Non-competition after termination covenants (also known as non-compete clauses) are one of the most common provisions incorporated into labor contracts in Spain, particularly in the case of senior managers’ special employment relationships or ordinary employees who occupy positions of responsibility. The aforementioned covenant is regulated under article 21 of the Employment Act (Estatuto de los Trabajadores).
In this sense, before including this covenant into a labor contract, several issues must be taken into account in order to avoid potential issues regarding the validity, the removal or the payment of the covenant.
This brief piece provides some key aspects that should be taken into consideration regarding non-competition covenants, and establishes some differences between this non-compete clause and other similar ones commonly incorporated into employment contracts.
What is a non-competition after termination covenant? Requirements and potential repercussions of non-compliance
The validity of the post-contractual non-compete agreement relies on the fulfillment of the following requirements, and we discuss the first three in more detail below:
- It must be agreed between the parties (company and employee) and it must also be in writing.
- The company must have a real industrial or commercial interest that would justify the inclusion of the covenant into the labor relationship.
- An adequate compensation must be provided to the employee as consideration for the non-competition restriction after the employment contract is terminated.
- The length of the covenant shall be limited up to a maximum of two years for technical or highly qualified employees, and six months for other employees.
Mutual agreement in writing. Regarding the first requirement, Spanish case law has established that a covenant exclusively conditioned on the willingness of the company is null and void, because the effectiveness of the agreement is left to the discretion of only one party, contravening article 1256 of the Spanish Civil Code (Código Civil). Consequently, any clause stating that the covenant could be unilaterally revoked will be null and void.
In this sense, the only way to eliminate the validity of the covenant once it has been agreed to would be by mutual agreement of the parties. Therefore, a negotiation process should be carried out. Furthermore, the agreement stating the revocation of the covenant should be made in writing, in order to avoid potential disputes regarding the applicability of the covenant.
In general terms, the covenant will be enforceable during its established duration. In the case where the former employee would fail to comply with it, the following consequences would arise:
- The former employee will have to reimburse the company the compensation received.
- The former employee could also have to pay compensation for damages incurred as a result of the breach of said covenant, in case this would have been agreed in the covenant and in the event that the damages caused would be connected to the employee's breach of such covenant.
Furthermore, in the event that the company would fail to comply with the mentioned requirements, the covenant will lose its enforceability and therefore the employee’s “professional freedom” will be restored. The employee could also make a claim for damages compensation to the company as a result of the covenant's breach by the employer.
Real industrial or commercial interest. Moreover, the company must evidence a genuine proprietary industrial or commercial interest which requires protection and which therefore would justify the establishment of the non-competition after termination covenant. In other words, as established by the Supreme Court of Spain, the company must evidence it would suffer damages as a result of the employee carrying out the activity that the covenant specifically attempts to temporarily prohibit. In practice, this requirement is clearly visible in the cases of employees who hold critical positions and possess valuable expertise to the employer's competitors, and especially in the cases of companies that belong to very dynamic and competitive sectors (e.g., IT companies).
Adequate consideration. Regarding the third requirement, the compensation must always be specified; otherwise, the covenant will be null and void. Spanish law does not define what an adequate compensation is, but labor case law has determined that an adequate compensation will depend on the specific circumstances of the employee, as well as on the period and scope of the non-competition restriction. In practice, the minimum amount will be 50–60 percent of the employee’s fixed salary; however, such amount could be increased depending, for instance, on the geographical scope of the restriction.
Furthermore, the monetary amount and the way in which this compensation will be paid must be included in writing. From a practical point of view, there are many different ways of paying this amount, such as establishing a fixed amount when the covenant is signed. However, it must be noted that in the case where the mentioned payment method would be chosen, the amount could either not be sufficient (less than the 50 percent previously mentioned) or very high by the time the contract is terminated. Therefore, in order to avoid such risk, it would be advisable to include a section within the covenant stating that an amount equivalent to 50–60 percent of the fixed gross remuneration that the employee has been receiving at the time of termination of the contract will be provided as compensation.
In sum, it is absolutely crucial to observe that the mentioned requirements are met before entering a non-competition after termination covenant. Otherwise, such clause would be considered null and void and, therefore, it would be non-enforceable.
Is a non-solicitation covenant subject to the same requirements as a non-competition after termination covenant?
Employment contracts often include non-solicitation covenants as a part of a non-competition after termination clause. The non-solicitation covenant applicable to employees, suppliers or customers is not specifically regulated under Spanish law, but it can be agreed between the parties. Since some authors consider that the restriction on solicitation after termination of employment is a form of no competition, such non-solicitation covenant should comply with the requirements established for non-competition after termination covenants mentioned above, including adequate compensation. Otherwise, there is a high risk of nullity.
Difference between non-competition after termination covenant, permanency covenant and exclusivity covenant
A non-competition after termination covenant should never be confused with a permanency covenant (although they are both covered under the same Employment Act article) since a permanency covenant involves the obligation of staying in the company for some amount of time (no more than two years) when the employee has received a professional specialization paid by the employer to implement certain projects or perform a specific job. Furthermore, as in a non-competition after termination covenant, if an employee breaches a permanency covenant, they must pay a damages compensation which amounts, generally, to the price of the professional training paid by the employer.
Moreover, exclusivity clauses prohibit the employee from working at other companies while the employment contract is in force. The consideration of the exclusivity clause must amount to at least 10 percent of the employee's fixed remuneration. However, in the event that the mentioned remuneration would exceed 10 percent of the minimum salary under the applicable Collective Bargaining Agreement, such compensation could be “absorbed”—in other words, the 10 percent could be included in the fixed remuneration. However, such provision should always be included in the employment contract in order to be enforceable.
In sum, although the aforementioned covenants are similar in that they all restrict the “professional freedom” of the employee, there are several differences that one must bear in mind. In this sense, the permanency covenant must not be compensated, as it obliges the employee to stay in the company for a certain period of time, as opposed to the non-competition after termination and the exclusivity covenants, which must be remunerated and do not oblige the employee to remain at the company. Finally, only the non-competition after termination covenant comes into force once the employment contract has been terminated.