Enforceability of the Non-compete Clause

In the Netherlands, since 1 January 2015, there has been a legislative prohibition on non-compete clauses in temporary employment contracts. However, in practice, these clauses continue to be widely used both in fixed-term and in permanent contracts, appearing in approximately one third of such agreements. This widespread application often leads to unjustifiable restrictions on employee mobility, complicating job changes for workers and talent acquisition for employers.

The Dutch government is now looking to modernise the non-compete clause, in order for it to be used to genuinely protect a necessary business – ie, it is undertaking efforts to reform the non-compete clause to ensure it serves its true purpose: safeguarding legitimate business interests.

Proposed legislative amendments include the following.

The public consultation process for this bill has been postponed due to national elections, with further developments anticipated following the formation of the new government.

Enforcement of non-compete clauses, particularly those with ambiguous wording, often results in complex legal disputes. Under Section 7:653(3) and subsection (b) of the Dutch Civil Code, courts have the authority to nullify a non-compete clause if it unnecessarily restricts the employee or disproportionately disadvantages them compared to the employer’s protected interests.

Recent judgments highlight varying interpretations of these clauses, as discussed below.

The appeal court in Arnhem-Leeuwarden determined that the enforcement of a non-compete clause necessitates a careful weighing of the employee’s fundamental right to freely choose their employment against the employer’s need to protect its business interests. This decision affirmed the earlier ruling of the subdistrict court. For an employer to legitimately enforce a non-compete clause and claim the stipulated penalties, it must demonstrate that an employee’s engagement with a direct competitor materially damages its business interests.

The court also recognised that the employee’s situation had improved following their move to the competitor, evidenced by higher earnings and reduced commute time. However, the employer’s position was weakened by the written communication from its HR department following the employee’s resignation. This communication stated that a breach of the non-compete clause would result in substantial financial penalties and advised settling the matter before commencing work with the new employer. The court interpreted this as an indication that the employer’s primary concern was not to prevent unfair competition but rather to obtain financial compensation from employees who terminate their contracts.

This stance was seen as inconsistent with the core principle of an employee’s right to freely choose their employment. Furthermore, the court noted that such a focus on financial compensation undermines the employer’s interest in enforcing the non-compete clause, as after receiving compensation the employer seemingly loses any further claim to enforce the clause’s terms.

In a separate ruling, the subdistrict court in Zwolle clarified the primary objective of a non-compete clause. The court posited that such clauses are designed to safeguard an employer’s business assets, including their accumulated know-how and goodwill, rather than to restrict employees’ career mobility. The court emphasised that an employee acquiring skills and knowledge through their role does not automatically imply a detrimental impact on the employer’s business if the employee decides to join a competitor.

The court further elaborated that the purpose of a non-compete clause is not to prevent an experienced employee from moving to a competitor per se, but to guard against the potential damage to the company’s operations resulting from such a move. This situation is particularly pertinent when an employee in a key position possesses critical commercial and technical information or is privy to unique operational processes and strategies, which could be leveraged to the new employer’s advantage in the competitive marketplace. The court’s interpretation underscores the need for a nuanced application of non-compete clauses, focusing on the protection of specific business interests rather than broadly restricting employee mobility.

However, employers are not without recourse.

The subdistrict court in Roermond found in favour of the employer, recognising the significance of the knowledge transferred by the employee to a competitor. The court acknowledged that such knowledge could enable the competitor to replicate the employer’s technology and to gain easier access to its customer base through the employee’s contacts, thereby affecting the employer’s business operations.

This perspective was echoed at the International Bar Association (IBA) Annual Conference in Paris, November 2023, in a session titled “Non-competes restricting employee mobility – is there a future?”. The consensus was that non-compete clauses are not intended to unduly bind employees but to prevent the transfer of sensitive information to competitors. Employers, however, bear the burden of proving that their business will suffer significantly if an employee joins a competitor.

The enforcement of non-compete clauses demands careful formulation and ongoing management. Employers must ensure that these clauses are precisely drafted and updated as necessary, especially in response to changes in employee roles and responsibilities. An incorrectly framed non-compete clause is difficult to rectify later and can lead to significant legal challenges. Thus, employers should consistently review and adjust these clauses to reflect current circumstances, thereby mitigating future legal complications.