The legal framework for post-contractual non-compete covenants is unchanged since our last post on the topic in 2013. It is nevertheless worth mentioning the following interesting court decisions which deal with the enforceability of employee restraints and the employer’s obligation to pay compensation:
- Pursuant to the statutory provisions in sec. 74 et. seq. German Commercial Code (HGB), a post-contractual non-compete covenant must be in writing and the compensation payable for each year of the restraint period must be at least 50 per cent of the last remuneration received by the employee.
In a recent decision the German Federal Labour Court held that the parties do not necessarily have to specify the precise amount of compensation in the agreement to comply with these requirements. A post-contractual non-compete agreement is, however, not binding if the amount of compensation is entirely at the discretion of the employer. In such a case, the employee is free to decide whether he or she wants to compete or to comply with the covenant and receive reasonable compensation of at least the amount provided by the law.
- As a general rule, due to the complexity of the requirements for its enforceability, a post-contractual non-compete covenant can be kept very short and refer to the specific statutory provisions in sec. 74 et. seq. German Commercial Code (HGB) for the rest.
However, a German Higher Labour Court has now held that such a covenant cannot be validly agreed by a mere general reference to all (German) statutory provisions, for example, in the final provisions of an employment contract. An implied agreement of a post-contractual non-compete covenant can only be assumed if at the very least, there is a very short non-compete agreement in place which refers to the specific statutory provisions of the German Commercial Code.
- Another general principle established by the courts is that a post-contractual non-compete covenant is invalid and thus not enforceable if no compensation payment is provided for in the agreement.
An exception to this general rule is where a severability clause is included in the contract. If such a clause provides for the substitution of an invalid provision by a new effective provision which comes close to the ineffective clause, compensation equal to the statutory amount is deemed to be agreed. In such circumstances a German Higher Court affirmed an employee’s claim to receive a compensation payment.
Even though the legal framework remains unchanged, current court decisions have to be kept in mind when post-contractual non-compete covenants are agreed. To be on the safe side, employers should seek legal advice when drafting such covenants to avoid “unwelcome surprises” when it comes to the end of the employment.