Effects of legislative proposal on current non-compete clauses

To this end, the minister announced a draft bill in March 2024. The possibilities for employers to agree on a non-compete clause will be more restricted. It is proposed that the employer must pay compensation to the former employee who continues to be bound by a non-compete clause. The consequences of this draft bill for both new and already existing non-compete clauses are as follows.

Which validity requirements will apply in the future?

If this proposal eventually becomes law, the following cumulative requirements will apply for a valid non-compete clause in an employment contract (for fixed and indefinite periods):

• In writing (can also be done via email)
• The employee must be 18 years or older
• Maximum duration of 12 months
• Description and justification of the geographical scope (whether the clause applies within a certain radius around the company, within a region, or within Europe, for example)
• Justification of the significant business interest that the employer has in including and enforcing the non-compete clause.

If the non-compete clause does not meet one or more of these (largely new) requirements, the clause is void.

Advance payment of non-compete compensation

Truly new in this proposal is the obligation for the employer to pay compensation to the employee for the period during which the employer wants to enforce the non-compete clause. This amount is 50% of the monthly salary, including benefits. This is a gross amount that must be paid to the employee after deduction of income tax.

Thus, at the end of the employment contract, the employer always has a choice: not enforcing the non-compete clause on the employee incurs no compensation, or enforcing it costs half a month’s salary each month. Depending on how the employment contract ends, the employer must inform the employee within a month before the end or within 14 days after the end date. The non-compete compensation must be paid upfront to the employee for the entire duration of the non-compete clause (up to 12 months).

Existing non-compete clauses: an example

This last obligation, namely having to pay compensation if the employer wants to enforce the non-compete clause, will also apply to all (long-standing) currently existing non-compete clauses! Existing non-compete clauses remain valid after the introduction of this bill, so they do not suddenly need to have a geographical scope or a justification of its necessity. However, for existing clauses, the employer must also inform the employee in writing and in a timely manner if and for how long they intend to enforce the non-compete clause.

For example;

• Assuming article 7:653 Dutch Civil Code changes according to this proposal as of January 1, 2025;
• On February 28, 2025, the employee, who has been bound by a non-compete clause with a duration of 12 months since joining a company in 2018, resigns as per April 1, 2025;
• By mid-March 2025 at the latest, the employer must indicate whether they intend to invoke the non-compete clause; If the employer does so for the full 12 months, they must pay an amount equal to six months’ salary to the employee by the end of March 2025 (end date of employment contract);
• The employee will then remain bound by the non-compete clause until the end of March 2026.

If the employee believes that this non-compete clause is not valid or unfairly disadvantages them, he can still go to court under the new situation and request that the non-compete clause be annulled or limited. If the employee succeeds in court and part of the non-compete clause becomes invalid, he must obviously repay the non-compete compensation to the former employer.

Ensure a robust confidentiality clause

In this draft legislative proposal, the minister confirms that the new strict rules for non-compete clauses also apply to a relationship clause. This is different for a confidentiality clause. Therefore, these restrictions do not apply now or after the legal amendment. Employers use a non-compete clause to protect their so-called trade secrets, namely: know-how, rates, customer data, goodwill, and business secrets. The latter and other confidential information can also be protected by a confidentiality agreement and an associated penalty clause. When drafting a good confidentiality agreement, it is important to consider its enforceability.

It remains to be seen how strict the restrictions on non-compete clauses will actually be. In the meantime, employers and HR departments can already start (re)formulating the ‘standard’ confidentiality clause and preparing for the new rules on non-compete clauses.

More information

Do you have questions about non-compete clauses or confidentiality agreements? Or do you need advice on drafting them? Please feel free to contact us.