Non competition contracts

Non competition clauses are wide spread. Employers often insist on inclusion of a non competition clause in contracts of employment to defend market share. Employees tend to sign non competition clauses reluctantly as they need a job. A conflict is born when the employee wishes to leave the company to work for a competitor or to start his own business.

The solution of the conflict differs from jurisdiction to jurisdiction. The Dutch legislator has created rules and regulations regarding the validity and enforceability of non competition clauses. Rules are further laid down in extensive case law. This article tries to give you a short outline of Dutch Law on non competition clauses between the employer and the employee.

Non-competition clause

So what does a non-competition clause look like? For example like this:

Without prior written consent of the Employer the Employee shall be prohibited from entering the employ of or from working in any manner, either directly or indirectly, for any business that manufactures, sells or trades in the same or similar products as the Employer in the provinces North Holland, in South Holland and Utrecht, or from doing the same or similar work for his own account, for a period of nine months after termination of the employment contract. A penalty of EUR 1,000 shall be forfeited by the Employee to the Employer for each violation of this provision or each day that the employee acts in violation of this provision.

The employer can have a genuine interest in preventing an employee from involvement in a directly competing business after the termination of his employment contract. This is especially the case when the employee has special knowledge of operating charges, profit margins, or client structures of his former employer’s company. The employee may have built up a special relationship with the company’s customers. The employer sometimes has a reasonable fear that the employee will exercise his skills, knowledge or customer relations to the benefit of his main competitor.

The employee on the other hand has an interest in freely choosing his employer. Another employer may offer better employment conditions, or career possibilities. A valid non-competition clause may prevent him from making his preferred choice. The Dutch legislator has tried to strike a balance between both viewpoints with its legislation.

Art. 7:653 of the Dutch Civil Code addresses the relationship between the interests of the employer and the employee. The result thereof is that not all non competition clauses are valid. Morever certain valid clauses may not be aways enforceable.
validity

If confronted with a non-competition clause (either as an employer or employee) the first question to answer is whether the clause is valid or not. A non-competition clause is only valid if it meets the following requirements:

  1. It must be concluded in writing, and
  2. It has to be agreed with an employee who has reached the age of majority.

Secondly, the non-competition clause may have become ineffective after the conclusion thereof. This could be the case if the employee’s job description has undergone a significant change since the employer and employee entered into the employment contract. The non-competition clause may have become more burdensome for the employee as a result of the extension of his activities within the company. If no new non-competition clause has been concluded, the old clause becomes ineffective.

After a change of ownership of the company the non-competition clause will under certain circumstances pass to the acquirer by operation of law. But it is also possible that the companies non-competition clauses will have to be renewed.

As not all rules are laid down in statute law, these exemptions may be surprisingly bad news for employers from abroad, who are not aware of all the particulaties of Dutch Labor Law (You are in good company; a lot of Dutch employers are unaware of all rules relating to non-competition clauses). If one has a subsidiairy in The Netherlands and if it is important for the interests of your firm to conclude non competition clauses with key personnel, one should always seek professional advise before hiring of a new employee, and also before giving such an employee a promotion or other tasks.

legal action

Under Dutch Law, a court can wholly or partially annul the non-competition clause on the grounds that – in relation to the interests of the employer – the employee is unfairly prejudiced by the clause. The court can restrict the period of time for which the clause remains effective or the geographical extent of the clause. The court can also attach certain conditions to the effectiveness of the clause, such as the obligation for the employer to pay a certain amount of compensation for each month that the clause remains in function.

It is not usual that employees engage proceedings to annul a non-competition clause. Proceedings may take a long time and the decision is subject to appeal. It is more common that the employee just leaves to try his luck. The ex-employer should then act swiftly. There are interesting possibilities, but with the passing of time, these will become less and less effective. What happes during the first few months is of paramount importance to you and your ex-employee. Seek legal action directly.

An employer confronted with a violation of the non-competition clause can take legal action against the former employee, and it happens frequently. He can decide to ask the Court for an injunction. He can also initiate proceedings to collect any forfeited penalties or damages sustained. In some cases it is also possible to take steps against the new employer, especially if the new employer profits from the breach of contract. Provisional measures can be very effective for an employer seeking relief against a former employee in competing business.
As you will realise it is not possible to address the non-competition clause in detail here. Due to the complexity of the system it is wise to seek professional assistance prior to any measure envisaged.
What we can do for you

Kernkamp Advocaten can assist you with the following services:

  • advice on drafting of non-competition clauses
  • advice on validitiy of exisiting non-competition clauses
  • litigation on violiation of non-competition clauses

Further information

For further information regarding non competition clauses in The Netherlands, please contact our contact person. Click here to mail your question to the specialized lawyer.

see also:

FAQ’s about termination agreements in The Netherlands

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