Limits to the non-compete clause

One in three employers in the Netherlands binds employees to a non-compete clause. However, this is not always necessary and hinders employees’ freedom to leave for a new job. The government therefore wants the non-compete clause to meet stricter requirements. What does this mean for employers?

Non-compete clauses are widely used in the Netherlands. A study commissioned by the government shows that one in three employers include such a clause as a standard in employment contracts. Minister van Gennip of Social Affairs and Employment mentioned in her parliamentary letter dated 2 June 2023 that research shows that non-compete clauses can lead to unjustified restrictions of employees to leave for a new job. For instance, some employers see a non-competition clause mainly as a tool to prevent good and experienced employees from leaving for another employer. Which is certainly undesirable in a tight labour market.

However, this is not the purpose of such a clause. A non-compete clause is there to prevent damage to the company’s business field by former employers. Minister van Gennip has therefore indicated her intention to reform the non-compete clause so that it can not be included in an employment contract without necessity. What does a non-competition clause actually entail?

Restriction of employee’s freedom

A non-compete clause restricts the employee’s freedom to work in a certain way after the end of their employment. A non-compete clause may not be included in a fixed-term employment contract unless the employer states in the employment contract what substantial business interests exist that require a non-competition clause. A non-competition clause in a permanent employment contract is not subject to this requirement. The Cabinet wants to change this.

The court may nullify a non-competition clause in a permanent employment contract, in whole or in part, if the employee is unreasonably disadvantaged. When does this apply?

Balancing of interests

In a request to set aside a non-compete clause in whole or in part, the court will weigh up the employer’s interest in maintaining the clause on the one hand and the employee’s interest in having the clause set aside on the other. This balancing of interests may involve the following factors:

On the employer’s side

• The employer has invested substantially in the employee’s training and expertise
• The fear of damage to the business, because the employee has knowledge of trade secrets and has (had) personal contact with customers and/or other relations of the employer
• The long duration of the employment, because an employee who has been employed for a long time has more information, knowledge and experience with which to compete
• The initiative for termination of employment lies with the employee

On the employee’s side

• The possibility of a significant position improvement, such as a higher salary
• Opportunities in the labour market, e.g. if they are limited due to a one-sided work-experience
• Family and living conditions
• The short duration of the employment
• The initiative for the end of employment lies with the employer

Substantial business interests

The purpose of a non-compete clause is to protect the employer’s business interests. In the case of a fixed-term employment contract, these business interests must be substantial and must be stated in the clause itself. What is meant exactly by substantial business interests? This is not explicitly mentioned in the law or in parliamentary documents. The government has indicated that no general statement can be made about what kind of business interests justify a non-compete clause, as this may differ from one employer to another. Specific balancing and justification has to take place on a case-by-case basis.

Case law has made it clearer what may constitute substantial business interests. The primary concern is the protection of the company’s business field, including knowledge, customer base, business relationships, specific products and goodwill. Damage to the company’s business field may occur when the employee has acquired knowledge of fundamental commercial and/or technical information or unique work processes and strategies because of the employee’s position and can use this knowledge for the benefit of a new employer. Generally wanting to avoid competition does not constitute a substantial business interest.

Reform of non-compete clause

Many employers use a non-compete clause as a standard clause in the employment contract. They always include a non-compete clause, even if there is no need to do so, the employee has no specific business knowledge and the business interests are therefore not at stake. Minister van Gennip of Social Affairs and Employment wants to put an end to this. She plans to work out the following changes in a new legislative proposal:

• Legally limit the non-compete clause in duration
• When including a non-compete clause, the geographical scope must be included, specified and justified
• When including a non-compete clause, employers will also have to justify “the substantial business interest” for including a non-compete clause. This is already the case for fixed-term employment contracts
• If the clause is invoked, an employer will in principle have to pay compensation, set at a percentage of the employee’s last earned salary determined by a statutory provision

The legislative proposal is expected to be offered for internet consultation by the end of 2023, allowing citizens, businesses and institutions to make suggestions to improve the proposal. After this, the legislative proposal will be debated and possibly adopted.

With this new proposal, when assessing the validity of a non-competition clause, the court will first determine whether the employer has substantial business interests. Only if this is the case will the court consider whether these business interests outweigh the interests of the employee.

Abolition of non-compete clause

The purpose of the reform of the non-compete clause is for the number of non-compete clauses to decrease significantly, to promote labour mobility. In addition, it must become clear when a non-compete clause may be included in an employment contract, so that employers can weigh up in advance whether a clause is really necessary for the protection of the business interests. This increases legal certainty as both parties know when the clause may be included and invoked. Completely abolishing the non-competition clause would be detrimental to the protection of employers who actually want to protect the company’s business field, so it is not an issue.

Non-compete clauses are also under discussion outside the Netherlands. For instance, a number of states in the United States of America already prohibit the inclusion of a non-compete clause in employment contracts. See more on this in our article on the protection of business interests in the United States and Europe. The Federal Trade Commission has issued a new legislative proposal, which would generally prohibit employers from agreeing non-competition clauses. If the proposal is passed, non-compete clauses will be illegal in all US states.

Conclusion

The Minister of Social Affairs and Employment is planning a new legislative proposal that will limit the possibility of including a non-compete clause in an employment contract. If this proposal is adopted, employers will have to pay close attention to the requirements for including this clause in an employment contract. We are keeping a close eye on the state of affairs regarding the non-compete clause and will provide updates on this.

Employment lawyers

As an employer, are you planning to include a non-compete clause in an employment contract? As an employee, are you curious to know whether you can get rid of the non-compete clause you agreed upon? We will be happy to advise you on this. You can also contact us for other questions about employment law.