Non-compete clause in an employment contract

A non-compete clause in an employment contract protects a company against a former employee using the know-how they have gained for the benefit of a competitor after they leave. It is a sensitive tool that must be balanced, otherwise it may be invalid. Companies often mistakenly believe that it is enough to insert a non-compete ban into the contract and they are covered. In reality, the opposite is true, because a poorly worded clause tends to be ineffective at the very moment the company needs it. In this article, we explain how to set up a non-compete clause correctly.

What a non-compete clause is

A non-compete clause in an employment contract is an arrangement under which the employee undertakes not to carry out any activity competing with their former employer for a certain period after the employment ends. Its purpose is to protect the company’s business information, know-how and client base.

Conditions for validity

To be valid, the clause must meet the statutory conditions and be reasonable. It must not make it disproportionately difficult for the employee to find further work on the labour market.

• written form of the arrangement
• a limited and reasonable duration
• a definition of the prohibited competing activity
• reasonable financial compensation for the employee

Financial compensation for the employee

Since the clause restricts the employee in finding further work, they are entitled to reasonable financial compensation from the employer for as long as it lasts. Without agreed compensation, the clause is generally invalid. The amount of compensation is based on the employee’s income; check the specific rules under the current legislation.

Contractual penalty and its limits

The parties may agree on a contractual penalty for breaching the clause. However, this too must be reasonable and must not be ruinous. A court may reduce a disproportionately high penalty. It is therefore important to set it sensibly in relation to both the compensation and the company’s interests.

When a non-compete clause is worthwhile

A clause makes sense mainly for employees who have access to sensitive information, business contacts or unique know-how. For ordinary positions without access to confidential information, it may be unnecessary and merely increase the cost of compensation.

• key sales and technical staff
• people with access to clients and know-how
• managerial and strategic positions

Withdrawal from and termination of the clause

A non-compete clause in an employment contract does not have to remain in force under all circumstances. The parties may agree on conditions under which the employer can withdraw from it, for example while the employment is still ongoing. The employee, in turn, can withdraw from the clause if the employer does not pay the agreed compensation. It is important that these conditions are clearly agreed in advance and that withdrawal is not left to the whim of one party. Without clear rules, there is a risk that the company will not be able to get rid of the clause once it no longer makes sense and will have to keep paying compensation despite the changed circumstances.

How to set up the clause correctly

A non-compete clause in an employment contract is effective only if it is balanced and correctly worded in legal terms. Incorrect wording can make it invalid at precisely the moment you need it most. We recommend having the wording reviewed and having the payroll implications of the compensation calculated. We will be happy to help you set up the clause and calculate the compensation, so that the protection of your know-how really works and the clause holds up in any court dispute.

Related articles: Working time, breaks and attendance records, State contribution for training new employees, Compensation for damage in the workplace: who is liable.

Frequently asked questions

Does an employer have to pay for a non-compete clause?

Yes, the employee is entitled to reasonable financial compensation for as long as the non-compete clause lasts, because the clause restricts their employment opportunities. Without agreed compensation, the clause is generally invalid. Check the specific rules on the amount under the current legislation.

How long can a non-compete clause apply after employment ends?

The clause may apply only for a reasonable period, limited by law, after the employment ends. It must not make it disproportionately difficult for the employee to find further work. Check the current maximum duration and conditions, as they may change.