A general overview

Paolo Donati / HR Dept.

In the actual global business scenario MNCs are commonly using non compete clauses (NCC) in order to protect internal know-how:

Intellectual property

Trademarks and patents

Non compete clauses

Confidentiality / non disclosure agreements

KNOW-HOW

Training, Comp&Ben, Retention

policies etc.

Knowledge workers – rather than machines, software and other operational tools – are indeed, in our “brain new world”, HUMAN CAPITAL for MNC companies.

That’s why HR Dept.s have to use employment & contractual regulations in a mutual win-win system rather than on a (too much) legal / coercive based approach that, by the way, Courts are often tackling in order to protect workers…

To put it simple: the best tool to protect the Company Know-How might be simply inside a… positive and collaborative internal climate!!

Knowledge workers – rather than machines, software and other operational tools – are indeed, in our “brain new world”, HUMAN CAPITAL for MNC companies.

That’s why HR Dept.s have to use employment & contractual regulations in a mutual win-win system rather than on a (too much) legal / coercive based approach that, by the way, Courts are often tackling in order to protect workers…

To put it simple: the best tool to protect the Company Know-How might be simply inside a… positive and collaborative internal climate!!

“Know-how" (which NCCs are protecting) might be

defined as the set of information, technical and operational knowledge or skills:

- required to perform certain tasks / activities within industrial and / or commercial areas (so called “indispensability”);

- referred to a sales, distribution, technical or production activity whose added value (so called “usefulness”) is referred to the consequential savings realized by the company/owner;

- not generally known or easily accessible, thus being impossible for a competitor to independently access to such knowledge (so called “secrecy”).

It comes itself that know-how can be protected only if an It comes itself that know-how can be protected only if an economic value derives from this kind of secrecy!economic value derives from this kind of secrecy!

“Know-how" (which NCCs are protecting) might be

defined as the set of information, technical and operational knowledge or skills:

- required to perform certain tasks / activities within industrial and / or commercial areas (so called “indispensability”);

- referred to a sales, distribution, technical or production activity whose added value (so called “usefulness”) is referred to the consequential savings realized by the company/owner;

- not generally known or easily accessible, thus being impossible for a competitor to independently access to such knowledge (so called “secrecy”).

It comes itself that know-how can be protected only if an It comes itself that know-how can be protected only if an economic value derives from this kind of secrecy!economic value derives from this kind of secrecy!

LET’S SEE NOW HOW NCCs ARE RULED ACROSS SOME EUROPEAN COUNTRIES…

Referring to Section 36 of the “Angestelltengesetz (AngG) NCCs (“Konkurrenzklauselverhaltnis”) can be signed by the parties only if:

- explicitly made in writing and if the work assigned to the employee objectively involves the use of confidential information;

- the length is set up to max 1 year;

- the clause defines the local geographical boundaries;

- does not transcend the assigned business managed by the employee;

- …and is fairly built, ie not preventing the employee to find another possible occupation in the market.

Please note that the law requires that NCC are applicable to (“knowledge”) workers whose last monthly gross salary does not exceed 17 times the ceiling set out in Section 45 of the “Allgemeines Sozialversicherungsgesetz” (ie, more than 2,125 Euro / month).

The NCC does not apply if the employer dismisses the employee without reasonable ground / just cause and / or without notice, unless the employer pays a "compensation" (“Karenzentschadigung”) based on his own last pay.

According to Belgian law and without the need of an explicit NCC inside hiring contracts, all employees are obliged not to use the information collected during previous jobs in order to (dishonestly) compete with the former employer (eg systematically contacting old customers or damaging former employer’s reputation). Burden of proof falls on the former employer.

In general NCCs are applicable only if the employee is dismissed for reasonable/justified cause after the probation period. The same applies if the employee resigns after the notice period or after a payment in lieu of notice (PILON).

Hereby the legal requirements (also valid for foreign-made NCCs extended in Belgium):

- written form;

- employee must have an annual gross remuneration of more than EUR 64,508 EUR (2013 amount),

- applicability to specific & limited business (the one that the employee was doing) and not generically defined;

- geographically limited and not extended outside Belgium (except for the sales reps if it is possible to show that their activity was involving a significant economic, technical or financial burden on a cross-country basis);

- longer than 12 months;

- must provide an indemnity of at least 50% of the employee’s salary (unless the employer notifies the employee within 15 days after the termination his intention not to use the NCC);

In case of violation of a NCC by the employee the minimum penalty is of 3 monthly payments for salesmen unless the employer proves a bigger damage.

