The tight labour market currently makes it hard for employers to find, and more importantly, to keep suitable staff. In practice, employers rely on the non-competition clause ever more often for this purpose. By doing so employers want to prevent their staff from leaving (to a competitor). However, a non-competition clause with the purpose of binding employees will not stand up in court. When is a non-competition clause enforceable?
Valid non-competition clause
The first question to be answered when determining whether a non-competition clause is enforceable is the question whether this clause was validly agreed. In principle, that is the case when the clause (i) was agreed in writing with (ii) an employee who is of age in (iii) an employment agreement for an indefinite period.
Agreeing on a non-competition clause in a fixed-term employment agreement is only possible on strict conditions. Including the clause has to be necessary because of serious interests of the business or the service. These interests and the arguments supporting them must be included in the text of the employment agreement and must be substantiated for each individual employee. Courts are usually very strict in testing this.
A non-competition clause that was validly agreed can (partly) lose its effect by an important change in the employment relationship. This may occur, for example, with a drastic, unforeseeable change of position. A non-competition clause will then have to be agreed in writing anew in order to keep its validity.
What is covered by the non-competition clause and what is ‘a competitor’?
Furthermore, it is important to determine whether the specific situation that occurs is also covered by the non-competition clause. Attention should be paid, for example, to the duration and the geographical scope of the clause, and to what activities are exactly prohibited under the clause.
In addition, the non-competition clause can only be relied on if there is actually a competitor. It is therefore important to determine first whether the other employer is covered by the definition of ‘competitor’. This should be tested on the basis of the kind of work, services and customers. What exactly is included by a ‘competitor’ depends also on the exact wording about this in the non-competition clause.
Weighing of interests
A validly agreed non-competition clause still does not absolutely mean that an employee can be kept to it. An employee may ask the court to suspend the non-competition clause (in part) (in special expedited proceedings known as kort geding), or to annul it if the employee believes he is being unfairly prejudiced by the clause.
In such cases the court will weigh the interests. It is important whether, and to what extent, the employer's market position – the know-how and goodwill built up – will be affected if the employee will start working for a competitor. The market position will be affected if the employee knows competition-sensitive information, by which the employee can give the competitor an advantage compared to the (former) employer. This may happen, for example, if the employee is aware of information about purchase and sales prices, margins, or strategies.
For the employee, the extent to which he is unfairly prejudiced by the non-competition clause plays a part in the weighing of interests.
Besides the question whether the employer’s market position is affected and the employee is unfairly prejudiced, the following aspects may play a role in the weighing of interests:
- The length of the employee's employment;
- Whether the (former) employer or the employee takes the initiative to terminate the employment agreement;
- Whether the (former) employer or the employee has committed a culpable act;
- Whether the employee, upon leaving, was again made aware of the enforcement of the non-competition clause by the former employer;
- A possible improvement in salary and/or position for the employee at his new employer, and whether any such career opportunities existed also at the (former) employer;
- The attachment of the employee to the sector, for example because the employee has received a very specific training or has been working with the same employer for 20 years;
- Whether a confidentiality or non-solicitation clause perhaps already sufficiently protects the interests of the (former) employer.
Purpose of non-competition clause
It is also relevant to bear the purpose of the non-competition clause in mind. According to existing case law, the non-competition clause is meant to protect the employer’s market position. It is expressly not meant to bind employees or to prevent that after one employee has gone to a competitor, others will follow. The former meaning has been confirmed by the Dutch Supreme Court.
Tips for practice
The fact that a non-competition clause was included in an employment agreement does not mean that the employee is (fully) bound by it. We advise employers who wish to rely on a non-competition clause to take the following steps. Check and assess whether:
- a valid non-competition clause is (still) in place;
- there is a competitor;
- the situation falls within the scope of the non-competition clause;
- the employer’s market position will be affected if the employee will take up employment with the competitor;
- the employee is unfairly prejudiced by the enforcement of the non-competition clause.
In all cases, the employer has to be able to demonstrate clearly:
- what competition-sensitive information the employee has exactly;
- why this information is competition-sensitive;
- how the employee can give the competitor an advantage with this information.
Sometimes it may help to have a talk with the employee and a potential new employer. When the interests of all parties involved are out in the open, a solution may be found without having to depend on litigation. However, if the damage has already been done and the employee has joined a competitor and is affecting the employer’s market position, the employer has the choice to send the employee a demand letter. If this proves unsuccessful, the employer may take the matter to court.
Do you have questions about the non-competition clause? Please feel free to contact Noor Sluis.
