A non-compete clause in an employment contract limits the right to free choice of employment. Strict criteria therefore apply for the agreement of a legally binding non-compete clause. The courts are very critical when it comes to assessing the fulfilment of these criteria. That means you must be careful. Here is a list of the most important issues you need to be aware of.
- The rules that apply for a permanent contract
- The rules that apply for a temporary contract
- What to do when an employment contract is extended or an employee changes jobs
- Do the same rules apply for a non-solicitation clause or a non-recruitment clause?
- The extra protection for agency workers
- Stricter laws have been announced for non-compete clauses.
Non-compete clause: permanent employment contract
In order for a non-compete clause in a permanent employment contract to be legally binding, there are two requirements: the employer and the employee have to agree the clause in writing, and the employee has to be aged 18 or over. According to the Supreme Court, a clause can be agreed to in three different ways in writing:
Option one: the employee signs an employment contract or some other document – for example, employment regulations or a staff manual. The non-compete clause is included in this signed document.
Option two: the employee signs a document – for example, an employment contract or letter, in which the employee declares to agree to the attached employment conditions in another document. The non-compete clause is included in the attached employment conditions – the other document that has not been signed.
Option three: The employee signs a document and declares in that signed document to expressly agree to the non-compete clause.
The non-compete clause is included in another document – with the employment conditions – that has not been signed, and this document can be consulted before the employee agrees to the non-compete clause in writing.
Non-compete clause: temporary employment contract
Stricter requirements apply for a temporary employment contract.
- The employee has to be aged 18 or over, and
- the non-compete clause has to be included in the employment contract itself, so not in a separate document, and
- The non-compete clause describes the compelling business or service interests that are protected with the non-compete clause, and
- The employee must also sign the employment contract.
You should make sure the explanation of the reasons for the clause relates as far as possible to the concrete situation, and describes the nature of the business, the sector, and the specific characteristics of the job.
This would be the case if, for example, if an employee is involved in tendering procedures or the formulation of the marketing strategy. In that case, the employee will have access to information that is commercially sensitive within that sector. The employer can be seriously harmed if this information falls into the hands of a competitor.
You should also make sure there is a specific description of the compelling business interests. For temporary employment contracts agreed before 1 January 2015, less strict requirements apply.
If an employment contract is extended or the employee changes job
Extension of a temporary contract: explicitly state that it concerns the extension of a temporary contract and ask the employee to sign a new temporary employment contract with a non-compete clause and a written explanation of the reasons for such.
Alternatively, include the non-compete clause and the written explanation in a letter confirming the extension of the contract and ask the employee to sign and return this letter.
If a temporary contract is converted into a permanent contract: if a temporary employment contract is converted into a permanent employment contract, then ask the employee to sign a new employment contract with a non-compete clause, but without the written explanation.
If the employee changes jobs: under certain circumstances, a non-compete clause can partially lose its validity if an employee changes jobs. Therefore, if the new job is significantly different to the old job, look closely at whether or not it is necessary to agree to the non-compete clause again.
Do the same rules apply for a non-solicitation clause or a non-recruitment clause?
Non-solicitation clause: a non-solicitation clause usually prohibits an employee from contacting or maintaining contacts with customers or business associates of the employer for a certain period after they leave the company.
The courts will often apply the same criteria for the assessment of the validity of a non-solicitation clause as for a non-compete clause.
Non-recruitment clause: a non-recruitment clause prohibits an employee from persuading other employees to end their employment contract with the employer after they leave the company.
It is debatable whether or not the same rules apply for the conclusion of a non-recruitment clause as for a non-compete clause. However, in some cases it definitely is the case that the same requirements apply, for example if an employee is responsible for the recruitment and selection process, and especially if they work for a temporary employment agency.
Extra protection for agency workers
Restriction prohibition: unrestricted takeover by the hiring organisation
Agency workers made available to a third party to carry out work under the supervision and management of that third party get extra protection under the Placement of Personnel by Intermediaries Act (Waadi). The employer of the agency worker – the employment agency – is not allowed to place any restrictions on the employee entering into employment with the hiring organisation at the end of their placement.
Consequences for a non-compete clause
If a non-compete clause of an employee who is made available to third parties is formulated in such a way that it prohibits the employee from entering into employment with the hiring organisation, then that non-compete clause will be in contravention of the restriction prohibition. In such cases, many courts will rule that the entire non-compete clause is null and void.
Exclude the hiring organisation
Formulate the non-compete clause, and where relevant the non-solicitation clause, in such a way that the conclusion of an employment contract or employment relationship with the hiring organisation is not prohibited.
Stricter laws announced for non-compete clauses
In a letter to the House of Representatives on 2 June 2023, the Minister of Social Affairs and Employment announced stricter measures. The minister wants to limit the widespread use of the non-compete clause.
The minister has announced the following proposed measures:
- Limitation of the duration of a non-compete clause
- Compulsory specification and explanation of any geographical scope of a non-compete clause
- ‘Compelling business interests’ also have to be explained in writing for a permanent contract
- Compensation for the employee when a non-compete clause is invoked fixed at a certain percentage of the last-earned salary
The minister will present a new legislative proposal for internet consultation in late 2023.
This article is was authored by Steven Palm, Partner and Peter de Waal, Partner Windt Legal. Our Head of International, Nicolas Groffman, leads this service for HCR and can be contacted by email.