11. May 16

LAG Hamm on non-competition clause and compensation for period of non-competition in employment contract

Non-competition clauses agreed between employer and employee with no provision for compensation for the period of non-competition are generally invalid. However, the LAG Hamm (Regional Labour Court of Hamm) recently reached a different conclusion (Az.: 10 Sa 67/15).

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London conclude: Employment law provides that the employer and employee can agree to a non-competition clause in the employment contract for when the employee leaves the company. This is usually linked to the payment of compensation for the benefit of the employee, which he receives in return for refraining from competing with his former employer for a period of time specified in the employment contract. In the absence of an undertaking to pay compensation for this purpose, the non-competition clause is normally invalid.

However, the Landesarbeitsgericht Hamm recently came to a different conclusion. It held that if an employment contract contains a severability clause in addition to a non-competition clause without a commitment to pay compensation for the period of non-competition, this may give rise to an effective post-contractual restraint on competition including an undertaking to pay compensation at the statutory rate for the period of non-competition.

In the instant case, a company and one of its employees had agreed to a two-year non-competition clause in the latter’s employment contract. This stipulated that the employee in question would have to pay a contractual penalty in the amount of 10,000 euros in the event of any infringements. No compensation payment was arranged for the period of non-competition. That being said, the contract did contain a severability clause stating that should a provision of the contract be invalid or ineffective, this would have no bearing on the legal validity of the remainder of the contract. Instead, a suitable provision would then apply in place of the ineffective or invalid one.

After the employment relationship had been brought to an end by the employee giving ordinary notice of termination, she asserted a claim for payment of compensation for the period of non-competition. The company dismissed the claim on the grounds that the agreed non-competition clause was invalid due to the fact that no arrangements had been made for the payment of compensation for this purpose.

However, the LAG Hamm ruled that an effective restraint on competition did apply to the parties and that the plaintiff was therefore entitled to be paid compensation for the period of non-competition. It pointed out that it had been agreed in the severability clause that an invalid provision was to be replaced by an effective one which reflects the original intentions of the parties as closely as possible. The Court went on to say that this would take the form of a provision for payment of compensation for the period of non-competition in this case.

If an employer wishes to arrange a non-competition clause, it needs to pay close attention to the wording in order to ensure that this restraint on competition is binding. Lawyers who are competent in the field of employment law can advise on drafting employment contracts.

For more informations:

http://www.grprainer.com/en/legal-advice/employment-law.html

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