relationship Work on call clauses Definition Standby duty is a period during which the employee must be in a position to intervene so as to perform work for the company, without being present at his or her place of work, and without being at the permanent and immediate disposal of the employer Requirements Implementation by collective agreement or, failing that, by unilateral decision of the employer May not be performed at the employee s place of work Conditions imposed on the employee may not lead to his or her being at the permanent and immediate disposal of the employer Must be subject to compensation, whether financial or in terms of paid leave days Implementation Caretaking activities: the on-call time of caretakers who do not dispose of lodgings on company premises is deemed to be effective working time. For those lodged on-site, cases where they have no other obligation than that of remaining on call in their lodgings to respond to a potential call and are free to engage in personal occupations must be distinguished from those cases where their intervention is required (rounds, mail delivery, opening and closing of doors) On-call medical staff: night shifts performed by nurses do not constitute standby duty but rather effective working time if they are at the disposal of the employer in occupying quarters located in immediate proximity to those of the patients and may be solicited at any time 40

41 Restrictions after termination of the employment relationship Non-compete clauses Definition Written provision of the employment contract or a collective bargaining agreement which prohibits a former employee, for a certain period of time following his or her departure from the company and confined to a certain geographical area, from engaging in competing professional activities which could harm the interests of his or her former employer Requirements Must be in writing Must be indispensable to the protection of the legitimate interests of the company Must be of limited duration Must be geographically confined Must take into account the specificity of the employee s position Must provide for financial compensation Implementation The clause will be valid only if, for instance, the employee s functions lead him or her to be in direct and continuous contact with the clientele or if he or she held an important position affording him or her access to specific techniques, or know-how 41

42 Restrictions after termination of the employment relationship Non-compete clauses (Cont d) The implementation of the clause may not lead to the absolute impossibility of the employee to engage in any professional activities conforming to his or her skills and professional training It should be noted that, even when the conditions of validity are met, case law grants judges the power to reduce manifestly excessive clauses In the case of a breach of the non-compete clause, the new employer may also be liable with respect to the former employer if it can be proven that the new employer was aware of the existence of said clause 42

43 Restrictive covenants Comparative chart 43

44 Restrictive covenants Comparative chart among EU jurisdictions Country Non-compete term Compensation Belgium Limited to 1 year (2 or 3 years accepted for international clauses) No less than 50% of the applicable remuneration (except sales representatives) National statutory provisions Yes Particularities Non-compete clause only valid for employees with a yearly gross remuneration above EUR 64,508 Distinct provisions applicable in case of sales representatives Denmark Determined on a case-by-case basis (proportionality test) No less than 50% of the applicable remuneration Yes Non-compete clause only valid for salaried employees Finland Limited to 6 months or 1 year if the employee receives fair compensation Between 50% and 100% of the employee s monthly salary (only required if the restricted period exceeds 6 months) Yes Statutory restrictions not applicable to employees with a leading role in the Company Germany Limited to 2 years At least 50% of the most recent contractual remuneration (including fixed and variable elements) Yes Cf. country-specific slide presentation Hungary Limited to 3 years At least 1/3 of the employee s salary has to be paid for the non-compete period Yes Compensation for the non-compete obligation is determined based on the different professional group of the employees Italy Limited to 5 years (senior managers) and 3 years (other employees) Determined on a case-by-case basis Yes Non-compete clauses are rarely included in contracts due to their difficult enforcement 44

45 Restrictive covenants Comparative chart among EU jurisdictions (Cont d) Country Non-compete term Compensation Netherlands Limited to 1-2 years (market practice) Determined on a case-by-case basis Norway Limited to 12 months No less than 100% of the compensation between 1 and 8 times the basic amount, and 70% of the salary between 8 and 12 times the basic amount National statutory provisions Yes Yes Particularities Non-compete clause only valid in indefinite employment contracts (except for major business interest) Non-compete clauses are only enforceable if the employer have a particular need for protection. Statutory provision not applicable for the undertakings chief executive Poland Limited to 6-12 months (market practice) No less than 25% of the applicable remuneration Yes Non-disclosure and non-solicitation obligations apply regardless of specific agreement in this regard Spain Limited to 2 years (qualified employees) and 6 months (other employees) Determined on a case-by-case basis Yes - Sweden Limited to 18 months since 2015 (before, 24 months) No less than 60% of the applicable remuneration Yes New non-compete Agreement replacing the CBA Non-compete clauses may be use by all companies relying on trade secrets United Kingdom Determined on a caseby-case basis (proportionality test) No legal requirement to compensate the employee during the period of a post-termination restrictive covenant, consideration is provided at the time it is agreed No Non-compete clauses are unenforceable unless demonstrated that they are reasonably necessary to protect a legitimate proprietary business interest 45

46 Questions and answers

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49 Contact information Fernando Bazán Legal Partner Deloitte Legal, Madrid, Spain Myriam Henderson Legal Lawyer Deloitte Legal, Paris, France Petter Schjelderup Legal Lawyer Deloitte Legal, Oslo, Norway Tim Spellmann Legal Senior Manager Deloitte Legal, Dusseldorf, Germany Julia Torres Legal Lawyer Deloitte Legal, Madrid, Spain

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