Important: collective agreements might exclude the possibility of NCC in specific functions!

In France there is no specific law text that defines the application and conditions of NCCs. This because such clauses are usually contained in individual employment contracts or in collective agreements or sometimes in additional internal company collective agreements. This means that NCCs are ruled by jurisprudence.

Following 3 judgments of the Supreme Court of 2002, the NCC must:

- be in written form in order to protect the legitimate interests of the employer (in other words, a NCC might be imposed on people whose technical or sales know-how can seriously damage the former employer if disclosed to competitors: so-called "détournement de clientèle" );

- be limited in time and space (in this sense it’s important to geographically define the "departments" covered by the clause);

- take into account the specificities of the employee’s tasks in a way that does not undermine the general principle of freedom of trade contained in art. 7 of the "Décret d'Allarde de 2 et de 17 mars 1791 : "il sera libre à toute personne de faire tel négoce, ou d'exercer telle profession art ou métier qu'elle trouvera bon") et de la liberté du travail garantie par la Constitution (Cass. soc., 19 novembre 1996, n° p. 94-19404);

- must provide fair compensation to the employee. The determination of this sum is left to the parties even if it normally is around 25-30% of the last monthly salary. If not paid the NCC is void.

Important:

- it is possible that the new employer has to pay to the previous one all damages resulting from the when the previous employee was under a NCC. The previous employer has the burden of proof;

- it is also possible to include them in temporary contracts (CDD) and / or during the course of employment.

The non compete clause is ruled in Sections 74-75d of the Commercial Code (HGB), which provides

that a Wettbewerbsverbot is valid only if made:

• in writing (even in a document in the margins);

• for defined jobs (eg, salesrep, technician etc.) and geographical delimitation (Lander);

• with a max time constraint of 2 years

• with the provision of a indemnity for the employee that has to be minimum 50% of the last total annual salary (thus including non-monetary components). Such compensation is tax-deductible if the employee has another job (with new revenue).

The employer may waive from the application of NCC only by sending a written letter to the employee 12 months in advance. If the employment contract is dissolved before that period is going to be calculated by removing the remaining months of service (eg. if an NCC is removed 1 month before the dismissal, the employer will have to pay 11 months).

In general for German Courts a NCC is not binding if:

- the ad hoc indemnity has a low valued figure: in this case the employee can choose whether to have an integration (and thus observe the NCC) or vice versa;

-does not protect the legitimate (even potential) business interest of the employer;

- if the time or geographic constraints does not restrict the (constitutional) right for the employee to have a job and a professional development.

In UK the general rule is that business does not need to be protected from competition unless there are legitimate interests to be secured such as the stability and integrity of employees, customers or suppliers and / or the need to protect confidential information (laissez-faire).

There are 4 kind of clauses which typically are containing some restrictions for the employee:

- Non compete clauses (“classic NCC”);

- Non dealing clause: the employee agrees not to accept business from old or actual customers;

- Non solicitation: prevents the employee from contacting old or actual customers;

- Non poaching: forbids the former employee to divert his previous colleagues and get them to take in the new society in which it is now located.

In any case, it is important to clarify that each employee has an obligation of confidentiality to cope with his own employer: this also applies to post termination trade secrets. However this does not prevent the employee from performing other activities...

NCCs can then be made:

-during the work period: valid only if not severely limit the right to work of the employee. An alternative is the use of "garden leave" (vd below);

-after termination: are valid only if "reasonable" (ie able to protect a legitimate interest or temporally limited to the period required).

Important: if made during the employment period and if no indemnity has been specified on it, parties have to set the incorporation of a minimum (mandatory) indemnity of 100 BP.

UK-FOLLOWS…

In order to assess the effectiveness of a NCC, the judges normally consider the following:

- if the clause is needed in order to protect the legitimate interest of the employer. For example, if the employer is willing to protect own customers a NCC is not needed, might be enough a "non-dealing clause“;

- geographical limits: the larger the area will be valid unless the NCC and, likewise, the more precise the term in this sense is best;

- time limits: they must be "reasonable." Also here: the more lengthy less will be considered valid. To be assessed in these cases also the type of customers and how often is contacted;

Although theoretically there is no real formal obligation, even in the UK NCCs have to be made in written form.

In any case it is important to point out that also in UK Labor Courts are willing to protect workers (“favor lavoratoris”): therefore it is quite common for judges to correct materially ("blue penciling") a NCC if considered "unreasonable."

The jurisdiction of the English courts is always applicable even if the clause refers to laws of different countries (thus preventing offshoring).

