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08. Restrictive Covenants

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08. Restrictive Covenants

Definition and Types of Restrictive Covenants

An employee is bound by a duty of loyalty towards the employer during the course of the employment. A restrictive covenant may clarify and extend the obligation of an employee’s loyalty, both during the employment and after it expires. As such, restrictive covenants may concern undertakings as regards confidentiality, non-compete or non-solicitation of customers and/or employees.

Post-termination restrictive covenants are valid under certain conditions. In principle, covenants regarding confidentiality are generally used for all kinds of employees. However, when it comes to non-compete covenants, such covenants should normally only be used for employees whose position in the company makes such restrictions necessary. The main rule is that post-employment restrictive covenants are valid only if they are reasonable. A general assessment of whether or not a post-employment restrictive covenant is reasonable must be made in each individual case.

Types of Restrictive Covenants

The most common post-termination restrictions are confidentiality, non-competition, and non-solicitation of customers and employees.

Non-Compete Clauses

The period of a non-compete covenant should not exceed 9 months, but can be for up to a maximum of 18 months if the employer has a strong interest in protecting against post-employment competition. The main rule is that non-compete clauses are valid only if they are reasonable. When determining whether a non-compete clause is reasonable, many different factors have to be taken into account, for example, if employees receive some kind of compensation for the restriction. According to collective bargaining agreements and market practice, employers are obliged to pay approx. 60 per cent of the monthly income from the employer during the non-compete period.

Non-solicitation of customers

There is no defined time limitation for clauses regarding non-solicitation of customers, such as for non-compete clauses, but in practice they adhere to the time limitations and conditions set forth in non-compete covenants. An assessment must also be made to determine if a clause regarding non-solicitation of customers is reasonable.

Non-solicitation of employees

The period for a non-solicitation of employees clause is often the same as for clauses regarding non-compete and non-solicitation of customers. However, a non-solicitation of employees clause is considered a less restrictive post-termination covenant, and may be reasonable without the otherwise required additional payments from the employer, for the inconvenience of the affected employee.

Enforcement of Restrictive Covenants – Process and Remedies

Covenants are normally combined with a contractual penalty. The penalty shall be reasonable in relation to the employee’s salary. Normally such penalty for each breach of the clause is set to between three and six months’ salary. Furthermore, restrictive covenants may also be combined with a continuing penalty.

 

Use and Limitations of Garden Leave

The employer may under certain circumstances unilaterally release the employee from the duty to perform work during the notice period. When the parties agree on a mutual separation, it is common to agree also on a release from work, i.e. garden leave.

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