7 March 2024

Employer beware: bill on modernisation of non-competition clauses is here

Stefan SagelBarbara Kloppert

The Bill on Modernisation of the Non-competition clause (the Bill) was published for internet consultation on 4 March 2024. The Bill is intended to prevent the including of non-competition clauses as a standard clause in employment agreements, which is currently the custom for many employers. According to the legislature, this has led to an unjustified restriction of the labour mobility of employees and has negatively affected the labour market. The explanatory memorandum accompanying the Bill elaborates on the newly proposed measures and what these mean for employers and employees alike in terms of how long a non-competition clause can remain in effect; the geographical range possible; timely notification for the employee; and compensation amounting to 50% of the employee's monthly salary for an employer invoking the clause, per month that the clause is invoked.

The Bill suggests several changes to existing legislation on the following topics:

Maximum duration of 12 months. Currently, courts typically restrict non-competition clauses that exceed 12 months. A non-competition clause with a duration longer than 12 months, or without a specified duration, will be void.

Specification of the geographical range. Many non-competition clauses already include a geographical limitation, but this will become mandatory when the Bill comes into force. The Bill gives contracting parties the freedom to determine the scope themselves, which can be as limited or as broad as parties wish to agree on. However, if the geographical range is not included, the non-competition clause will be void.

It will remain possible, as is the case under current law, for a court to mitigate the duration or the geographical scope of the non-competition clause, if it proves to be too restrictive for the employee.

Justification of the non-competition clause. New legislation in 2015 introduced the requirement for employers to specify which compelling business interests justify the inclusion of non-competition clauses in temporary contracts. The Bill now extends this obligation to permanent contracts. Case law has shown that courts are strict when examining the description of an employer's compelling business interest: if the wording is too generic or insufficient, the non-competition clause can be annulled by a court. Without any specification of the employer's compelling business interests, the clause will be void.

Compensation by the employer when invoking a non-competition clause. If the Bill passes, employers will have to pay employees a compensatory amount of 50% of the employee's monthly salary, per month that the employer invokes the non-competition clause. This compensation would have to be paid out by the employee's last day of employment. A general administrative order (AMvB) will determine which components have to be included in the monthly salary, but these will most likely be the same as those currently included in the transition payment: gross monthly salary, plus fixed salary components such as holiday allowance, 13th month, structural overtime compensation and a fixed shift allowance. If the employer chooses not to pay this compensation, the clause will lapse.

This measure is meant to be a financial incentive for employers to think carefully about restricting the employee's post-employment mobility. For employees, it serves as compensation for their free choice of employment being restricted. If the employee does not comply with the conditions of the clause (for example, if they start working for a new employer who is a competitor of the former employer), the employer is no longer obligated to pay compensation. Any compensation already paid then becomes an undue payment.

Notification period of one month before the employment contract ends. The Bill introduces the obligation for an employer to notify the employee in writing one month before termination of the employment contract that the non-competition clause will be enforced and for how long. If the employer does not observe one month's notice or does not inform the employee in writing, the employer cannot invoke the non-competition clause.

There are three exceptions to this rule. First, if the contract is terminated at the employer's initiative (for example, in a collective dismissal or an individual dismissal based on personal grounds), the employer must invoke the non-competition clause when giving the termination notice, which could be more than one month before the termination date. Second, in the event of a summary dismissal (ontslag op staande voet), the employer has two weeks after serving the termination notice to consider whether or not to invoke the non-competition clause. Third, if the employment contract is dissolved by the Sub-district court, the employer also has a period of two weeks after the ruling date to invoke the clause. In these last two cases, the mandatory compensation must be paid by the employer no later than two weeks after the termination date.

Transitional law: employers do not need to renew all existing clauses when the Bill enters into force. However, from that moment employers will need to comply with the provisions of the Bill regarding invoking the non-competition clause (timely and in writing); the maximum duration (12 months); and providing compensation for each month of the restriction.

These amendments apply equally to non-solicitation clauses. The Bill is open for internet consultation through 15 April 2024 to the general public. It is not yet known when the new legislation will come into force.

The measures proposed in the Bill will significantly affect the inclusion of non-competition and non-solicitation clauses in standard employment contracts, and how they are dealt with in the event of termination via a settlement agreement. Should you wish to consult us on how these changes may impact your business, please feel free to contact our Employment and Employee Benefits department.