Reform of the non-competition clause

On June 2, 2023, Minister Van Gennip (Social Affairs and Employment) announced in a letter to the House of Representatives that she would prepare a bill to modernize non-compete clauses. This resulted in the Bill on the Modernization of Non-Compete Clauses (“the bill”), which was opened for internet consultation on March 4, 2024. The bill significantly restricts the ability to agree on a non-compete clause.

Background

Employers are increasingly including non-compete clauses in employment contracts. It is estimated that more than one-third of all employees are bound by a non-compete clause. A non-compete clause prohibits an employee from performing similar work for another company or as an entrepreneur after the employment relationship ends. The purpose of such a clause is to enable employers to better protect their business interests, such as trade secrets and client relationships.

However, research into the use of non-compete clauses shows they are increasingly being used for improper purposes. For instance, one in three employers includes a non-compete clause as a standard provision in employment contracts, even though employees are not always aware of any business interests that could harm their employer’s competitive position. In such cases, the clause is used to prevent scarce talent from moving to competitors, rather than for its intended purpose. As a result, employees are unnecessarily hindered from switching jobs, which restricts labor market mobility.

Objectives of the Bill

To put an end to the automatic inclusion of non-compete clauses by employers, new legislation is needed. The bill aims to achieve the following goals:

•  Reduce the use of (unnecessary) non-compete clauses, promoting freedom of job choice, labor mobility, and optimal labor allocation;
•  Strike a balance between the interests of employers and employees;
•  Provide greater legal certainty, making the rights and obligations of both parties clearer and reducing the need to go to court;
•  Maintain the possibility for businesses to protect their business assets.

Content of the Bill

The key changes proposed in the bill are as follows:

•  Limitation on duration: A non-compete clause may only last up to twelve months after the employment ends.
•  Geographic limitation: Employers must define and justify the geographic scope of the clause.
•  Justification of business interest: Employers must justify in every employment contract the compelling business interests for including a non-compete clause. This requirement already applies to fixed-term contracts and will now also apply to permanent contracts.
•  Mandatory compensation: If an employer wants to enforce a non-compete clause upon the employee’s departure, they must pay compensation. This is set at 50% of the employee’s last earned monthly salary, to be paid no later than the last day of the employment contract.
•  Timely and written notification: Employers must inform the employee in writing no later than one month before the end of the employment contract if and for how long the clause will be enforced. Exceptions apply, such as in the case of resignation by the employee or summary dismissal.

If a non-compete clause fails to meet the first three conditions, it will be legally invalid. If the compensation is not paid in full or on time, the clause will also be unenforceable. The same applies if the employer does not inform the employee in writing on time.

The Bill Also Applies to Non-Solicitation Clauses

The bill covers not only the traditional non-compete clause but also non-solicitation clauses. These also fall under the scope of Article 7:653 of the Dutch Civil Code, which governs non-compete clauses. As such, the new rules will apply not only to clauses preventing employees from working for competitors, but also to those preventing employees from working with clients or business contacts of their former employer.

Deviating Terms in a Termination Agreement

In practice, employment contracts are often ended by mutual agreement, and the terms are recorded in a settlement agreement. These agreements often include provisions regarding the non-compete clause.

The bill allows parties to deviate from the standard compensation rules and notice period by mutual agreement in such cases.

Transitional Law

Under the bill, existing non-compete clauses will remain valid in principle. Employers will not need to renegotiate existing clauses. However, the new rules regarding mandatory compensation and timely written notification will apply immediately.

Will Employee Salary Play a Role?

Separately from the bill, the House of Representatives recently passed a motion stating that a non-compete clause should not be valid if agreed upon with an employee earning less than 1.5 times the average salary (EUR 66,000 per year for full-time employment).

This motion has not yet been incorporated into the bill but will be further explored and presented before the summer. If implemented, it would further limit employers’ ability to impose non-compete clauses.

What’s Next?

The proposed measures clearly raise the bar for employers compared to current law. Employers will need to carefully assess whether they truly wish to enforce a non-compete clause.

Whether the bill in its current form will actually become law remains to be seen. The internet consultation closed on April 15, 2024, after which the bill may be amended and submitted to the House of Representatives.

To be continued!