There is currently a record labour market shortage, as a result of which employers are barely filling open positions. A recent survey of its members by the Algemene Werkgeversvereniging Nederland (AWVN) shows that as many as 9 out of 10 employers are experiencing shortages in the labour market. Do these circumstances affect the tenability of the non-compete clause? This is a question that has also recently been on the political agenda. In this article, after briefly discussing the current requirements for a valid non-competition clause, we address the main developments.
CURRENT REQUIREMENTS FOR A VALID NON-COMPETITION CLAUSE
Through a non-competition clause, employees can be restricted in their freedom to join a competitor after their employment in a certain way. Because of this restrictive nature, certain conditions are imposed on a non-competition clause: a non-competition clause must – in short – (i) be legally agreed, and (ii) be reasonable.
A non-competition clause is only legally valid if it is agreed in writing with an employee who is of age. In the case of a fixed-term employment contract, an additional requirement is that the employer’s written reasons for the clause must show that the clause is necessary because of serious business or service interests.
In determining whether and to what extent the non-competition clause can be enforced in practice, the employer’s interests in the clause must be weighed against the employee’s interests in joining a new employer. The court can set aside a non-competition clause in full/partially on a number of grounds. For example, the court can:
- annul the clause entirely if it is included in a fixed-term contract and is not necessary because of important business or service interests;
- set the clause aside in whole or in part if, the employee is unfairly disadvantaged by the clause;
- annul the clause in whole or in part if, in connection with an unforeseeable substantial change in the employment relationship, the clause has “become more onerous for the employee”; or
- moderate the amount of the fine attached to the clause if it is judged too high.
For a more detailed description of the various interests involved in whether or not a non-competition clause can be enforced, please refer to our earlier article on the subject.
RECENT (POLITICAL) DEVELOPMENTS
Since 2020, the following (political) developments have occurred, which may have implications for the non-competition clause as we know it today.
Borstlap Committee recommendation (January 2020)
At the end of 2018, the Borstlap Commission was appointed by the government to advise on the changes in the labour market and their possible impact on current legislation. The committee issued a report in January 2020. In this report, it recommends (among other things) allowing the non-competition clause in a more limited way: in an employment contract for an indefinite period of time, it recommends allowing the non-competition clause only if the employer can justify the necessity of it on the basis of a compelling business or service interest (this condition already applies in a fixed-term employment contract).
Research findings by Panteia (June 2021)
In 2020-2021, the Ministry of Social Affairs and Employment commissioned a study by Panteia on the operation of the non-competition clause. This was prompted by a motion, tabled in late 2019, requesting the government to investigate ways in which the use of the non-competition clause could be limited to what is strictly necessary. This was because the submitters of the motion had received signals that the non-competition clause was often used improperly. The submitters specifically asked that the following options be examined in this regard:
- excluding the competition clause from fixed-term contracts;
- limiting the maximum duration and geographical scope of the non-competition clause in open-ended contracts; and
- minimum compensation for the non-competition clause in open-ended contracts.
In mid-2021, Panteia published its report with the research findings. Among other things, the report shows that:
- 1 in 3 employers uses a non-competition clause even though there is not always a reason for it, because the employee does not have access to relations or sensitive information, for example;
- although this concerns improper use of the non-competition clause, some employers also use the clause to prevent the outflow of staff; and
- the use of a non-competition clause affects the labour mobility of employees.
Based on Panteia’s report, the Minister of Social Affairs and Employment concluded that further policy options – incorporating the policy options mentioned in the 2019 motion, and by the Borstlap Committee – should be worked out so that the Lower House can form an opinion on them. The intention was to inform the Lower House about the policy options by the end of 2021. This has since been postponed to early 2022.
New motion (December 2021)
A new motion was agreed to in early December 2021, in which the government – in view of the research results, the current shortage on the labour market, and the fact that work has been under way for some time to develop policy options aimed at curbing unnecessary use of the non-competition clause – is asked to proceed as soon as possible to adjust the non-competition clause so that employees are no longer unnecessarily hampered on the labour market.
That the non-competition clause will be amended seems very likely – given recent developments. What the adjustments will be is still under discussion, and will partly depend on the support for the various policy options that will be announced in the coming period. To be continued…
In the meantime, employers should think carefully about agreeing a non-compete clause with employees. Not only are employees – especially in this shortage labour market – likely to be less inclined to accept an employment contract with a heavy non-competition clause, it is also possible that – given current developments – the question of whether a non-competition clause protects a real interest of the employer will be looked at more and more critically. Thus, agreeing a non-competition clause deserves due consideration.
UPDATE 3 MARCH 2022:
On 25 February 2022, the Minister of Social Affairs and Employment informed the House of Representatives about the previously promised policy options to amend the non-competition clause (see link). A total of four policy options are described, increasing in severity:
- Option 1, the lightest variant, consists of several elements, including limiting the maximum duration of the non-competition clause and mandatorily writing out and justifying the geographical scope of the non-competition clause.
- Option 2 contains the elements from policy option 1, with the addition of a fee to be paid by employers for use of the non-competition clause.
- Option 3 also contains the elements from Policy Option 1, this time with the addition of a restriction on employers to include a non-competition clause only if they have a compelling business interest in doing so.
- Finally, Option 4, the heaviest variant, contains a combination of the elements from policy options 1 to 3.
In her letter, the minister indicates that there is support among social partners to review the non-competition clause. The minister is likely to come up with a detailed proposal for amending the competition clause in summer 2022.