Non-Compete Laws in the Netherlands

Non-compete clauses are provisions in employment contracts that restrict employees from engaging in activities that compete with their employer's business after the employment relationship ends. In the Netherlands, these clauses are regulated by the Dutch Civil Code, and their enforcement is subject to stringent legal requirements to protect employees' rights.

1. Legal Framework

Non-compete clauses in the Netherlands are governed primarily by Article 7:653 of the Dutch Civil Code. This article outlines the conditions under which non-compete clauses are valid and enforceable:

1. Written Form: Non-compete clauses must be agreed upon in writing. This means that both the employer and the employee must have explicitly acknowledged and accepted the clause, typically by signing the employment contract that includes it.
2. Adult Employees: Non-compete clauses are generally enforceable only for employees who are 18 years or older at the time of signing the agreement.
3. Significant Interests: For fixed-term contracts, non-compete clauses are enforceable only if the employer can demonstrate significant business interests justifying the restriction. The employer must provide a written explanation of these interests.

2. Duration and Scope

The duration and geographic scope of non-compete clauses must be reasonable and proportionate to the employer's business interests. Dutch courts assess the reasonableness based on several factors:

• Duration: Typically, non-compete clauses last between six months to two years. Longer durations require substantial justification from the employer.
• Geographic Scope: The geographical range should be limited to areas where the employer has a legitimate business interest.
• Scope of Activities: The clause should only restrict activities that genuinely compete with the employer's business.

3. Judicial Review

Employees have the right to challenge non-compete clauses in court. Dutch courts can modify or nullify a clause if they find it unreasonably restrictive. Factors considered include the employee's right to work, the employer's business interests, and the clause's impact on the employee's future employment opportunities.

4. Compensation

In some cases, employees subject to a non-compete clause may be entitled to financial compensation. This is particularly relevant if the clause significantly limits the employee's ability to find new employment. Compensation terms must be specified in the employment contract.

5. Exceptions, Invalidity, and criticism

Non-compete clauses may be deemed invalid under certain circumstances:

• Significant Changes in Employment: If there are substantial changes in the employee's job role, location, or salary, the non-compete clause may become invalid unless renegotiated.
• Fixed-Term Contracts: For fixed-term contracts, non-compete clauses are generally harder to enforce unless the employer can demonstrate specific business interests.

In recent years, criticism of non-competition and relationship clauses has significantly intensified. This is primarily attributed to the widespread misuse of non-competition or relationship clauses by employers, who employ people to prevent scarce talent from joining competitors or as a precautionary measure, even when these employees do not possess sensitive company information. Consequently, employees often find themselves unnecessarily restricted in their job mobility, which violates their right to choose where they work. The Modernization of Non-Competition Agreement Bill aims to overhaul and improve the regulations concerning non-competition and relationship clauses in the Netherlands, thereby tackling the improper utilization of non-competition and relationship clauses.

6. Background of Proposed Changes

The purpose of the non-competition clause is to protect the employer and its business interests when an employee leaves employment. Research has shown that the non-competition clause is often included as a standard clause in employment contracts. This happens even when there is no need or reason to do so, for example, when the employee in question does not come into contact with company-sensitive information such as rates and customer data. If there is no reason for the inclusion of a non-competition clause, according to the government, job choice and job mobility should be paramount. Excessive use of the non-competition clause could lead to an unjustified restriction on employees, which in turn would have negative consequences for the proper functioning of the labor market. It would limit the employees' ability to change jobs within their own expertise while also making it more difficult for employers to hire new staff.

The Bill aims to continue allowing employers to protect their market position (bedrijfsdebiet) while reducing the unnecessary use of non-competition clauses.

7. Proposed Changes

The non-competition clause is laid down in Article 7:653 of the Dutch Civil Code. Currently, the only requirements regarding the non-competition clause are that it must be (i) agreed in writing with (ii) an adult employee. Furthermore, in the case of a fixed-term employment contract, the employer must justify why it has a substantial business interest in including the non-competition clause. The Bill aims to introduce a number of far-reaching changes with respect to the non-competition clause. These changes will be explained below and also apply to the relationship clause. Therefore, whenever reference is made below to the "non-competition clause," it should also be read as "relationship clause."

1. Limitation in Duration: Under the current Article 7:653 DCC, there is no maximum duration for the non-competition clause after the end of the employment contract. Although in practice a term of one year (twelve months) after the employment contract is usually adhered to and generally considered reasonable, a longer term can also be validly agreed upon. An employee can challenge the duration of the clause in court. However, the Bill stipulates that a clause entered into for a period longer than twelve months after the end of the employment contract is void.
2. Inclusion of Geographical Scope: The Bill states that, when including the non-competition clause in the employment contract, the geographical scope of the clause must be included and motivated as well. If the geographical scope is not included, the clause is null and void. If the employee believes that the geographical scope is not sufficiently motivated, they can turn to the court. The court may nullify a non-competition clause if the restriction is not necessary because of a substantial business interest.
3. Substantiation of Substantial Business Interest: In employment contracts for an indefinite period, the employer will have to motivate the substantial business interest of the non-competition clause in writing. This requirement currently only applies to fixed-term employment contracts. The non-competition clause is void if the substantial business interest is not motivated in employment contracts for an indefinite period.
4. Compensation for the Employee: The employer must pay compensation to the employee when the non-competition clause is invoked. The compensation will amount to 50% of the last earned (gross) monthly salary, for each month that the non-competition clause is invoked. Employer and employee may agree on a higher compensation, but not on a lower one. If they agree on a lower compensation, this part of the non-competition clause can be nullified by a court.
5. Employer Invoking the Non-Competition Clause: The employer can only invoke the non-competition clause by informing the employee in writing and timely that they will hold the employee to the non-competition clause, and for how long. "Timely" means one month before the end of the employment contract. If the employer does not give a comprehensive, timely, or written notice of the invocation of the non-competition clause, the clause does not apply.
6. Possibility of (Whole/Partial) Nullification: The Bill provides for the possibility to claim (whole) nullification of the non-competition clause before the court, if the restriction is not necessary because of a substantial business interest, or to claim (whole or partial) nullification if the employee is unfairly disadvantaged by the clause in relation to the employer's interest to be protected.
7. Minimum Salary Limit: The government will explore whether non-competition clauses can be prohibited up to a minimum salary limit equal to one and a half times the modal salary for full-time employment. Below this limit, a competition clause would be deemed null and void at all times.

8. Transitional Law

The new legislation is scheduled to begin operating on January 1, 2025. Non-competition clauses agreed upon prior to the new law will remain valid, even if they do not meet the new formal requirements (i.e., written justification, duration, and geographical scope). However, the substantive requirements will still apply to these clauses. Existing non-competition clauses will also be subject to provisions that:

-(i) a non-competition clause will only apply if and during the period that the employer invokes the clause,

-(ii) an invocation of the clause during a certain period must be notified in a timely manner and in writing by the employer to the employee, and

-(iii) compensation will have to be paid to the employee for the amount of half a month's salary for each month that the restriction lasts.

9. Netherlands: Case Law Shows the Justification for a Non-Competition Clause Must Be Tailored to Individual Employee

In principle, the inclusion of a non-competition clause and a relationship clause in a fixed-term employment contract is not allowed unless the employer has compelling business reasons for doing so and explicitly justifies those reasons in the contract. However, it’s common to find employers inserting a generic clause into all contracts, which was recently challenged by the Amsterdam District Court. In this instance, both the relationship clause and the non-competition clause were suspended by the court due to the employer’s indiscriminate application.