In France, the rules governing post-termination, non-compete and/or non-solicitation clauses in employment contracts have been established through case law. Restrictive covenants in an employment contract are only considered enforceable by French courts if they meet the following criteria (which are cumulative) :
– They do not extend beyond what is reasonably necessary to protect the legitimate interest of the employer;
– they are limited in terms of activity, geographical area and duration and the extent of the restrictions should be adapted appropriately to reflect the specific employee’s status and duties;
– they comply with any applicable sector-wide collective bargaining agreement; and
– they give rise to the payment of financial compensation to the employee: Such compensation generally being paid on a monthly basis for the whole period of the restriction.
When any of these criteria are not met or the restrictions are excessive in the context, the employee can file a claim, seeking a decision that the clause is null and void or a reduction in the scope of the clause (e.g. its duration, territoriality, etc). In addition, the employee can also claim damages for the loss suffered due to having been complied with an invalid non-compete / non-solicitation obligation.
French courts have been increasingly strict with respect to the enforceability of restrictive covenants.
As mentioned above, the French Supreme Court has held that, as a guiding principle, non-compete clauses require the payment of a corresponding financial compensation to the employee which must not be derisory. According to case law, the minimum level of the monthly payment should not be less than 20% of the employee’s monthly salary, payable for the whole duration of the restrictions under the clause.
In a judgement on 27th November 2020, which is surprisingly in favour of an employer, the Supreme Court held that the amount of any such financial compensation should also not be excessive.
In the case in question, a salesman was granted a particularly high level of compensation fixed at 100% of his monthly salary for each month of the post termination restrictions, payable as a lump sum amounting to €85,000. In this particular case, the non-compete clause had been concluded at a time where the company was encountering serious financial difficulties and shortly before it was sold to a new owner.
After the purchaser made the employee redundant, it refused to pay the amount specified for the post termination restriction. The employee then filed a claim for payment of the contractual sum in full.
The Court of Appeal rejected the employee’s claim on the basis that the non-compete clause could not provide protection to the company against the competition of its ex-employee for several reasons. The level of compensation could not be justified by the geographical cover of the non-compete clause, which only applied to two regions in France, thus providing the company with only limited protection at a high price. The court also decided that the level of compensation was not justified by either the duration of the restrictions or the employee’s duties and responsibilities. Finally, the court took into account that the contractual compensation under the contracts of other employees did not usually exceed 60% of their monthly salary.
The Supreme Court confirmed the Court of Appeal decision on the basis that the underlying object of the non-compete obligation was unlawful. It decided that, in light of the financial difficulties encountered by the company, the financial compensation was disproportionate compared to the restrictions imposed on the employee. In addition, the employer was under the obligation to pay the compensation as a lump sum without being able to waive the clause unilaterally, which is normally provided for in a well-drafted non-compete clause to give the employer the option of applying the clause and paying compensation or not. For those reasons, the court decided that it constituted an exorbitant benefit and therefore the clause was not enforceable.
