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08. Restrictive Covenants

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08. Restrictive Covenants

Definition and Types of Restrictive Covenants

Under Italian law, employment relationships are governed by the general principle of good faith, according to which the employer and the employee each have a duty to carry out their obligations with respect to this principle.

Furthermore, during their employment relationship employees are bound by their duty of loyalty under Section 2105 of the Italian Civil Code which states that «an employee cannot engage in business, either for his own account or for the account of third persons, in competition with his/her employer nor divulge information pertaining to the organisation and methods of production of the enterprise, nor use it in such a manner as may be prejudicial to the enterprise». This, in effect, prohibits them from engaging in competitive activity with their employer, or soliciting customers or enticing away employees other than on behalf of their employer. There is also a general obligation on employees to act in the interests of the employer.

The above provision applies to all employees, including “Dirigenti” (the highest category of employee, defined under Italian law mainly by reference to the NCBAs applicable to such employees. Typical examples are top managers or executives).

Loyalty obligation does not apply once the employment relationship has ended, thus afterwards employees are free to work for a competitor or soliciting customers/enticing away employees, unless there is a specific written restrictive covenant prohibiting this.

Moreover, on the one hand, there is a specific provision concerning the employees’ trade secrets obligations during the employment relationship and – on the other – there are certain obligations that may be of interest of the parties after the termination of the employment contract. A specific provision prohibits employees from disclosing trade secrets either during the employment relationship either after its end. Employers’ confidential information is granted with specific protection to the extent it qualifies as a ‘trade secret’ according to Legislative Decree no. 30 of 10 February 2005. This only happens when all the following requirements are met:

  • the information is secret, as it is not widely known or easily accessible by experts who operate in the sector in which the information is relevant;
  • it has an economic value to the extent it is secret;
  • specific measures aimed at ensuring the secrecy of the information have been adopted by the employer.

Types of Restrictive Covenants

Non-compete clauses

As anticipated, Section 2105 of the Italian Civil Code establishes a ‘duty of loyalty’ effective as long as the employment relationship exists. According to the provisions set forth by Section 2125 of the Italian Civil Code, post-employment non-compete covenants may only be deemed valid and enforceable if they:

  • are agreed in writing;
  • grant consideration to the employee;
  • narrowly define the prohibited activities and limit the geographical scope of the restrictions;
  • have a clearly specified term not exceeding three years (five years for executives).

In order to assess the validity of a non-compete covenant, it is necessary to ascertain whether its terms and conditions, when combined, prevent the employee from finding other employment and violate the employee’s right to preserve his/her professionalism. Case law indicates that the following need to be taken into account in making this determination: (1) the contents of the covenant (particularly with regard to the scope and geographical extent, to be assessed jointly); and (2) the skill and experience of the employee. The assessment also must take into account the amount of compensation paid to the employee for the non-compete obligation. In this regard, 15%–35% of the current monthly salary received by the employee for each month of duration of the non-compete obligation is usually considered adequate compensation.

Non-solicitation of customers

There is no legal regulation of non-solicitation of customer restraints. It is simply a matter of enforcing a contractual undertaking. It is therefore important that the non-solicitation clause is clearly drafted and is specific on which customers are within the scope of the restraint. Indeed, if the clause is excessive it will not be struck out by the courts as its content was agreed by the parties. Given the absence of any legal regulation on non-solicitation of customer covenant, the restraint can potentially cover non-solicitation of customers with whom the employee has had no dealings with previously or prospective customers with whom he/she had dealt with. There are no legal requirements in terms of duration of a non-solicitation restraint. However, it is common for this covenant to be inserted in a non-competition agreement and therefore the parties usually agree that this restraint will last for the same duration as the non-competition one. As to the compensation, it is debated whether the above statutory requirement for a non-compete agreement would also apply to a non-solicitation covenant: however, in principle no compensation is due to the employee.

Non-solicitation of employees

There is no legal regulation of non-solicitation of employee restraints and therefore no requirement to pay any compensation for them. As per the non-solicitation of customers ones, also for this kind of covenant it is simply a matter of enforcing a contractual undertaking. Equally, it is therefore important that the non-enticement away of employees covenant is clearly drafted and is specific on which employees are within the scope of the restraint. Given the absence of any legal regulation on non-enticement away of employees restraints, these can cover any employee of the company or group – regardless of whether the employee had had any dealings with them. There are no requirements in terms of duration of a non-solicitation restraint. However, this restraint is usually inserted in a non-competition agreement and therefore the parties usually agree that this restraint will last for the same duration as the non-competition one.

Enforcement of Restrictive Covenants – Process and Remedies

The normal remedy to enforce a restrictive covenant is by way of a judicial urgency proceeding aimed at obtaining a preliminary injunction.

It is also possible for the non-compete covenant to include a clause to the effect, if the restrictive covenant is wholly or partly breached, the employee must repay any compensation already paid to him for the non-compete.

Furthermore, in case of breach of a valid and enforceable non-compete covenant, the employer has also the right to request compensation for the damages suffered, to the extent it can prove its losses caused by the employee’s breach of the restrictive covenant; frequently, the damages are predetermined in a ‘liquidated damages clause’ contained in the covenant.

Nevertheless, according to Section 1384 of the Italian Civil Code, the Labour Judge can reduce the amount of liquidated damages if they are deemed excessive.

If expressly agreed, the ‘liquidated damages clause’ does not prevent the employer from claiming additional damages, which must be proven in Court.

The former employer may also ask for an injunction to prohibit the employee (who signed the non-compete covenant) from performing any activities in violation of the non-compete clause.

As underlined above, covenants not to solicit employees and/or customers after the termination of the employment relationship have to be inserted in the employment contract or in a separate agreement.

In this case too, damages are usually predetermined in a ‘liquidated damages clause’. If there is no liquidated damages provision, the employer must prove the damages suffered and their relevant amount.

Ultimately, where a new employer hires an employee, who then acts in breach of his/her restrictive covenants, the former employer will not have a remedy directly against it, even if the new employer was aware of the restrictive covenant. Nevertheless, the former employer may ask for an injunction aimed at preventing the said employee to carry out his/her working activity in breach of the non-competition clause he/she was bound to.

In addition, under Section 2598(3) of the Italian Civil Code all employers have a duty not to do acts in unfair competition. As a guideline, unfair competition occurs where a company acts outside commercial propriety with the intent of injuring another company’s business. Whether such conduct crosses the line will always be fact specific; but it is likely that it will be crossed where the new employer deliberate persuades an employee to divulge confidential information of the former employer and approach customers which he/she is restrained from soliciting.

Use and Limitations of Garden Leave

Under Italian labour law, garden leave does not exist. However, the parties can mutually agree a sort of “garden leave” as a term in a settlement agreement. Specifically, within the framework of such an agreement, the parties could agree that the employee will stay on the company payroll for a certain period and that during such a period of “leave” he/she will not be permitted to work or enter the office or will not be allowed to access emails and IT systems and/or other company items.

If the parties mutually agree a “garden leave”, the employee being still employed by the previous employer would be subject to the duty of loyalty under Section 2105 of the Italian Civil Code until termination of employment. If the employee breaches this duty, although from a purely theoretical perspective, the Court could issue an injunction to stop the activity performed in competition with the employer during this period. However, in practice it is more likely that the employer would terminate the employment for “good reason”.

As explained above, the employer has no unilateral right to put an employee on garden leave as according to the general principles of Italian labour law, the employee not only has the right to receive his/her contractual remuneration but also to perform his/her work and activities. Including a garden leave clause in the employment contract in Italy will have no effect.

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