A non-compete agreement is usually put in place to secure an employer against a former employee using inside information to the benefit of a competitor. However, its legal enforceability depends on the nature of the employment contract, the circumstances under which the labour agreement ends, and the applicable law. In this guide, I will focus on agreements subject to Dutch law.
Non-compete agreements in permanent contracts: Key points to consider
A non-compete agreement is more likely to be enforceable when part of an indefinite-term employment contract, provided the criteria are met. The clause must be in writing and agreed upon for a specific job. If your job changes substantially, the agreement must be renewed in order to remain applicable. That is why employers ask employees who accept a big promotion to sign a new non-compete agreement.
Restrictions and proportionality: What's fair?
Which types of restrictions are acceptable depends largely on both the type of business and the type of job. A dentist might be restricted from setting up shop within the same village or within 10 kilometres of the employer’s practice for six to 12 months, while a high frequency trader or analyst might be restricted from working in a similar job anywhere in the world for one or two years.
In the Netherlands, proportionality plays a key role in assessing non-compete clauses. Courts evaluate whether the restrictions imposed are reasonable relative to the employer's need to protect business interests and the employee's right to pursue career opportunities. In the Netherlands, it is rare to see restrictions of more than one year.
Additional rules for fixed-term work contracts
Fixed-term employment contracts impose more restrictions on the application of non-compete clauses. The law prohibits non-compete clauses in these contracts, but allows exceptions in cases where the employer can demonstrate that they are essential for the business. This justification must demonstrate that in this particular case, for this particular job, the non-compete clause is essential.
Many employers who try to use this exception fail in their justification - many justifications are rejected by courts as insufficiently specific.
Financial compensation
While the current law does not provide for specific financial compensation for employees who suffer substantial limitations as a result of a non-compete clause, the court can, if requested, decide upon an equitable compensation.
In the past few years, a debate was started by the previous government and parliament about changing the law regarding post contractual limitations for employees, such as non-compete clauses. A draft revision of the law has been debated, but it is unclear if it will ever make it into law.
Nonetheless, many employers have taken to heart essential elements of the proposed law, which is that non-compete clauses must always have a written justification, also in indefinite term contracts, and that employers should pay a fixed compensation equal to half of the employee's most recent salary.
Challenging a non-compete clause: Your options
Someone who agreed to a non-compete clause can contest its validity or its scope and duration in court, besides asking for financial compensation. In many cases, such petitions are awarded by suspending, modifying or limiting the effects of the non-compete clause.
Get advice when changing jobs
Many expats on highly skilled migrant visas and 30-percent-ruling jobs sign non-compete clauses without thinking too much of it. Then when they want to make a career jump, they realise they may not be able to make the leap as easily as they had presumed. In particular if they have visa and fiscal limitations, this can become a serious issue.
If this is you, before you sign anything, make sure you see an attorney, so you know what you are about to sign. This applies whether it is to check the original non-compete clause to begin with, or if you are starting a new job that might put you at risk of a penalty for breaching a non-compete clause.