In UK there’s another chance for employers in order to force employees from disclosing sensitive information: the so called “Garden leave o Gardening leave”. In a nutshell: the employer regularly pays the employee in order to stay home - “doing gardening” – during notice period. In other words the employee is suspended from going to office but on payroll.

The non-competition clause is a contractual obligation governed by Articles n.2125, 2596 and 1751 bis of the Civil Code.

The NCC contained in Article 2125 of the Civil Code - by extending the general “loyalty principle” at the end of the employment relationship - is the strongest “know-how” protection tool within domestic law.

But, being “de facto” a limitation of individual freedom, the law requires: -a written ad hoc clause that parties can set before / during hiring or even shortly before termination; -the stipulation of a reasonable indemnity/compensation to the employee (usually 15-35% of annual gross salary); - specification of object, time and place constraints. Therefore are void all NCCs providing only a generic prohibition referred to competition in companies operating in the same sector. The duration of this provision can be maximum 5 years in the case of Directors (“dirigenti”) and 3 years in all other cases.

The stability clause (“patto di stabilità garantita”)On a different approach it is also possible to add a contractual formula in which the employee is accepting to stay onboard a company for a certain number of years. Therefore in this case if the employee resigns before expiry date, he has to give back to the company the difference of the remaining gross monthly salaries. This special clause does not necessarily involve an ad hoc additional compensation for the entire duration of the agreement.

According to Article 7:653 of the Dutch Civil Code a “non-concurrentiebeding” clause is valid only if: -written and/or included in a "Personnel Handbook" (but in this case it has to be signed by the employee!); - containing geographic and job spec limits;- containing an indemnity in favor of the employee.

Usually the judges give a lot of importance to the balance of interests of the parties, considering eg seniority, date of signature of the NCC, the potential damage to business for the employer and, in some cases, if the employee has a family to sustain.

There are some binding limitations in respect to the NCC duration: it’s common to find out clauses with minimum 6 months / maximum 2 years duration.

The Dutch judges also often consider that a NCC is still valid, even if technically expired, when the employer continues to pay ad hoc compensation to the employee.

In the event of important career development within the company (eg, shift from Sales Manager to General Manager position), the NCC initially signed is not going to be considered valid and must be revised considering the features of the new position (Supreme Court / case AVM).

In Spain the use of the clause "no de competencia" is generally limited by Article.38 of the Constitution when recognizing the general freedom of trade principles.In any case, it is closely linked to the concept of "Diligencia" and "buena fe" that appears in particular within the "Estatuto de los Trabajadores (ET) / TÍTULO I / De la relación individual de trabajo / Capítulo II ("Contenido of contrato de trabajo"), and 20.2 artt.5A:

1. No podrá efectuarse la prestación laboral de un trabajador para diversos empresarios cuando se estime concurrencia desleal o cuando se pacte la plena dedicación mediante compensación económica expresa, en los términos que al efecto se convengan. 2. El pacto de no competencia para después de extinguido el contrato de trabajo, que no podrá tener una duración superior a dos años para los técnicos y de seis meses para los demás trabajadores, sólo será válido si concurren los requisitos siguientes:a) Que el empresario tenga un efectivo interés industrial o comercial en ello, yb) Que se satisfaga al trabajador una compensación económica adecuada.3. En el supuesto de compensación económica por la plena dedicación, el trabajador podrá rescindir el acuerdo y recuperar su libertad de trabajo en otro empleo, comunicándolo por escrito al empresario con un preaviso de treinta días, perdiéndose en este caso la compensación económica u otros derechos vinculados a la plena dedicación.4. Cuando el trabajador haya recibido una especialización profesional con cargo al empresario para poner en marcha proyectos determinados o realizar un trabajo específico, podrá pactarse entre ambos la permanencia en dicha empresa durante cierto tiempo. El acuerdo no será de duración superior a dos años y se formalizará siempre por escrito. Si el trabajador abandona el trabajo antes del plazo, el empresario tendrá derecho a una indemnización de daños y perjuicios.

Also in Spain NCCs must therefore have the usual geographic, functional and timeframe constraints.

According to Greek law NCCs are valid if not contrary to Article 179 Section A of the Civil Code, ie not excessively limiting the (professional) freedom of the employee.

Apart from this article, the obligation to refrain from competitive actions derives also from the good faith rules contained in the Civil Code in respect to general commercial relationships.

Required conditions for a valid NCC are:

- written form

- legitimate interest of the employer to protect its business

- 1 year timeframe limit

- geographic delimitation (town / province)

NCCs made abroad are valid if in line with the requirements set out above.