A Non-Competition Clause: What Should You, as an Employer, Keep in Mind?

“Freedom of enterprise” is a fundamental principle of our free-market economy. Entrepreneurs are the driving force of society, and the goal is for them to face as few restrictions as possible in carrying out their activities. Contrary to this fundamental principle, however, there is a demand and a need from the market to limit this (absolute) freedom in order to protect the market position of businesses. The basic principle is that everyone is free to engage in any economic activity. An employee is therefore free to work anywhere. However, certain restrictions do apply. For example, an employee may not compete with their employer during the term of the employment contract. After the employment contract ends, this is permitted, provided it does not constitute unfair competition. However, a non-compete clause (often referred to as a “non-competition clause”) may restrict that right.

A non-compete clause may be included in the employment contract to prevent the employee from competing with their former employer after their employment ends. The clause prohibits the employee from engaging in similar activities for a specified period of time and within a specified geographic area after the end of the employment contract. The employee may not, therefore, simply engage in similar activities with a competing employer or start a competing business on their own. If the former employee does so anyway, they must pay a lump-sum compensation amount specified in the non-compete clause.

The law provides for different types of non-compete clauses depending on the type of employment contract: 1. A “standard” non-compete clause (for white-collar or blue-collar employees) 2. A “deviating” or international non-compete clause 3. A non-compete clause for sales representatives Regardless of the situation, the clause must be drawn up in writing and must meet numerous legal validity requirements. If these requirements are not met, the non-compete clause is void. The most important condition—though it does not apply to sales representatives—is that a non-compete clause is valid only if it is accompanied by a non-compete compensation payment. The employer therefore pays its former employee a sum as compensation for the restriction on the freedom to compete. Finally, it is important to know that a non-compete clause will not have legal effect in all cases. Depending on the timing and manner in which the employment contract is terminated, there is a chance that the employer will not be able to invoke it.

In practice, employers often forget that a non-compete clause is not always enforceable. For example, the non-compete clause will generally have no effect if you terminate your employee’s employment yourself (without cause). The non-compete clause does take effect, however, if the employee resigns or if the employment contract is terminated by mutual agreement. As an employer, you do pay a price for this restriction on your former employee’s “freedom of employment,” equal to (at least) 50% of the gross salary for the period during which the non-compete clause applies. This condition does not apply to sales representatives. So, when the employment contract ends, don’t forget to check whether a non-compete clause was included. If the clause applies but you would prefer not to pay the lump-sum compensation, you may waive the non-compete clause within 15 days of the end of the employment contract. Your former employee will then be free to compete with you, but you will not be required to pay a non-compete indemnity. Especially when an employee resigns, employers sometimes forget to check whether a non-compete clause was agreed upon. Caution is advised.

A non-compete clause can be a useful tool to protect the company against employees who might start a competing business after leaving the company and thereby threaten to disrupt the company’s market position. However, it is crucial not to include a non-compete clause in any employment contract without due consideration and to comply with all legal requirements. A clause that does not comply with the law is invalid and therefore offers no protection. Also, remember to always check at the end of an employment contract whether a non-compete clause was included and whether it is advisable to waive the clause or not. As a business owner, do you want to optimally protect your market position with a non-compete clause? Feel free to ask Crowe Legal Spark for help in drafting a valid non-compete clause. If you’re an employee with questions about a non-compete clause in your employment contract, our team is here to help.