Modernising Dutch Employment Law: The Evolution of Non-compete Clauses
The Netherlands’ recently proposed legislative overhaul of non-compete clauses in employment contracts has ramifications for employers and employees alike, as ACG’s Edith N Nordmann explains.
In a significant stride towards updating the landscape of Dutch employment law, recent legislative proposals have targeted the non-compete clause – a pivotal element in employment contracts that restricts employees from engaging in similar work with competing entities once a contract has terminated. This article delves into the intricacies of the proposed reforms and examines their implications both for employers and employees, alongside the legislative trajectory these changes are poised to follow.
Current Legal Framework for Non-compete Clauses in the Netherlands
Traditionally, Dutch employment law permits the inclusion of non-compete clauses in employment contracts, with the specific aim of preventing employees from partaking in competitive activities post-employment. However, such clauses are strictly regulated – especially in fixed-term contracts, where their validity hinges on the employer’s ability to demonstrate substantial business or service interests. This necessity for explicit justification of non-compete clauses within the contract underscores the law’s cautious stance towards balancing employer interests with employee freedoms.
Recent Judicial Perspectives and Legislative Ambitions
A pivotal ruling by the Hoge Raad der Nederlanden (Supreme Court of the Netherlands) underscored the non-performance nature of non-compete clause violations, showcasing the nuanced legal landscape surrounding these clauses. The Supreme Court of the Netherlands clarified that the violation of a non-compete clause is seen as a failure to perform the specific obligation not to engage in competitive activities as agreed upon in the employment contract. This distinction is important because it influences how remedies such as penalties and damages for breach of contract are assessed and enforced.
“The elapsed time between discovering the breach of the non-compete clause and taking action against the former employee could provide grounds for mitigating penalties.”
Furthermore, the judgment touched upon the time period between discovering the breach and taking action against the former employee. In certain circumstances, the elapsed time could provide grounds for mitigating penalties based on Article 6:94 of the Civil Code or lead to the assumption of estoppel, thereby affecting the enforcement of the non-compete clause.
Additionally, the recent governmental push for clarity regarding the inclusion of non-compete clauses in permanent contracts signals a legislative intent to refine the existing framework. This is evidenced by the draft Bill on Modernisation of the Non-competition Clause (the “draft Bill”), which was introduced on 4 March 2024.
Proposed Reforms: A Closer Look
The draft Bill proposes several key amendments to the regulation of non-compete clauses, including:
- duration limitation – capping the validity of non-compete clauses to a maximum of 12 months following contract termination;
- geographic specificity – mandating a clear definition of the geographic scope to which the non-compete clause applies;
- justification requirement – extending the requirement to provide written justification of non-compete clauses (and detail substantial business interests therein) to include those in permanent contracts;
- notification requirement – requiring employers to notify employees at least one month before contract termination about the enforcement of non-compete clauses, including specifics on duration and compensation;
- compensation obligation – imposing a compensation obligation on employers enforcing non-compete clauses, set at 50% of the employee’s monthly salary and payable upfront;
- payment of compensation – employers must pay the owed compensation by the last day of the contract and, if they do not pay in full by the specified day, the non-compete clause becomes ineffective (although they remain obligated to pay compensation); and
- compensation exemption – employers are not required to pay the owed compensation if the contract's end or non-continuation is due to the employee's serious misconduct or negligence.
Legislative Process and Public Consultation
The draft Bill, currently subject to public consultation, awaits further deliberation in the Dutch legislative bodies. The target effective date is now 1 January 2025. There is transitional law for already-concluded employment contracts with a non-compete clause.
Within the legal landscape of the Netherlands, it is noteworthy that an estimated one-third of the workforce is subject to non-compete clauses. This translates to approximately 3.1 million individuals whose employment terms include restrictions on their ability to engage in competing employment after leaving their current positions.
“The Dutch cabinet will explore whether non-compete clauses can be banned below a certain salary, highlighting a legislative focus on protecting lower- and middle-income workers.”
Following the Van Oostenbruggen/Patijn motion, the cabinet will explore whether non-compete clauses can be banned below a minimum salary limit (1.5 times the average salary). This highlights a legislative focus on protecting lower- and middle-income workers from overly restrictive employment conditions. The commitment to the House of Representatives is that this research will be conducted before summer 2024, so as to provide information for the new cabinet.
Financial and Legal Implications
The proposed changes introduce significant financial and legal considerations for employers, particularly when it comes to the upfront compensation requirement. This shift may precipitate increased disputes, especially regarding compensation repayment upon employee breach during the restriction period. Moreover, the potential for settlement agreements (vaststellingsovereenkomsten, or VSOs) to serve as a legal loophole necessitates careful navigation in order to ensure compliance with the new framework.
Anticipated Developments and Strategic Recommendations
As the legislative discourse progresses, stakeholders are encouraged to engage with the public consultation process and anticipate the eventual enactment of these reforms. Employers should begin reviewing existing contracts and consult legal advisors to align with the upcoming changes, while employees should seek legal counsel to help them understand their rights and obligations under the new regime fully.
In conclusion, the proposed legislative reforms signify a considerable evolution in Dutch employment law, aimed at balancing employer interests with employee freedoms more equitably. Both employers and employees must stay informed and prepared to adapt to these changes, thereby ensuring a smooth transition to a more modernised and fair employment contract framework.
