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Competition Clause

Competition Clause

Competition Clause

Most employees usually sign an employment contract that includes a competition clause without giving it much thought. For an employer a competition clause may be a useful tool to bind an employee to the company (although practice has shown that different tools are more effective, such as remuneration for services rendered).

The law has set several conditions to the inclusion of a legally valid competition clause in an employment contract. When these conditions are not met, the employee is free to go wherever s/he wants to go without you having foreseen this. For this very reason, a competition clause that is legally valid and can be enforced needs to be formulated carefully.

For an employee it is rather sour to be held to a legally valid competition clause when the employment relation was terminated by the employer. Also when the employee is dismissed after e.g. a dispute at work, the effects of a competition clause may be extra detrimental to him/her.

The law provides for a special procedure in which the employee may request full or partial annulment of the competition clause. In such a procedure the employee must claim and prove that the clause infringes him/her unfairly in relation to the employer's interests it aims to protect. When it comes to such a procedure, the key element is the degree to which the competition clause impedes the employee to work elsewhere. Roughly one can say that, as the competition clause is formulated in more general terms - i.e. when its effects span a disproportionate period of time and range of locations - chances increase that the judge will annul it fully or in part afterwards.

When, at the termination of an employment contract, it is possible to negotiate the conditions of the termination, it is important to include a competition clause, if present, in the negotiations. If the employer values enforcing the clause, it may be combined with e.g. higher redundancy compensation.

Relevant factors considered by the court when deciding whether to nullify or moderate the effect of a non-competition clause:

  • Has the employee been in service for a long time?
  • Does the employee hold a position giving him access to information of a sensitive nature for the company?
  • Who initiated the employee's departure and what was the reason?
  • What tangible interest does the employer have in having the non-competition clause upheld?
  • Could the employer's interests be protected equally well by a non-solicitation clause?
  • What is the market in which the employee is proposing to carry out competing activities?
  • Where is the employee proposing to carry out the competing activities and how close is this to the area where the employer operates?
  • Does the employee have other opportunities available to him in the labour market?

If, on the termination of an employment relationship, there is the opportunity to negotiate the conditions of that termination it is important to take any non-competition clause into consideration during those negotiations. If it is important to the employer for this clause to be complied with, this could be tied in to, for example, the award of higher severance pay.

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