Non-competition

The post-contractual non-competition clause prohibits the employee from competing with the employer. A non-competition clause can have drastic effects for employees.

Contents

    Non-competition in employment

    Competition

    A non-competition clause obliges the employee not to compete with the employer. The employer’s competitors are suppliers of the same or similar services or products (same market level), which are aimed at the same group of customers (opposite side of the market). The prohibition of competition includes both the employee’s own competitive business activities and activities for a competitor or participation in a competitor.

    During the employment relationship

    During the employment relationship, the employee has a duty of loyalty to the employer; among other things, he must protect the legitimate interests of the employer (Art. 321a para. 1 CO). Accordingly, the employee may not perform work for a third party in return for remuneration during the employment relationship if this is incompatible with his duty of loyalty. In particular, the employee must not compete with the employer (Art. 321a para. 3 CO). According to the literature, this also applies to unpaid work for a competitor.

    In principle, these duties end with the termination of the employment relationship. A post-contractual non-competition clause may be agreed for the period after termination of the employment relationship. The post-contractual prohibition of competition is only permissible under certain conditions and must be limited in time, space and subject matter.

    Procurators and authorised representatives who are appointed to operate an entire trade or who are in an employment relationship with the owner of the trade are subject to a statutory non-competition clause (Art. 464 CO). This prohibition of competition also ends in principle with the end of the employment relationship.


    Post-contractual prohibition of competition

    Validity requirements

    Capacity to act of the employee

    Only an employee who is capable of acting may validly enter into a post-contractual non-competition agreement (Art. 340 para. 1 CO).

    The employee must be of age and capable of judgement (Art. 13 CC). In the case of minors, a non-competition clause cannot be validly agreed upon even with the consent of the parents or the legal representative.

    Apprentices are usually not yet of age when they start their apprenticeship, which is why a non-competition clause is already inadmissible for this reason. In the apprenticeship contract, non-competition clauses are also considered inadmissible because they interfere with the free decision of the apprentice about his or her professional activity after the end of the apprenticeship (Art. 344a CO).

    Agreement

    The post-contractual non-competition clause must be agreed in writing (Art. 340 para. 1 CO). The agreement is usually included in the individual employment contract, but can also be made separately.

    The admissibility of including a non-competition clause in unsigned general terms and conditions of employment or in regulations and referring to it in the employment contract is rejected by the prevailing opinion and, as far as can be determined, also by case law.

    Clientele and trade secrets

    The non-competition clause is only binding if the employment relationship gives the employee insight into the clientele or into manufacturing and business secrets (Art. 340 para. 2 CO).

    If the employment relationship does not give the employee insight into information subject to secrecy, the non-competition clause does not apply. If the information is available from publicly accessible sources or if it is industry knowledge, it is not a matter of facts to be kept secret from the outset.

    Significant potential for harm

    The non-competition clause is only binding if the exploitation of the employee’s knowledge of the employer’s secrets gained through the employment relationship could significantly harm the employer (Art. 340 para. 2 CO).

    If there is no significant potential for harm, the non-competition clause does not apply.

    In the case of strong customer loyalty, the possibility of significant harm to the employer does not exist according to case law and the non-competition clause does not apply. → Prohibition of competition and customer loyalty

    Restrictions

    Economic advancement

    A non-competition clause may not unreasonably impede the employee’s economic advancement. It may only exceed three years in exceptional cases and must be reasonably limited in terms of space, time and subject matter (Art. 340a para. 1 CO).

    Spatial limitation

    The prohibition of competition must be limited to the area of the employer’s intensive business relations. Outside this area there is no interest on the part of the employer from the outset. The prohibition of competition is further limited by the territorial scope of the special knowledge acquired by the employee.

    Duration

    The non-competition clause is intended to protect the know-how or knowledge of the employer. The permissible duration of a non-competition clause depends on the type of know-how or knowledge. In practice, non-competition clauses of one year are frequently encountered. If the focus is on customer relations, a period of six months may be sufficient. If business secrets are involved, a longer period may be justified.

    The non-competition clause may only last longer than three years under special circumstances. Such circumstances must be proven by the employer.

    Material limitation

    The non-competition clause is limited on the one hand by the field of activity of the enterprise and on the other hand by the specific knowledge acquired by the employee.

    A distinction is made between company-related and activity-related non-competition clauses. Company-related non-competition clauses are more comprehensive and prohibit any activity for competitors. The activity-based non-compete is narrower and prohibits personal activity in the previous field of work for competitors. The two forms are often mixed.

    Excessiveness

    If a non-competition clause is excessive, i.e. it goes beyond what is necessary to protect the interests of the employer, or the economic advancement of the employee is unreasonably impeded, it may be limited to the permissible extent by the court. The court may limit the non-competition clause in terms of space, time and subject matter. For this purpose, the employee must file a lawsuit if an agreement with the former employer is not possible.

    Waiting allowance

    If the employer pays compensation (waiting allowance) for the duration of the non-competition clause, the non-competition clause is usually judged more strictly.

    If the non-competition clause has the effect of a prohibition of employment, it is generally only considered permissible if the employee is paid compensation.

    Extinction

    Lapse of Employer’s interest

    he non-competition clause is extinguished if the employer no longer has a material interest in it (Art. 340c para. 1 CO). The lapse of the employer’s interest must be proved by the employee.

    Employer gives notice

    The non-competition clause also lapses if the employer terminates the employment relationship without the employee having given reasonable cause for the termination (Art. 340c para. 2 CO).

    In order for the non-competition clause to remain in force in the case of an employer’s termination, the employee must have given reasonable cause for the termination and this cause must be causal for the termination. This includes, for example, disloyalty or failure to fulfil contractual obligations. Fault on the part of the employee is not required.

    Termination of employment due to restructuring etc. is not considered as justified cause set by the employee. In these cases, the non-competition clause does not apply.

    Employee resigns

    If the employee terminates the employment relationship for a justified reason for which the employer is responsible, the prohibition of competition lapses (Art. 340c para. 2 CO).

    This may be the case if the employee is permanently overworked due to a lack of staff, if salary payments are late, etc.


    Breach of the non-competition clause

    If the employee violates the non-competition clause, legal consequences are triggered.

    Damages

    The employee must compensate the employer for the damage caused by the competing activity (Art. 340b para. 1 CO). The employer must prove the damage and all conditions for the claim for damages, which is very difficult in practice.

    Contractual penalty

    If a contractual penalty was agreed in the employment contract for the violation of the non-competition clause, it must be paid. The payment of the contractual penalty does not exempt the employee from paying further damages (Art. 340b para. 2 CO). The employer must prove the further damage and the preconditions for the claim for damages.

    In the absence of an agreement to the contrary, the employee may release himself from the non-competition clause by paying the contractual penalty (Art. 340b para. 2 CO). Therefore, non-competition clauses regularly exclude the release by payment of the contractual penalty.

    Real performance

    If nothing has been agreed in the employment contract, the employer cannot prohibit the employee from engaging in the competing activity by legal order. In this situation, the employer is only entitled to an agreed contractual penalty and, if applicable, to damages.

    Only if it has been expressly agreed can the employer demand the elimination of the breach of contract (so-called actual performance), i.e. compliance with the non-competition clause (Art. 340b para. 3 CO) and enforce it.

    The enforcement of real performance requires that the violated or threatened interests of the employer and the conduct of the employee justify it (Art. 340b para. 3 CO). In addition to competition, further requirements must be met and the interests of the employer must be weighed against those of the employee.



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