There are few clauses in employment contracts more heavily debated than Non-Competition Clauses (post-contractual non-competes). While employers tend to include them rather easily in order to protect company secrets beyond the term of an employment, strict and mandatory provisions under German law differ from those found in most other jurisdictions. For post-contractual non-competes to be enforceable, an entire catalogue of requirements must be met, including a mandatory compensation payment of at least 50% of the employee`s total earnings for the maximum term of two years – to name just the two most prominent requirements. Because of the potential financial impact on employers, it is highly advisable to carefully consider whether post-contractual non-competes are necessary at all and, if so, whether they will be enforceable.
Two recent decisions in January 2018 by the Federal Labor Court/ BAG (10 AZR 392/179) and by the Appeals Court/ LAG Düsseldorf (Az: 7 Sa 185/17) are worth noting:
“Vorvertrag” – Keeping your options open
It is a common situation (and sometimes a true dilemma) for the employer to decide at the beginning of the employment relationship whether to agree on a post-contractual non-compete. While it is easy at that point to negotiate a non-compete, the employer might not be sure whether the circumstances and the unclear future developments justify the investment in a (potentially) costly non-compete. LAG Düsseldorf confirmed that it could be valid for an employer to agree on a post-contractual non-compete in the form of a preliminary contract (“Vorvertrag”) that grants the employer the option to bind the employee and be bound himself to pay compensation in return. Such a clause, however, must be carefully drafted and must include a clear time limit on execution of the option. In LAG, the employer could exercise the option as long as the employment contract was not terminated by either of the parties. The Appeal Court held that such a preliminary agreement was valid because it did not unduly hinder the employee’s professional career. If the employee decided to join a competitor, he could avoid any non-compete restrictions by terminating the employment before the employer had exercised the option.
The LAG decision provides the employer with clarity and a safe option to monitor the development of newly hired employees, and to evaluate their performance during probation and beyond, before becoming bound to the costly compensation commitments required for a valid noncompete. Employers who do not use this form of a preliminary agreement as part of an employment contract can only use their right to waive an initially agreed post-contractual non-compete unilaterally – which, however, will usually make sense only at a point in time considerably prior to the termination date because of the mandatory obligation to pay compensation for a one year (grace) period following the waiver.
Be aware – “Rücktrittsrechte”, rights of cancellation apply
Post-contractual non-compete clauses are mutual, reciprocal contracts. Therefore, they can be cancelled by either party if the other party breaches its obligations under the agreement. In the (somewhat unusual) case before the BAG, the employer refused to pay the required compensation despite a valid post-contractual non-compete. Therefore, the employee informed the employer via email that the employee was no longer bound by the non-compete – but later claimed full compensation nevertheless. The BAG held that the employer was obligated to pay the required compensation, but only until he received the cancellation email from the employee.
The BAG decision is a warning message to all employers to closely monitor the execution of validly agreed post-contractual non-competition clauses. Employers have various remedies against employees in case of a breach of contract by the employee, such as
- applying for an injunction and cease and desist order;
- demanding disclosure of profits made while undue competing;
- claiming respective damages; and
- immediate dismissal.
However, the employee may choose whether or not to comply with the non-compete clause in the event of a breach of contract by the employer.
In sum, it is not only complex to draft valid and enforceable non-compete provisions under German law. It is also highly advisable to monitor such clauses after termination of the employment – for both sides.