The competition clause on the rocks?

In February 2022, the Minister of Social Affairs and Employment sent a letter to the House of Representatives with “policy options” for the revision of the non-competition clause. The letter follows an investigation into the operation of the non-compete agreement. Participants in that study included employers, employees, labor lawyers and experts from employer organizations and unions. The investigation was prompted by suspicions that the non-compete clause was being used improperly. The outcome of the study confirmed that suspicion.

Problems identified

In her letter to the House, the minister describes a number of problems that currently arise around the non-competition clause. The first problem is that the threshold for including a non-competition clause in an employment contract is very low, even though the clause can have far-reaching consequences for the employee. In many cases, a non-competition clause is included in the employment contract as a matter of course, Many model employment contracts now include a non-competition clause. An estimated 3.1 million employees were bound by non-compete agreements by 2021.

A second problem is that employers use the non-compete clause for the wrong purposes. The purpose of the non-compete clause is to prevent business-sensitive information, such as customer data or information about intellectual property rights, from reaching the competitor. However, a large proportion of employers report using the non-compete clause to retain scarce staff. A conceivable goal, but not the right one according to the minister.

A third problem is that the ball is currently entirely in the employee’s court. It is up to the employee to show why his employer does not have a legitimate interest in invoking the non-competition clause. Or to show that the period of operation should be shortened or the geographical scope reduced.

Policy options

These problems require a solution, according to the minister. In anticipation of a “future government proposal to modernize the non-competition clause,” it already carries four policy options for revising the non-competition clause.

Policy Option 1

The first policy option has the following elements:

1. maximum duration of one year;
2. the employer must make the geographic scope explicit and justify it in the employment contract;
3. the non-compete clause expires in bankruptcy;
4. The non-competition clause expires in the event of dismissal during the probationary period;
5. the employer can invoke the non-competition clause only if dismissal is at the employee’s initiative;
6. the employer must disclose at the end of employment whether or not it is keeping the employee bound by the clause.

Some of these elements are consistent with the current line of case law. That line is that the maximum duration of operation of a non-competition clause – barring exceptions – is one year and that the geographic scope should not exceed what is necessary.

Policy Option 2

The second policy option has the following elements:

1. all elements of policy option 1;
2. mandatory compensation when the clause is invoked or concluded.

The mandatory fee when the clause is invoked is designed to separate the wheat from the chaff. The employer will have to assess which employees may actually harm the company’s bottom line and which may not. Relevant question in that context is what company-sensitive information the employee has. The mandatory compensation at the conclusion of the clause goes even further. This forces employers to weigh up in advance whether or not to bind an employee to a non-compete clause.

Policy Option 3

The third policy option has the following elements:

1. all elements of policy option 1;
2. non-competition clause only possible in case of compelling business interest, which business interest must be explained in the employment contract.

This is consistent with the current rules for including a non-compete clause in a fixed-term contract. An employer wishing to include a non-competition clause in a fixed-term contract must currently already provide a reasoned explanation of the substantial business interest in doing so. If he does not, the clause is void. If he does not sufficiently motivate the weighty business interest, the clause is voidable.

Policy Option 4

The fourth policy option has the following elements:

1. all elements of policy option 1;
2. reimbursement from policy option 2;
3. Major business interest requirement from Policy Option 3.

This option is the most “heavy” and preferred by the unions. This option brings together all the previous policy options.

How to move forward?

The minister’s letter contains several policy options. We can consider these policy options as possible lines of thought for achieving the revision of the non-compete agreement. There are no concrete plans for that revision yet, but we can look forward to a proposal to that effect in due course. The attorneys in Wille Donker Law’s Employment Law Practice Group will keep an eye on developments for you.