Many employment contracts include a (standard) non-compete clause. A validly agreed non-compete clause means that, after their contract ends, employees may not do the same work for a competing business. Non-compete clauses come in many shapes and sizes, and are intended to protect employers’ business interests.
Clients regularly ask us for advice on how to handle a non-compete clause in practice, for example on an unexpected end of employment or a takeover. A non-compete clause restricts employees in finding a new job, and consequently creates dilemmas and/or risks for new employers too.
Background
Minister Van Gennip had earlier announced her intention to modernise the non-compete clause through a bill: “A non-compete clause can be necessary to protect trade secrets or business relationships, for example. But we are increasingly seeing a non-compete clause included in contracts as standard, without good reason. That is unnecessarily restrictive for employees and hinders mobility in the labour market. That is why we are going to reform the rules on the non-compete clause.”
Greater clarity
Minister Van Gennip’s proposed changes were as follows:
- The non-compete clause will be subject to a statutory maximum duration;
- The non-compete clause must be geographically defined, specific and justified in the contract;
- Employers must also justify the compelling business interest behind a non-compete clause in permanent contracts (this already applies to fixed-term contracts);
- If an employer holds a departing employee to the non-compete clause, the employer must pay the employee compensation – a statutory percentage of their most recent salary. Such compensation ensures employers think carefully before including and invoking a non-compete clause.
Although no bill existed at that time, this marked the first step towards tightening the rules on the non-compete clause. On 13 February 2024, the House of Representatives adopted a motion providing that a non-compete clause agreed with an employee earning less than 1.5 times the median income should be void. In 2024 terms, this would mean employees earning less than EUR 66,000 per year could not be bound by a non-compete clause in either a fixed-term or a permanent employment contract.
It has since become clear that this income threshold does not, in fact, form part of Minister Van Gennip’s draft bill. The bill to amend Section 7:653 of the Dutch Civil Code was published today, 5 March 2024.
Proposed changes
The bill to modernise the non-compete clause proposes a considerable number of changes to the ability to agree a non-compete (and non-solicitation) clause. The key proposed changes are as follows:
- A non-compete clause may last a maximum of twelve months. A clause with a longer duration will be declared void.
- The non-compete clause must be geographically defined, specific and justified in the contract.
- Every non-compete clause must be justified by reference to the employer’s compelling business or operational interests. This rule already applied to fixed-term contracts, but will now also apply to permanent contracts. Without justification, the clause will be declared void.
- If an employer holds a departing employee to the non-compete clause, the employer will be required to pay the employee compensation, amounting to 50% of their monthly salary.
- The employer must inform the employee, no later than one month before the contract ends, whether it intends to hold them to the clause, and for what period.
All of the proposed changes to the non-compete clause also apply to the non-solicitation clause.
It remains uncertain, for now, whether the final legislative change will actually be as far-reaching as proposed. What is clear is that employers increasingly benefit from investing in better protection of their business when it comes to sensitive business information, trade secrets and client lists. It is also advisable not only to reassess non-compete and non-solicitation clauses, but also to review confidentiality clauses and reformulate them where necessary.
Do you have questions about the effects of this future legislative change on the non-compete clause in your employees’ contracts, or in your own contract? Do not hesitate to contact one of our employment lawyers.
