Is There a Future for the Non-Compete Clause?

An internet consultation was recently held on a bill that intends to tighten the rules for non-compete clauses in the Netherlands. This bill’s purpose is to create a better balance between the corporate interests of the employer and the freedoms of the employee.

A non-compete (or non-competition) clause restricts the options of employees to start working elsewhere after their employment agreement has ended. The clause prevents former employees from taking up employment with (specific) competitors shortly after their departure. As a rule, a non-solicitation clause (prohibiting the maintenance of business contacts with relations of the former employer) or a non-recruitment clause (prohibiting the soliciting of former colleagues to join the new employer) is also regarded as a non-compete clause.

Use of the non-compete clause has increased strongly over the past 10 years. It is often included as a standard clause in employment agreements, and in a tight labour market it is also relied on ever more often to bind employees to the company.

The bill contains measures to restore the balance between the interests of employers and employees. While employers will keep the option of using a non-compete clause to protect their market position, it is expected that the measures will bring such use down.

Employers will become obliged to add a written substantiation to their non-compete clause, demonstrating:

1. the duration of the restriction after the end of the employment, which has a maximum of 12 months;
2. the geographical scope of the restriction; and
3. the compelling business or service interests for which the employer deems the restriction necessary.

If these points are not complied with in the substantiation, the clause is invalid. Furthermore, if an employee leaves, the employer will have to notify him in good time and in writing whether it will rely on the non-compete clause.

In order to further restrict improper use of non-compete clauses, employers will owe employees a compensation when they leave. For each month that the employer relies on a non-compete clause, it will have to pay its former employee compensation amounting to half of the employee’s monthly salary. If the employer fails to pay this compensation or pays it too late after relying on the clause, the clause can no longer be relied on, while the full compensation remains payable.

The parties will still be free to make deviating arrangements in a termination agreement.

These proposed changes will have a big impact in practice. Employers will no longer be able to rely on a non-compete clause in the absence of compelling business or service interests. In addition, the compensation due may prevent employers from relying on this clause. Finally, employers must ensure that any compensation due will be paid timely and correctly.

Before the bill can enter into force, after the internet consultation it will have to be approved by the Dutch Senate and the Lower House of Parliament. We will of course keep you posted.

Do you have any questions? Please contact Marnix van Berckel Smit.