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08. Restrictive Covenants
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08. Restrictive Covenants

Definition and Types of Restrictive Covenants

Types of Restrictive Covenants

Non-compete clauses

According to Article 340 et al. of the Code of Obligations (CO), an employee may enter into an obligation towards the employer to refrain from any competitive activity after termination of the employment relationship. A post-termination non-competition clause is binding only if the employment relationship gives the employee access to customer data, manufacturing secrets, or business secrets, and if the use of such knowledge could significantly damage the employer.

The non-competition clause has to be in written form and must be reasonably limited in terms of geographic market, time, and products/services in order to preclude an unreasonable impairment of the employee’s economic prospects.

The maximum duration of a post-termination non-competition clause is three years. A judge may limit an excessive prohibition against competition, whereas due consideration to the employer’s contribution, if any, must be given. A prohibition of competition lapses if the employer no longer has a significant interest in upholding the prohibition. Courts have a tendency to limit agreed prohibitions with regard to subject (products, services), place (market), and time, particularly if they are drafted as “catch-all” clauses. Hence, it is very important to draft a non-compete in a way that protects the employer’s legitimate business interests, but at the same time allows the employee to continue a career in the market. Generally, a non-competition clause should cover only the main products or services for which the employee was responsible and only the main geographic markets in which such products and services were sold. Furthermore, a non-competition period should be only as long as the employer needs to reestablish a customer relationship with a successor of the exiting employee.

The law does not require a consideration for the post-termination non-competition covenant. However, courts are generally more reluctant to restrict agreed prohibitions where the employee receives consideration. Non-compete obligations are extinguished if the employer terminates the employment relationship without the employee having given him any good cause to do so, or if the employee terminates it for good cause attributable to the employer.

Non-solicitation of customers

Non-solicitation clauses follow the same rules as non-compete clauses. If the legal prerequisites are fulfilled, a non-solicitation covenant may even apply for customers and clients who were prior customers or clients of the employee when he or she joined the employer, because they become—from a legal perspective—clients and customers of the employer. However, case law makes a very difficult distinction with regard to the reasons why customers and clients do business with enterprises or organisations. If a client or customer does business with an employer solely because of very specific knowledge or specific capabilities of an individual employee (e.g., lawyers, doctors), then a non-solicitation covenant can be void. Furthermore, if clients follow an employee because personal aspects characterise their business relationship, a non-solicitation clause will not be valid or applicable to such clients.

Non-solicitation of employees

During employment, the duty of loyalty does not allow employees to solicit employees. For the time after employment, the question arises whether non-solicitation covenants are subject to the same restrictions as noncompetition covenants. If this were the case, as argued by some scholars, restrictions would in most cases not be enforceable, because there is no direct competition on the end market for the products and services of the employer. For instance, case law does not allow a restriction on working for a supplier or on soliciting suppliers, because this is not deemed competition with the products of the employer, which, in principle, supports this argument.

However, the majority of scholars are of the opinion that non-solicitation covenants regarding employees are not subject to the same restrictions as general post-contractual noncompetition covenants because such covenants do not restrict employees in their professional development. This position is also supported by case law. Nevertheless, the restrictions have to be adequate to protect the employers’ legitimate interests because excessive covenants would constitute a breach of employees’ personal rights. Considering this, an employee can be prohibited from soliciting other employees.

Enforcement of Restrictive Covenants – Process and Remedies

Without including a specific enforcement clause, the employer can claim only damages, but not compliance with the non-competition covenant. In practice, the burden of proof for damages requires real factual evidence of damages and an exact calculation, which makes it very difficult for an employer to claim damages. Hence, without an agreed penalty in case of infringement, a non-competition clause is rather toothless. Consequently, it is very important to define an adequate penalty for breach, knowing that courts tend to reduce stipulated penalties. Penalties are quite often based on the duration of non-compliance, for example, on a daily, weekly, or monthly basis. Further, the remedy of specific performance requires an express written agreement.

Use and Limitations of Garden Leave

In principle, there is no entitlement to active employment under Swiss law. However, members of specific professional groups may be adversely affected in their economic development by garden leave, which is why a claim to active employment may exist in exceptional cases (e.g. professional athletes, researchers, pilots, surgeons, etc.).

Garden leave is very common in case of dismissals, particularly the dismissal of executives and/or in connection with the dismissal of sales forces or client relationship managers.

During garden leave, employees retain all contractual entitlements to remuneration, including pension entitlements. Hence, the base salary and variable salary must be paid. The calculation of variable salary during garden leave is quite often difficult, due to the lack of provisions in employment agreements or compensation programs. For instance, an employee may be entitled to on-target variable pay. However, if the employee was always over target in the past, he or she may be entitled to be paid on the basis of past performance.

In case of a dismissal, garden leave may be granted to compensate the employee for their outstanding vacation balance, to a certain amount. There is no strict rule on the ratio garden leave/compensation of vacation, and court practices vary considerably. As a rule of thumb, some courts apply the 1/3 rule, meaning that one third of the period of garden leave can be used for the compensation of vacation.

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