In reference to a previous post, entitled “Limits on non-compete and non-solicitation clauses under German law” by Bettina Goletz, we have been asked about non-compete compensation payments in case of the employer’s insolvency. This post will address whether the employee is entitled to compensation payments under a post-contractual non-compete clause in the situation where the employing company files for insolvency under German law.
In general, under German law a post-contractual non-compete clause is only valid if an amount of 50% of the most recent compensation has been granted to the employee. In the situation where the employing company files for insolvency, the company might not fulfill the obligation to pay the granted amount.
In such a situation, the entitlement of the employee depends on the question if the claims against the employer are only so called sole insolvency claims (einfache Insolvenzforderung) or so called incumbent obligations (Masseverbindlichkeiten).
The employee’s claims against the employer are only sole insolvency claims (einfache Insolvenzforderung), if
- the non-compete obligation of the employee ended before the insolvency proceedings’ were opened, restricted to outstanding installments which ought to have been paid under the contract by the company, or
- the non-compete obligation of the employee did not end before the commencement of the insolvency proceedings but the insolvency administrator has subsequently rejected the continued performance of the non-compete obligation by the employee and as a result the employee has lost the benefit of future contractual payments to which he/she would have been entitled.
If the employee’s claim will be qualified as a sole insolvency claim only, such claim must be formally included in the insolvency table (Anmeldung zur Insolvenztabelle). Following the liquidation of the company’s assets, the insolvency administrator will first fulfill all priority claims. Afterwards, the remaining amount will be used to fulfill all claims formally included in the insolvency table. If the remaining amount is not sufficient, the creditors of the claims included in the insolvency table will receive a pro rata payment.
The employee’s claims against the employer are incumbent obligations (Masseverbindlichkeiten) if the non-compete obligation did not end before the insolvency proceedings’ were opened and if the insolvency administrator has not rejected the continued performance of the non-compete agreement. In this case the employee will have a stronger right to enforce the compensation payments, as the incumbent obligations (Masseverbindlichkeiten) have to be paid as a matter of priority (i.e. before sole insolvency claims of other creditors are settled).
In order to comply with all formal prerequisites of the insolvency proceedings, legal advice should always be sought prior to taking or avoiding taking any action in this regard.
