Post-Contractual Non-Compete Clauses in German Employment Agreements

… and how to get rid of them

Many employers want to prevent their employees to work for competitors when the employment ends. Under German labor law, this can be achieved by putting a post-contractual non-compete clause (nachvertragliches Wettbewerbsverbot) in the employment contract. The typical standard wording for such a non compete clause would be this:

The Employee shall not, for a period of 24 months following the end of the employment and within the territory ….., directly or indirectly, with or without remuneration, render services for a competing enterprise either as managing director, employee, or consultant, which are essentially similar to the services which the Employee has rendered to the Employer during the 24 months prior to the termination of the employment. The Employee may not establish any participation in a competing enterprise either, if such participation exceeds 5 % of the capital of such enterprise or enter into competition with the Employer as being self-employed. Competing enterprises are considered those which supply ………

Under German law, there are strict limits on how far an employer can go with such a non-compete obligation because the employee shall not be unreasonably restricted in finding a new job. Therefore, the maximum period is 24 months. If the non-compete period contained in the employment agreement is longer, the entire clause will be considered excessive and thus void. Also, the territory to which the non-compete obligation applies should be limited to what is absolutely necessary to protect the employers business interests. Defining the territory as “all of Germany” or “the European Union” or even “all over the world”, is extremely dangerous and probably also unnecessary.

Also, and this is often completely overlooked or even knowingly ignored by US or British employers, any such post-contractual non-compete obligation of a (former) employee is only binding and enforceable, if the employer pays the employee a financial compensation, the so called “Karenzentschädigung“.

This compensation must be paid during the entire non-compete period and must amount to at least 50% of the latest salary of the employee (including any bonus payments and gratuities).

A typical wording for this section of the employment agreement would thus be:

During the non-compete period the Employer shall pay to the Employee a compensation of … , i.e. 50% of the Employee’s last contractual salary. The statutory legal provisions, in particular secs. 74 et seq. HGB (German Commercial Code) shall apply.

In order to give the non-compete clause teeth, i.e. make the employee care about any breach, the contract should contain a penalty clause. Here, again, there are limits on what an employer can put in the contract and still expect it to be enforced by German courts.

What if the employer changes his mind about the non-compete clause?

Sometimes an employer no longer sees the need to bind an employee by a post contractual non-compete clause. Either because he does not feel that the employee could hurt him by working for a competitor. Or because he simply does not want to pay the Karenzentschädigung.

In such a case, there are two ways to go about this:

(i) The employer can waive the rights resulting from this clause (“auf das Wettbewerbsverbot verzichten”). This must be done in writing and BEFORE the employment has ended. However, the bad news is that the waiver does not come into effect with immediate effect. Instead, the non-compete clause stands for another 12 months. In other words: If the employer notifies the employee (in writing) that the employer no longer wishes the non-compete obligation to apply, this waiver only becomes valid after 12 months have expired. This means that if a contract contains a 24 month non-compete period and the employer declares to waive sied clause immediately before he terminates the employment, then the non-compete period is effectively reduced  from 24 to 12 months, but the employer does not get rid of it entirely.

Another example: If the employer notifies the employee in January 2018 that he waives the non-compete clause and then terminates the employment 12 months later, then the employer does not have to pay any Karenzentschädigung.

(ii) The other option is that both parties amicably agree to lift the non-compete clause. The employee will of course only agree to this if he or she has already received an interesting job offer that he or she would otherwise be prevented from accepting due to the non-compete clause.

More on German Labour Law, Employment Agreements, Contract Drafting and Employment related Litigation in Germany is available in the posts below and in the brochure “Living and Working in Europe

 

Experts on German-British and German-American Legal Matters

Since 2003, the German law firm Graf Partners LLP with its headquarters in Munich specialises in British-German and US-German legal cases. Our German lawyers are fluent in English, have many years of practical experience with clients from Britiain and the USA and are part of a well established network of law, tax and accounting firms.

Bernhard Schmeilzl_crop1Managing partner Bernhard Schmeilzl was admitted as German Rechtsanwalt (attorney at law) to the Munich Bar in 2001 and specialises in international cases ever since, especially German-American and German-English commercial and probate cases. In addition to obtaining his German legal exams with distinction, he also graduated from the English University of Leicester where he obtained his Master of Laws degree in EU Commercial Law in 2003. But do not mistake Bernhard for a German lawyer who focuses merely on German-British legal matters.

In 2014, Graf Partners LLP has set up the international litigation department GP Chambers which focuses on providing professional litigation services to British and US-American clients, both on a commercial and a private client level. The Graf Partners litigation lawyers regularly appear before German law Courts throughout the country and provide specialist legal advice, support and advocacy services in all commercial and civil law matters, ranging from contract disputes, corporate litigation and employment, to damage claims, divorces and contentious probate. If you wish us to advise or represent you in a German or cross border case, or if you need an expert report on German law, please call +49 941 463 7070.