How the employer can prevent competition
Non-competition clauses in employment relationships
Preventing competition is a large and complex area, both in business and in law. Competition is fundamentally something that democracies strive for. That is precisely why the possibilities for agreeing to refrain from competing are limited in employment relationships. In other contexts, the situation is different.
Many non-compete clauses are unfair and therefore run a high risk of being declared invalid in court. Let's take a closer look at the factors that affect the validity of a non-compete clause, as well as how an assessment is made of whether a non-compete clause is valid or not.
How does the labor court make its assessment?
There are collective agreements that regulate the validity of non-competition clauses. In the event that the employer is bound by a collective agreement that regulates competition, the court will apply it. For employers who are not bound by a collective agreement, Section 38 of the Contracts Act applies. However, the preparatory work for that act states that collective agreements in the area should be used as a yardstick when applying whether a clause is reasonable. So the result may therefore be the same. The Labor Court has a strongly restrictive view of non-competition clauses.
What caused the termination of employment?
If the employee is terminated due to a lack of work, non-competition clauses do not apply. Only if the employee resigns or if the employer has terminated or dismissed the employee due to the competing business.
There must be a legitimate objective protection interest for the employer
Non-compete clauses may only be used when there is reason for the employer to protect trade secrets that would mean that the employer would suffer damage if they were used in competing activities. The trade secrets are to be transferred to the employee in connection with the employment. Here, the employer's industry will be a determining factor. That an employer recruits a knowledgeable person and in this way protects and confines the employee will be rejected. Likewise, that the employer is responsible for training efforts. It is in the nature of the employment contract that the employer continuously trains its staff. In certain situations, however, training efforts may marginally affect the validity of the clause.
Is the employment and employee applicable?
Non-compete clauses cannot be applied to all roles in a company. It is required that it is a specific role that comes into contact with trade secrets. It is also required that the employee, taking into account his or her skills and experience, is capable of exploiting them. The more experience the employee has and the more responsibility the position carries. Compare the janitor with the technical manager and everything in between.
Does the clause constitute a prohibition on occupation and/or business?
Clauses that cause an employee to lose the opportunity to take another job or start their own business will be unfair. They may only marginally affect the employee.
Will the employee be compensated during the validity period?
The idea is that an employee should never lose income due to a non-compete clause. The employer is therefore liable for compensation in the event that such a situation arises, but not more than 60% of the remuneration the employee had with the employer. The employee is therefore obliged to tell the employer about their new remuneration and why the non-compete clause has had a negative impact.
Binding time
The binding period must be justifiable. The longer it is, the greater the likelihood that it is unreasonable. Up to nine months is common. But a maximum of 18 months unless there are very special reasons.
Standard damages and fines
It is possible to agree on a fixed amount of damages that the employee must pay in the event that he violates a valid non-competition clause. It is also possible to reach an agreement on an amount that the employee must pay if he repeatedly violates the agreement, so-called penalty. These amounts must also be reasonable to be valid, which is also subject to regulations.
Different variants of non-competition clauses
There are several types of non-compete clauses. First, there are broad clauses where the employee is obliged not to compete, either directly or indirectly. Then there are so-called "non-solicitation" clauses which aim to ensure that the employee, after employment, shall not recruit employees from the employer to start working in a competing business. Finally, there are also so-called "customer protection" clauses where the employee undertakes not to take over the employer's customers or that the employer may do so but then must pay a certain cost for this.
Good luck, and don't forget to get in touch if you have any questions.
Kind regards,
Christoffer Lewinowitz
Employer lawyer
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