Introduction
Facts
Non-compete clause during garden leave
No surrender of earnings
Set-off of earnings against salary claims
Comment


Introduction

Employees are often released from their duty to work after they have been issued with a dismissal notice or if they are under a termination agreement. In such cases the employer must continue to pay the agreed remuneration until the end of the employment relationship, but the employee is no longer obliged to work. If the employee uses his or her free time to work for another employer, in most cases the previous employer, will be keen to prevent the employee from pocketing twice his or her usual income. This is all the more true if the employee works for a competitor during garden leave. On October 17 2012 the Federal Labour Court dismissed a claim of a former employer to surrender the remuneration which the employee had received from a competitor.(1)

Facts

The employer terminated the employment relationship of an employee, complying with the ordinary notice period. The employee filed a claim against unfair dismissal with the Federal Labour Court. The unfair dismissal proceedings ended with the conclusion of a settlement in which the parties agreed to end the employment relationship on expiry of the ordinary notice period in return for a severance payment. The employee was released from his duty to work for the entire period of garden leave, offsetting any outstanding leave entitlement. The parties had not concluded an agreement regarding the set-off of other earnings against the remuneration claim. Two months before the end of the employment relationship the employee entered into a new employment relationship with a competitor of the employer. The employer's claim against the employee to surrender the remuneration earned while working for the competitor was unsuccessful. The court also dismissed the claim to set off the remuneration received from the competitor against the remuneration claims regarding the employer.

Non-compete clause during garden leave

During the employment relationship an employee may not compete with his or her employer even if there is no express provision in the employment contract. This is set out in Section 60 of the Commercial Code. The provision applies to all employment relationships.

Whether the non-compete clause also applies during garden leave depends on how the garden leave declaration or the corresponding agreement in the termination agreement is worded. If the employee is released from duty to provide work and the employer has reserved the right to offset the employee's other earnings against the remuneration owed, the employer must at the same time expressly state that it continues to insist on compliance with the contractual non-compete clause. Should it fail to do so the employee may, under Federal Labour Court case law, assume that he or she is no longer bound to the contractual non-compete clause and is free to realise his or her earnings potential.(2) However, in the case decided by the Federal Labour Court on October 17 2012 no set-off of other earnings was agreed between the parties. Therefore, the court assumed that the contractual non-compete clause continued to apply during garden leave. The court also held that the employee had breached the prohibition on competition.

No surrender of earnings

If an employee engages in competitive activity, which is not permitted during garden leave, the employer may be entitled to compensation. However, the employer can successfully assert such claims in court only if it can prove that it has sustained economic loss owing to the conduct of the employee in breach of the prohibition on competition. If the employer can state that it is highly probable that the employee competed with it without permission, then the employer can demand information about such transactions from the employee in order to prepare compensation claims. In the case decided on October 17 2012, the employer did not state that it had sustained economic loss owing to the breach of a prohibition on competition. The earnings received by an employee based on an employment contract with a competitor do not give grounds for a loss for the former employer. This is because the assets of the former employer are not reduced as a result and the employee would have earned the remuneration if he or she had worked for any other employer (but not for a competitor) during garden leave.

In practice, the employer can generally prove only with great difficulty that it sustained a commercial loss owing to conduct in breach of competition, but it does have another option. It can exercise its entry right pursuant to Section 61(1) of the Commercial Code. That means that it can enter into the transactions which the employee has concluded in breach of competition, with the result that the employee must surrender the profit gained from the transaction once his or her expenses have been deducted. If the employee carries out the transaction to the account of a third party (not to his or her own account), then he or she must surrender the remuneration gained or assign the remuneration claim to the employer pursuant to Section 61(1).

In light of this, one could be forgiven for thinking that the employee must also surrender the salary generated from the employment relationship with the competitor, because the employee is not supposed to retain the economic advantages gained through his or her conduct in breach of the prohibition on competition. However, this was expressly dismissed by the Federal Labour Court in its October 17 2012 decision. The fixed salary earned from the employment contract with the competitor does not constitute the "remuneration from transactions to the account of another" within the meaning of Section 61(1). This was held by the court in a 1962 decision and was further confirmed with specific grounds.(3) It is the view of the court that the term 'enter into transactions' within the meaning of Section 61(1) refers only to those transactions where the employee appears on the market as a competitor of the employer. If the employee enters into the market actively in the context of an employment relationship with a competitor and concludes or prepares transactions for the competitor, the previous employer can demand the remuneration generated directly from these transactions from the employer (as a rule, the commission). By contrast, only the conclusion of an employment contract with a competitor is not a 'transaction' for the purposes of Section 61(1). This is because the employee does not draw his or her salary for a specific transaction concluded on the market. In addition, the right of the previous employer from Section 61(1) to enter into the transactions concluded in breach of competition is subject to the condition that the previous employer could assume the transaction without material change to the content thereof. However, the employer (in most cases a company) cannot work as an employee of its competitor.(4)

Set-off of earnings against salary claims

Irrespective of whether the employee has worked for a competitor or another employer during garden leave, he or she must nevertheless, under certain circumstances, have the remuneration paid by the new employer offset against his or her salary claims as against the former employer pursuant to Section 615(2) of the Civil Code. However, the set-off is not possible if the parties have agreed, as in this case, that the employee will be released from the obligation to work for the entire period, irrevocably offsetting outstanding leave entitlement without the specific time of the leave being stipulated. This is because during leave no other earnings can be offset, and in the case of such an agreement the employer leaves it up to the employee to determine when he or she is going to take the leave. Therefore, other earnings can be offset only when the date that leave is taken has been fixed.

Comment

The result of the court's decision is frustrating for employers. The employer must continue to pay the employee, although the latter no longer works for the employer but for a competitor, while the employee also draws a salary from the competitor. In order to prevent this, the garden leave agreement must be carefully worded. This agreement must stipulate specifically the set-off of other earnings and the time when the outstanding leave is taken. If a set-off after salary is provided, the continuation of the contractual non-compete clause must also be expressly agreed, otherwise the employee may compete with his or her former employer. Accordingly, these principles apply to unilateral garden leave declarations from the employer.

For further information on this topic please contact Bjoern Gaul, Bernd Roock, Antje-Kathrin Uhl or Eva Schäfer-Wallberg at CMSHasche Sigle by telephone (+49 711 9764 248), fax (+49 711 9764 96249) or email (bjoern.gaul@cms-hs.com, bernd.roock@cms-hs.com, kathrin.uhl@cms-hs.com or eva.schaefer-wallberg@cms-hs.com).

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Endnotes

(1) Federal Labour Court, October 17 2012, 10 AZR 809/11.

(2) Federal Labor Court, September 2006, 5 AZR 703/05.

(3) Federal Labor Court, February 15 1962, 5 AZR 79/61.

(4) Federal Labor Court, October 17 2012, 10 AZR 809/11.