NL: The end of the non-compete clause?

 

It has been a topic of discussion for years that there is improper use of the non-competition clause. Reason enough for the government to investigate the effect of the clause in practice in its entirety. The study was completed in 2021 and identified a clear problem: the use of the non-competition clause is so broad that it can lead to an unjustified restriction of employees. This affects the proper functioning of the labour market, as it restricts employees from changing jobs and remaining active within their expertise and specialism. It is more difficult for employers to hire new staff. This issue has led the government to submit a bill to tighten the rules for non-competition clauses.

Protection of company flow vs. constitutional freedom of choice of employment

Many employers include a non-competition clause in the employment contract. The non-competition clause prohibits an employee from performing similar work for another company or as an entrepreneur after the end of his employment contract. The employer’s purpose is to protect its business interests, such as trade secrets, knowledge about tariffs, customer data and files and goodwill, also collectively referred to as the „business flow“.

The downside of the non-competition clause is the restriction of the constitutional freedom of employees to free choice of employment. The government is of the opinion that a non-competition clause should only be included and invoked if it is really important for the protection of the business flow. If there is no need to protect the flow of the company, then the free choice of work and labour mobility of the employee should be paramount.

Precisely because many employers include the non-competition clause as a standard clause in the employment contract, without there being any real reason to do so, there is no reason to unnecessarily hinder employees in their search for the labor market. Research has shown that the non-competition clause is used so often that it can lead to an unjustified restriction of employees. This hinders the proper functioning of the labour market, as it restricts employees from changing jobs and remaining within their expertise and specialism. But this is not desirable for employers either: after all, it is more difficult to hire new staff if they are hindered by a non-competition clause.

The government therefore wants to reduce the number of non-competition clauses and restore the balance between employers and employees. At the same time, the government wants to ensure that companies that have an interest in a non-competition clause can continue to make use of it.

 

Current legislation
 
Bill

The non-competition clause can be unlimited in duration – there are no limits set by law.
 
A non-competition clause can have effect for a maximum of one year after the end of the employment contract. Clauses with a longer duration or in which no duration is stated are null and void.

The inclusion of an area in which the non-competition clause applies, also known as geographical scope, is not mandatory.
                                                        
The geographical scope in which the employee is not allowed to work because of the non-compete clause must be stated. Despite the fact that it is not mandatory, it is wise to give good reasons why the geographical scope in question has been chosen.

In the case of fixed-term contracts, a non-competition clause is not permitted, unless this clause contains a written justification that the clause is necessary due to compelling business or service interests.
 
The compelling business or service interest for a non-competition clause must be justified for all employment contracts (i.e. not just for fixed-term employment contracts).

In principle, no compensation has to be paid to the employee if the employer invokes the non-competition clause, but the court may determine that the employer must pay compensation to the employee for the duration of the restriction if the clause significantly hinders the employee from working other than in the service of the employer. The amount of the compensation is determined by the court in accordance with fairness.
 
The employer must pay compensation to the employee when the non-competition clause is invoked. The compensation amounts to 50% of the last earned monthly salary for each month that the non-competition clause is invoked.

It follows from the proposed changes that the employer must explicitly indicate whether the clause will be applied upon the employee’s departure. If this does not happen, the employee is in principle free to go wherever he/she wants, but no compensation has to be paid to the employee.

Non-solicitation clause also restricted

The non-solicitation clause is a special form of non-competition clause. The proposed changes and reforms will therefore apply not only to a non-competition clause, which prevents employees from entering into employment with competitors, but also to a non-solicitation clause, which prevents employees from working for or with relations of employers, such as customers (and also to the anti-solicitation clause).

Consequences for current clauses

The non-competition and non-solicitation clauses that were validly agreed before the entry into force of this bill will in principle remain legally valid. The formal requirements introduced in this bill will not apply to these existing clauses. After the entry into force of this bill, the provisions relating to invoking a clause and paying compensation will apply to existing clauses.

Expectations and internet consultation

The government expects these measures to strengthen the position of the employee, but also to make it easier for employers to hire new staff, because fewer clauses will be agreed and invoked. The labour market will function better, according to the government.

The bill is currently under internet consultation and stakeholders have six weeks to respond. It is not yet known when the bill will enter into force.

 

For further information, please contact:

Ron Andriessen, Partner

Labré advocaten, Amsterdam

e: ron.andriessen@labre.nl

t: +31 20 3052030

 

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