In contrast to UK law, restrictive covenants in German employment contracts
are usually regarded as enforceable. Sascha Grosjean of German law firm Velten
Franz Jakoby explains how they are applied Â
In the UK restrictive covenants are regarded as unenforceable unless the
employer shows a legitimate business interest requiring protection. But in
Germany the view point is in direct contrast – that restrictive covenants are
likely to be enforceable.
The reason for this is that the employer has to pay the employee a
compensation payment during the restriction period. Furthermore, while UK
employment contracts usually contain different types of restrictive covenants –
for example, non-competition, non-dealing and non-solicitation regarding
clients, and non-solicitation of employees clauses, contracts under German law
usually only include a simple non-competition clause.
Non-competition clause
A typical non-competition clause in a German contract might be along the
lines of, "For two years after termination of employment, the employee
will not work for any company which is in the same business as the employer
which is particularly but not exclusively [business type]".
Generally speaking, the employer still has to show that there are legitimate
business interests – such as trade secrets or client connections – that require
protection by the non-competition clause. The non-competition clause must not
usually exceed two years from termination of employment and normally it is
necessary for the employer to limit the extent of the clause by reference to the
type of business and territory.
Compensation payment
The most important prerequisite for a valid non-competition clause is the
payment by the former employer of a monthly compensation payment during the
restriction period. Unless such compensation payment has been agreed in the
employment contract, the non-competition clause is null and void.
The compensation must amount to at least half the total cash remuneration of
the employee immediately prior to leaving. This is why only a few German
employment contracts contain non-competition clauses. On the one hand the
employer does not want to pay compensation to low-salaried employees who are
not expected to exert serious competitive pressure in the future. On the other
hand, the compensation payments to relevant senior executives who could be a
threat after termination, could, depending on their salary, become an
unbearable financial burden for the former employer. Consequently such
non-competition clauses are usually only agreed with a few key employees within
an organisation.
Although the former employer is obliged to make such compensation payments
throughout the restriction period, the employee is obliged to try to find
another job during that time.
Earnings set-off
The former employer has the right, subject to an earnings threshold, to set
off against the compensation payment actual earnings of the employee from their
new job, or notional earnings which they should have received if they had made
an effort to find a new job.
This set-off against the compensation payable is only allowed in relation to
earnings over 110 per cent of the employee’s total cash remuneration with their
previous employer. For example, if the former employee previously earned
DM100,000, during the period of restraint they are entitled to compensation of
DM50,000 from their former employer. If they earned DM60,000 at a new
organisation, the former employer could not make any set-off deductions, but if
the employee earned DM80,000 in a new job, the former employer could deduct DM20,000
from the compensation payable.
Breach of clause
Under a German contract if an employee acts in breach of a non-competition
clause, the former employer can apply to the German employment tribunal for an
injunction to stop the breach and also for compensation from the employee,
based on damages.
Many German employment contracts include a clause specifying the financial
penalty for breaching the contract. For example, an amount equal to three times
the employee’s monthly compensation for every month they are in breach of the
restrictions. This is in addition to the employer’s right to seek an
injunction. An employer who applies to an employment tribunal for an injunction
can usually secure it within one to two weeks of making the application.
Exceptions to the rule
The restrictive covenants are not enforceable if the employer terminates the
employment in breach of contract. In such circumstances the employee would send
a notice to the employer stating that they are terminating the contract with
immediate effect and are no longer bound by the non-competition clause. The
restrictive covenants do apply, however, if the employee resigns or if there is
a normal termination by the employer.
Finally, an employer has the right to withdraw from the non-competition
clause and from the obligation to pay the compensation payment, but only if it
gives at least one year’s notice of such a withdrawal to the employee.
Therefore the employer cannot simply decide on termination that it does not
require the employee to comply with the restrictive covenants. In this instance
the employee could sue the employer for the compensation payment, provided, of
course, they comply with the non-competition clause.
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Cases of non-competition clauses in Germany have been few to date. However,
this is an area of increasing concern, particularly in light of the growing
global workforce. The idiosyncrasies of the German system without doubt present
certain headaches for human resources professionals trying to adopt a unified
approach to restrictive covenants across worldwide organisations.
Edited by Clare Murray, employment law partner at Fox Williams and editor of
Fox Williams’ online employment law information service www.hrlaw.co.uk
