Legislative proposal on reform of non-competition clauses

The government has detailed its plans for tightening non-competition clauses in a legislative proposal. What are the proposed conditions for valid reliance on a non-competition clause? How will the proposal affect existing clauses?

The legislative proposal on “modernisation” of non-competition clauses has gone into online consultation. As a result, the plans have become more concrete. As promised in our blog on the government’s plans regarding non-competition clauses, we are happy to update you on the further details of the plans. The condition here is that these are still only plans and that it is quite possible that the government will adjust the proposal after the online consultation, after which the Lower and Upper Houses will also have to approve the law.

Conditions to the text of non-competition clauses

For a non-competition clause to be valid, the text has to meet the following conditions:

• The clause contains a statement of “the substantial business interest” that necessitates the inclusion of a non-competition clause in an employment contract. This is already the case for fixed-term employment contracts.
• The non-competition clause is limited in duration and it is explained why this duration is necessary. The maximum duration is 12 months.
• The clause contains a statement of the geographic scope to which it applies and the reasons for this.

If the text does not meet one or more of these conditions, the clause is null and void and the employer cannot invoke it.

When is the clause in effect?

A non-competition clause only binds the employee when the employer invokes it in writing and in a timely manner:

• The clause must be invoked no later than one month before the end of the employment contract. A clause not invoked by the employer is no longer valid.
• In the case of dismissal with immediate effect, the clause must be invoked no later than two weeks after the dismissal.
• If the court terminates the employment contract, the employer must invoke the clause no later than two weeks after the date of the termination order.

Compensation

In principle, when an employer invokes a non-competition clause, he will have to pay compensation to the employee. This compensation amounts to 50% of the salary or more for each month that the non-competition clause lasts. The employer must pay the compensation no later than the last day of the employment contract. If the employer pays too late, he can no longer invoke the non-competition clause. However, the employer must still pay the compensation.

No compensation

An employee is not entitled to compensation if the termination is the result of seriously culpable acts or omissions by the employee or if the employee does not comply with the clause. As the compensation is paid in advance, the employer will have to reclaim it.

Lump-sum payment

We wonder whether lump-sum payment is the right choice. An employee may face tax problems if he suddenly receives six months’ salary in addition to his income, when in fact he has no income during the term of the clause. After all, he terminated the employment himself and will therefore often not be entitled to unemployment benefits. And for the employer, the restitution risk in case of breach of the clause is less with monthly payments.

Deviation in written agreement

A written agreement to terminate the employment contract (settlement agreement) can deviate from some parts of the law:

• The parties can agree that the clause need not be invoked in writing or that the clause applies for a longer period of time.
• They can also make other agreements on the amount of the compensation and the period within which it must be paid. Thus, the employer can opt for lower or no compensation.

In practice, this means that the parties have the freedom to agree on new terms for the non-competition clause in a settlement agreement. However, the conditions to the text of the clause, such as the obligation to state reasons and the maximum duration and scope continue to apply.

Review by court

The court can annul a non-competition clause if the clause is not necessary to protect important business interests or service interests. If the clause puts the employee at an unfair disadvantage compared to the employer’s interest, in addition to full nullification, partial nullification of the clause is also possible, for example by limiting its duration or geographical scope. According to the government in its explanation of the proposal, this is similar to the current situation. However, where now the substantial business interests or service interests can be freely invoked in the procedure, the legislative proposal seems to limit them to the interests already mentioned in the clause.

What happens to existing non-competition clauses?

According to the legislative proposal, existing clauses simply remain valid. Thus, there is no need to amend their text. So far, so good. However, there is a catch for employers. Although the clauses do not lose their force, the new legislation does apply when the employer invokes a non-competition clause. This means:

• The clause only applies if an employer explicitly invokes it.
• The employer must notify the employee at least one month before the termination, specifying its duration.
• The clause can be invoked only for a maximum of 12 months.
• If the clause is invoked, compensation of at least 50% of the salary must be paid.

In short, employers will have to carefully consider whether or not to invoke a non-competition clause after the law takes effect.

Employment and dismissal lawyers

Do you have questions about this blog or would you like us to draft a non-competition clause for you? Do you want us to review your existing employment contracts? We will also be happy to assist you in the event of disputes regarding the termination of an employment contract. Please contact: