Employment law newsletter: The Minister for Employment has just resubmitted the Bill on Restrictive Covenants to Parliament. If the Bill is passed, there will be significant changes to the legislation governing restrictive covenants.
The Bill on Restrictive Covenants which the Minister for Employment has just presented to Parliament is equivalent to the Bill which was introduced in March 2015. This means that the new Act - if passed in its current format - will replace the existing rules governing covenants in employment contracts which are in restraint of trade.
Assuming the Bill is approved by Parliament, the new Act will contain significant changes which will apply to any restrictive covenants that are entered into on or after 1 January 2016.
The essential aspects of the bill
The new Act will apply to both non-compete clauses, non solicitation of clients/customer clauses and non solicitation of employees clauses (also referred to as non-poaching clauses). Additionally, it should be noted that all employees will be subject to the Act and it will therefore no longer be a requirement for an employee to have salaried employee status (funktionærstatus) before the rules on restrictive covenants apply.
The Bill introduces a general ban on non-poaching clauses, albeit with the current exceptions governing TUPE transfers and the employment of temporary agency staff.
Going forward, an employee cannot be subject to a noncompete clause unless he or she holds a “position of particular trust and responsibility”. This is a more stringent requirement compared to the current rules where salaried employees are only required to hold a “position of trust and responsibility”.
If an employee is subject to either a non-compete clause or a non solicitation of clients/customers clause, then these covenants can only be upheld (valid) for a maximum of 12 months after the effective date of termination.
Any employees who are subject to a non solicitation of clients/customers clause must receive a list from their employer by no later than the date on which notice of termination is given which sets out the details of the clients/customers with which the employees have had business related contact in the 12 months prior to the date on which notice of termination is given.
In future, if an employee is subject to both non-compete and non solicitation of clients/customers clause, then these covenants will be referred to as “employment covenants” (ansættelsesklausul) and they will be subject to the more stringent rules. The maximum length of such restrictive covenants is limited to six months from the termination date.
In future, employees will receive a monthly sum equivalent to 40% of their salary as at the termination date as compensation for any applicable restrictive covenant of a length of up to six months. If the restrictive covenant has a length of between six to 12 months – or if the covenant in question is an “employment covenant” – then the compensation must amount to 60% of the salary which is payable as at the termination date.
For the first two months after an employee’s termination of employment, he or she will be entitled to a compensation payment and this will be payable as a lump sum. The lump sum is payable regardless of whether the employee in question has found and started suitable alternative employment.
Even if an employee has commenced suitable alternative employment, he or she will continue to be entitled to receive monthly compensation payments beyond the initial two months following on from their termination date:
- For non-compete and non solicitation of client/customer clauses which apply for a maximum of six months after the termination date, the compensation payable from the third month (of the covenant’s validity and onwards) must amount to 16% of the salary payable as at the termination date.
- In respect of non-compete or non-solicitation of clients/customers clauses which apply for the maximum period of 12 months, the compensation payable following on from the third month must amount to 24% of the salary payable as at the termination date. This also applies to “employment covenants” with the maximum length of 6 months.
The Bill contains a number of very significant changes to the current rules governing the use of non-compete clauses, non solicitation of clients/customers clauses and nonpoaching clauses. The Bill might, however, be amended during the consultation process.
It is important to bear in mind that the Act (if passed) will come into force within a very short timeframe.
We recommend that employers prepare for the changes and consider any consequences which may follow from the changes to the law. At the same time, any employers who are considering introducing restrictive covenants ought to consider whether such covenants should be implemented prior to 1 January 2016.