Non-competition clause in the employment contract: what is permissible?
If a non-compete clause has been agreed in writing with the employer, it can lead to unpleasant surprises for both parties after the end of the employment relationship. What is the legal situation?
Example: Mr. Meier worked as a personnel consultant at X-AG. After giving his notice, he started a new job in the same sector. On the basis of a non-competition clause in his employment contract, X-AG demands a contractual penalty of 6 months’ salary.
The following three questions arise:
Is the non-compete clause valid?
Is the amount of the contractual penalty reasonable?
Is the non-competition clause pursuant to Art. 340c CO no longer applicable?
1. Validity of the non-competition clause
A non-competition clause agreed in writing must be valid and reasonable.
a. Admissibility
It is only admissible if the employee acquires sufficient knowledge of customers or production or trade secrets within the scope of the employment relationship. The use of the knowledge acquired in this way must also be capable of causing significant harm to the employer. The harm to X-AG must have occurred because Mr Meier had knowledge of customers. There must therefore be an appropriate causal link between the insight and the significant risk of harm. This is not the case if the employee’s personal characteristics and skills are of decisive importance to the customer. Thus, if customers switch to Mr Meier only because of his personal characteristics, these characteristics and not Mr Meier’s intuition about the customer were decisive. Due to the lack of a causal connection in these cases, a non-compete clause is impermissible.
b. Adequacy
In addition, the non-competition agreement must be reasonable. This is only the case if the non-competition clause is reasonably limited in terms of place, time and object (Art. 340a para. 1 CO). A valid non-competition clause may exist even if there is no description of place, time and object. Clauses stating that competition is prohibited ‘throughout Switzerland’ generally do not withstand judicial scrutiny. A territorial limitation to certain cantons may be appropriate. In terms of time, the law itself sets a maximum limit of three years, but this has proven to be an upper limit that is rarely permissible. In practice, a restriction of a few months to two years is common. If X-AG’s non-competition clause is excessive in terms of place, time or object, it is neither void nor ineffective. However, the court must reduce it to the permissible level at its discretion.
2. Is the amount of the contractual penalty reasonable?
As a rule, a contractual penalty is agreed in the event of a breach of the non-competition agreement. Unless otherwise agreed, the employee may be released from the non-competition agreement by paying the contractual penalty. If the contractual penalty is excessive, the amount may be reduced by the court.
Despite inconsistent case law, it is becoming evident that courts usually do not go beyond an amount of 3-6 months’ salary when assessing the contractual penalty. For Mr. Meier, there is a good chance that the agreed contractual penalty of 6 months’ salary will be reduced.
3. Cancellation of the covenant not to compete pursuant to Art. 340c CO
Art. 340c CO provides for three cases in which a non-competition agreement lapses in order to protect the employee from an unjustified restriction of his or her economic development opportunities:
The employer no longer has a significant interest in the covenant not to compete because the possibility of significant harm has ceased to exist.
The employer dismissed the employee without just cause.
The employee dismissed the employer, but for a just cause for which the employer is responsible.
In our example, Mr Meier resigned on his own. The question is whether X-AG gave him good cause to do so. According to established case law, just cause within the meaning of Art. 340c para. 2 CO means any event attributable to the other party that, on the basis of a reasonable commercial consideration, may constitute substantial cause for termination. It is not necessary that there be an actual breach of contract.
This may include, inter alia, poor working conditions, unworthy treatment of the employee, failure to keep promises, etc. Dissatisfaction due to (slightly) too low wages should normally not be recognised as just cause.
Mr. Meier has to prove just cause and the causal link between this and the subsequent dismissal.
» Contact us for a personal consultation
» Get a quote and start your business now
»Discover more informations on entrepreneurship in Switzerland
Get started as Mompreneur: www.mom-preneur.ch/en/home
Get started as Dadpreneur: www.dad-preneur.ch/en/home
Get started as Seniorpreneur: www.senior-preneur.ch/en/home
Get started as Youngpreneur: www.young-preneur.ch/en/home
