During the course of their employment relationship, employees are prohibited from competing with their employer and from soliciting other employees and/or customers; this applies even if there is no express provision in the employment agreement.
With regard to a post contractual non-compete covenant agreed before the employment’s termination there are several restrictions which have to be considered:
- The post contractual non-compete covenant must be agreed in writing. Two copies must be originally signed by both parties on the same document (email, scan, facsimile etc. are not sufficient), and one copy of the original signed documents must be handed over to the employee.
- It can be agreed only for a maximum period of two years and will be enforceable only if at the time the covenant is agreed, the employer undertakes to make a compensation payment to the employee. The compensation must be at least 50 per cent of the most recent contractual remuneration received by the employee in question for each year of the prohibition. If a lower payment is agreed, the covenant is not binding and the employer cannot claim that the employee has to comply with the covenant but the employee may choose whether or not he/she wants to be bound by it after the employment terminates. If the employee chooses to comply with the restrictive covenant, he/she is entitled to the agreed compensation payment. If no payment is provided for in the agreement regarding the covenant at all, the covenant is invalid and the employer can not enforce it; and if the employee complies with such a covenant he/she can claim damages.
- Any sums the employee earns through working elsewhere are deducted from the compensation, if the compensation plus these sums would exceed the most recent contractual remuneration by more then ten percent. The same is true of amounts which the employee maliciously fails to earn. If the employee has been compelled by the covenant to change his place of residence, this ten percent figure is replaced by 25 percent.
- In addition a non-competition covenant must be justified by a legitimate interest of the employer; and the employer may not unreasonably inhibit the employee in his professional advancement. In other words, the provision must be reasonable with regard to geographical area and the scope of its content.
These rules apply to employees and freelancers, who are economically dependent on the employer. It is not clear to what extent these requirements apply to company organs (e.g. managing directors of a German GmbH, member of the board of a German AG) and other non-dependent freelancers and which modifications (in particular with regard to the compensation payment) are possible. To ensure that the post contractual non-compete covenant is enforceable these requirements are, nevertheless, often complied with in practice.
In each individual case an analysis needs to be made to determine whether and/or to what extent post-employment non-competition covenants will be enforceable. In case of a breach of a valid post contractual non-competition covenant, the employer may file for injunctive relief and is not obliged to pay the compensation for the time period of such a breach.
In general, for post contractual non-solicitation covenants the requirements set out above apply. With regard to the prohibition of poaching of employees of the former employer it is not clear whether or not this requires a compensation payment. In particular if the employee sets up his/her own competing business after the employment the non-poaching covenant could be invalid if no compensation payment is agreed. From our experience restrictions on the poaching of employees are often agreed in combination with a post contractual covenant so that a compensation payment is agreed anyway.