Two Swedish Labour Court decisions have given important clarification on the limits that should apply when an employer contractually restricts a former employee from soliciting his or her former colleagues. This article analyses these decisions and their implications for employers.
By: Petter Wenehult and Sofia Lysén
Firm: Elmzell Advokatbyra AB
Does your business use non-solicitation clauses in employment agreements?
If so, there may be reason to review them to assess how they will hold up to legal scrutiny. In two recent decisions the Swedish Labour Court (‘AD’), has taken a position on whether clauses preventing a former employee (and its new employer) from soliciting former colleagues can be considered reasonable. In both cases, the AD concluded that the non-solicitation clauses extended beyond what could be considered reasonable. A non-solicitation clause usually means that a former employee is prevented from inciting his or her previous colleagues to join him or her at the new employer.
What your business should consider after the AD's decision Following the AD's decision, employers should consider the following points in drafting or reviewing non-solicitation clauses.
Does your organisation have a legitimate interest in imposing a non-solicitation clause? A legitimate interest may be, for example, being able to adapt the business to the new situation when a former employee has gone to a competitor. The two AD cases concerned gaming companies in Uppsala where former employees tried to recruit colleagues from their previous employer. The AD stated that there may be a legitimate interest in a non-solicitation obligation for a former employer during a transitional period when the person who has gone to a competitor has knowledge of the former employer's employees that could generate a competitive advantage for the new employer. There is a legitimate interest for the former employer in imposing a non-solicitation clause for a transitional period in order to adapt its activities to the new conditions.
Has your organisation limited the scope of the non-solicitation provision? According to the AD, a court injunction preventing a former employee or its new employer from inciting former colleagues to the new employer must be limited to colleagues the employee has worked with, or employees who have a special professional skill. It is therefore advisable for employers to review drafting of non-solicitation clauses to ensure they are sufficiently narrow. In addition, the prohibition will only apply when the employee actively seeks out colleagues from their former employer and not when those other employees seek out the new employer or the former employee themselves.
The time during which the prohibition applies must be short and normally not exceed six months In particular, the AD states in one of its recent decisions that a company can normally adapt to the situation and to the new competitor after six months. Previously, the general perception has been that the prohibited period could be longer than that.
The cases considered by the AD
In both cases, the employees had clauses preventing the individuals from, either directly or indirectly for a period of 24 months from the termination of their employment:
- trying to recruit, attract or entice other employees from their former employer; or
- trying to recruit, attract or entice other employees from any company that was part of the group to which the former employer belonged; or
- otherwise influencing employees to terminate their employment with the company.
By a decision of the District Court, both the employees and the new employers were forbidden from:
- hiring staff of the former employer or its affiliates; and
- trying to recruit such staff.
Both the new employers and the employees appealed the decision to the AD, which assessed the reasonableness of the non-solicitation clauses.
The AD based its decision on how case law applies to non-competition clauses in employment agreements, which is that such clauses must be used restrictively. According to the AD, a non-solicitation clause means only a minor limitation of the employee's ability to pursue a professional activity but aims to prevent other employees from changing employment. This can lead to employees with certain skills or professional competences and employees who live in a particular area being severely restricted, which limits mobility in the labour market and consequently, competition. The AD therefore considers that these clauses should also be used restrictively. In particular, the AD stated that:
- The clauses not only prevented recruitment of previous colleagues that the employees had worked alongside, but also those with whom the employees had created networks, which covered all occupational categories at the former employer.
- A non-solicitation clause may be allowed to prevent employees who has just left their employment from approaching previous colleagues and recruiting them to a competitor if the former employer needs time to adapt to changed market conditions as a result of a new competing business.
- A non-solicitation clause may not prevent employees of the previous employer themselves choosing to seek out former employees and their new employer.
In such cases, the clauses go beyond what is required to neutralise the competitive advantage that an employee may have in the form of knowledge of previous colleagues' professional skills. When the AD issued the decision, 15 months, 13 months and six months respectively had elapsed since the employees in question had left their employment. The AD stated that the period during which there was a legitimate interest in a non-solicitation clause allowing the former employer to adapt its operations to the new circumstances in these cases had expired. As a result of this, the AD repealed the decisions made by the district court both in relation to the former employees and their new employers.