Non-competition in employment contracts

Non-competition in employment contracts – basic information

A non-competition agreement is an agreement whereby an employee undertakes to refrain from activities that compete with the employer. A non-competition agreement must be concluded in writing (on pain of nullity). It may be a document separate from the employment contract (a completely separate agreement) or part of the employment contract, in which case it must constitute a clearly distinct element of the employment contract (for example, a separate paragraph devoted solely to non-competition).

A competitor in the market is considered to be an entrepreneur engaged in activities identical or similar to those of the employer. A non-competition agreement may further specify the scope of the prohibition by indicating precisely what will be considered competitive activities, for example:

1. a) an indication of its type (activity in the banking sector, clothing trade, etc.)
2. b) an indication of its scope (i.e. an indication of a specific position or responsibilities, e.g. sales manager, management position) or
3. c) an indication of the form of activity (e.g. employment contract, civil law contract, self-employment).

The non-competition agreement must also specify the territorial scope of the prohibition. The territory must be objective in relation to the employer’s activity. Thus, if the employer operates locally, a non-competition clause with, say, a pan-European scope will not be acceptable.

Non-competition during the employment relationship

A non-competition agreement for the duration of the employment relationship, i.e. de facto in addition to the existing employment contract (or consequently in its very content), can be concluded with any employee.

Such a contract cannot last longer than the employment relationship itself. It expires at the latest on termination or expiry of the employment contract. To refrain from engaging in competitive activities, the employee must not receive any compensation from the employer (although he or she is obviously entitled to do so).

Violation of a non-competition clause during the employment relationship may constitute grounds for termination of the employment contract. If the employer suffers loss as a result of the employee’s competitive activity, the latter will be liable according to the rules laid down in the French Labor Code. Thus, the employee’s liability will only be calculated within the limits of the actual loss (i.e., not future profits), and the amount of compensation itself will be limited to the amount of three months’ remuneration for the work the employee has received. Only if the employee breaches the prohibition intentionally (i.e. deliberately) will he/she be required to compensate the loss in full.

An indemnity limited to three times the employee’s salary is in principle the only possibility for the employer to compensate the employee for breach of a non-competition clause during the employment relationship. Legislation does not provide for the possibility of stipulating contractual penalties in the event of breach of a non-competition clause during the employment relationship.

Non-competition after termination of employment

A non-competition agreement after dismissal can only be concluded with employees who, during the term of their employment contract, have had access to particularly important information, the disclosure of which could expose the employer to prejudice (i.e. information constituting a business secret). Consequently, not all (former) employees can be covered by such a ban.

A mandatory element of post-employment non-competition is… :

1. a) an indication of its duration (it must be limited in time) and
2. b) an indication of the amount of compensation due to the (former) employee. The amount of the indemnity may not be less than 25% of the salary for the period corresponding to the duration of the non-compete. The indemnity may be paid in several instalments or in a single lump sum.

A post-employment non-compete agreement may provide for a contractual penalty to be paid by the employee in the event of a breach of the prohibition.

A post-employment non-compete ends when the reasons justifying the non-compete cease to exist (for example, a change in the employer’s business profile) or if the employer fails to pay compensation.

Can a non-competition clause apply in the absence of a non-competition agreement?

During the employment relationship, the employee is obliged, among other things, to look after the well-being of the workplace. This is one of the employee’s fundamental duties, which gives rise to the so-called loyalty principle. This principle states that in the event of disloyal behavior (e.g., accepting a job with a competitor), the employment contract may be terminated.

If the employee’s disloyal behavior causes damage to the employer, he or she is liable according to the rules laid down in the Labor Code (i.e. up to three times his or her salary). A non-competition agreement for the duration of the employment contract is therefore, so to speak, a concretization and clarification of the obligations laid down in the Labor Code.

The situation is different in the absence of a non-compete agreement for the period following termination of the employment relationship – the employee is then under no obligation to remain loyal (he or she is no longer bound by any agreement with his or her former employer). This does not mean, however, that the employer has no tools at his disposal – Article 11 of the Unfair Competition Act, which protects business secrecy, applies in this case.

Non-competition during and after the employment relationship – differences

The differences between non-competition during and after the employment relationship are shown in the table below: