The overriding business interest and non-compete clause
On 24 January 2024, Minister Van Gennip announced that the long-awaited bill to modernise the non-competition clause will not be submitted for internet consultation until the first quarter of this year. A slight delay, but it is on its way. The minister has clear plans to overhaul the non-compete clause:
- Limitation of duration: The non-compete clause will have a legal limit in terms of duration.
- Geographical demarcation: It should be more specific and justified in the contract.
- Justification of business interest: It should be stated in permanent contracts, not only in temporary ones.
- Compensation for enforcement: Employers should pay compensation to employees if they enforce the non-competition clause.
But what is at stake in the current situation? In our practice, we see countless employment contracts come along, almost all with a standard non-compete and relation clause. Especially in times of staff shortages, employers like to resort to a non-compete clause. Even in new contracts, this is often implemented sharply to prevent staff turnover. And then there are numerous questions about how a non-competition clause may be included in a fixed-term contract.
Much has already been written on this subject, but I would like to offer practical guidelines here to draft competition clauses correctly and efficiently yourself or to check whether the provisions in your contract are legally valid.
Limitation of duration
Regarding the duration: case law generally assumes that a maximum duration of one year after the end of the employment contract is reasonable. If this is laid down by law, it provides more guidance for both employee and employer upfront in the future.
Geographical demarcation is currently assessed on the basis of the employer’s sales market. For a local baker, this may be limited to neighbouring municipalities, while for a multinational, a global reach may be reasonable. As an employer, think carefully about this.
Justification of business interest
Until now, the justification of the weighty business interest is only required for temporary contracts. Minister Van Gennip wants to extend this to open-ended contracts. However, the criterion of compelling business interest is not yet precisely defined but must meet strict requirements. This means that the employer may not suffice with general wording. A standard provision is insufficient. The employer must specifically state what new knowledge or experience the employee will gain and how this may affect competition. The potential harm must be described specifically so that it can be objectively established, including by the employee.
Example of sufficient justification
A recent subdistrict court ruling is a good example of how strict the requirements are. The ruling [citing ECLI:NL:RBOBR:2022:1828] illustrates the need for employers to substantiate their business interest in detail. The subdistrict court ruled that the employer had made it sufficiently plausible that there was a compelling business interest in the non-competition clause that had been agreed. Important in this consideration was the fact that the employer and the competitor, operated in the same international market and as direct competitors. The stressed point was that only a handful of companies were operating in this particular market, so there was intense competition. Setting up and executing a campaign required months of preparation and customers invested significant sums in such initiatives.
The employer succeeded in demonstrating that the employee had operational knowledge essential for the successful execution of such campaigns. For example, the employee knew which logistics service provider to use and which not to use in case of problems. Transferring this knowledge to a competitor would save them considerable time and could even result in offering a campaign to another customer, with potential negative consequences for both the customer and the employer itself.
The employer could then concretise that a disappointing outcome of a campaign, caused by the unauthorised competition, would be detrimental not only to the customer the employer worked for, but also to the employer itself.
Compensation upon enforcement
This is and abroad very common but not in the Netherlands. The other way round also sometimes occurs. That the employer asks the employee for a sum of money to get out of the non-competition clause. The court finds an indication in this that this is not so much to prevent unlawful competition as to receive compensation from the employee for terminating the employment contract. This is not allowed. It is widely confirmed in case law that non-competition clauses are not intended to bind employees. Even if this has negative consequences for the employer. This does not fall under the heading of substantial business interest.
The text of the agreement is leading, but the court will always balance the employee’s interest – the right to free choice of employment – and the employer’s interest – the protection of the company’s turnover. The term ‘business flow’ is often used, but is not clear to everyone. It is defined in the literature as a company’s sales potential based on goodwill, special knowledge, insights and investments made (know-how).
Do you have questions about your vve situation? Or any other question related to tenancy law? Then contact one of our lawyers by mail, telephone or fill in the contact form for a free initial consultation. We will be happy to think along with you.