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08. Restrictive Covenants

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08. Restrictive Covenants

Definition and Types of Restrictive Covenants

A restrictive covenant is a clause included in the (signed) employment contract that prohibits the employee from engaging in certain activities for a specified period of time. The clauses must be written down in a language the employee understands. Examples of restrictive covenants are:

  • a non-compete clause;
  • a non-solicitation clause;
  • a non-disclosure clause;
  • a study costs clause and
  • an external activities clause.

Types of Restrictive Covenants

Non-compete clauses

In principle, employing a non-competition clause in a fixed-term employment contract is prohibited, unless the employer has a substantial business interest in including such a clause (which must be substantiated in the employment contract).

Non-competition clauses, effective for a certain scope of activities, a certain geographical area and/or for a certain number of years, must be agreed upon in writing. Furthermore, the employee must be at least 18 years old at the time of signature.

The restriction must be limited to what is reasonably necessary to protect the employer’s business interests. Typically, a duration of one year is considered reasonable. Limitations as to territory and the nature of activities depends on the branch in which the employer operates and the position of the employee.

The employer can enforce the non-competition clause in Court and claim damages from the employee. In practice, a penalty clause is usually agreed upon between the parties on the basis of which the employee has to pay an agreed amount to the employer, if the employee breaches the non-competition clause. The employer might also take the new employer to Court as the new employer might act unlawfully by hiring an employee while knowing that the employee breached the non-competition clause with the previous employer.

Enforcement of the non-competition clause can also be mitigated or denied by a Court. A non- competition clause may become (in whole or partly) invalid if the responsibilities ensuing from the employee’s position are substantially amended. If the non-compete clause prevents the employee from being employed elsewhere, the Court may order that the employer has to compensate the employee during the period in which the employer holds the employee to the non-compete clause. The employer can unilaterally release the employee from his/her obligations under the non-compete clause in which case the employer will no longer be required to pay any compensation.

Non-solicitation clauses

Employment contracts can also contain a non-solicitation clause, which stipulates that the employee is not allowed to solicit his/her employer’s customers or employees during or after his/her employment. The clause has to be in a language the employee understands. There are no other requirements as to form.

The employer can enforce the non-solicitation clause in Court and claim damages from the employee. In practice, a penalty clause is usually agreed upon between the parties on the basis of which the employee has to pay an agreed amount to the employer, if the employee breaches the non-solicitation clause. Enforcement of the non-solicitation clause can be mitigated or denied by a Court.

Non-disclosure clause

Employments contracts can also contain a secrecy clause, which is designed to prevent employees from disclosing specific, often sensitive, information to third parties, thus allowing the employer to safeguard its confidential business information. There are no legal requirements for a non-disclosure clause. As long as it is clear with respect to what the non-disclosure applies (

for example, with respect to the work, organization, customers, activities and market position). It is also wise to include a penalty for breach of the clause. However, the penalty clause must meet a number of legal requirements, namely it must be entered into in writing, there must be a penalty ceiling depending on the employee’s salary. And further, the purpose of the fine must be narrowly stated.

Study costs clause;

Employers and employees can include a study costs or training clause for non-compulsory training. Under such a clause, if the employee terminates the employment contract prematurely or if the employer terminates the contract due to reasons within the employee’s responsibility, the employee must repay the training costs. This requirement must be explicitly stated in the clause.

A study cost clause should meet the following criteria:

  • The clause must specify the period during which the employer benefits from the knowledge and skills acquired through the training. Only within this period can the employer reclaim the study costs.
  • The repayment amount should generally follow a sliding scale, decreasing proportionally with time. The longer the employment continues after the completion of the training, the less the employee is required to repay.
  • Finally, the repayment obligation must be explicitly established, and the employee must be informed about the potential severe consequences of invoking the clause.

However, the employer is obligated to provide necessary job-related training to the employee, which must be offered free of charge. Clauses related to compulsory training mandated by law or collective agreements are considered null and void.

External activities clause.

A clause that prohibits or restricts an employee from working for others outside of their employment hours is considered void, unless there is a valid and objective reason to justify the clause’s inclusion. The employer is required to specify the grounds for invoking such a clause in the employment contract. It is advisable to provide clear clarification on situations where a justification ground exists. This is important because if the employer chooses to enforce the clause, they must be able to provide a valid justification for doing so.

Enforcement of Restrictive Covenants – Process and Remedies

A restrictive covenant can be enforced in Court if an employee does not comply with the restrictions, which follow from contract. In Court, it will first be decided whether the restrictive covenant in the employment contract is valid, and secondly, whether the employee breached it.

The clause is valid if the prohibition is limited to what is reasonably necessary to protect the employer’s business interests. Typically, a duration of one year is considered reasonable. Limitations as to territory and nature of activity depend on the branch in which the employer operates and the area where the employee lives.

If it is decided that the employee did not comply with a validly agreed restrictive covenant, the employer can request the Court to issue a ban and to impose a penalty. The employer can also claim damages from the employee for not complying with what they agreed upon.

An employee can also go to Court and ask to (partially) void a restrictive covenant.

Use and Limitations of Garden Leave

Basically, garden leave is not an acknowledged concept under Dutch law. Unilaterally releasing an employee of his/her duties without the employee’s consent, is prohibited. If an employee does not agree to a release, the employer can suspend the employee. However, the employer should be able to substantiate the reason behind the suspension and if a fair reason is not in place, the employee can claim reinstatement (even in Court). The main question is what a “good employer” would do in a comparable situation. If a good employer would have never reasonably given a release/suspension in this situation, it would be unlawful for the employer to do so.

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