Non-compete clause

What is a non-compete clause?

In simple terms: it is a contractual provision that prevents an individual (or entity) from engaging in certain business activities with third parties that compete with the contracting party. But there’s much more to it! Whilst its use is applicable in scenarios beyond employment law, this is typically where we see this clause return the most.

Earlier this year, a bill was passed in the Netherlands to place greater restrictions on the commonly-used non-compete clause. As such, the meaning of this term in our legal glossary has changed slightly. The effects of the new bill, expected to come into force sometime in Q1 2025, are explored below.

Why did the law change?

The proposed change challenges a common convention in Dutch law where employers have applied this blanketed restriction leisurely. Sounds nice - “if you want to work with us, you must forego the opportunity of working with our competitors tomorrow”. Sure enough, a position most contracting parties would not mind taking if they believe they had the leverage in negotiations to do so. Evidently, in employment law, the employer usually does. As a result, we see it in almost all full-time employment agreements. Is that needed? Does this potentially harm the individual? And what is the impact on the Dutch labour market? These are questions lawmakers grappled with in passing the new bill.

Whilst the previous convention placed fewer restrictions on the scope of application (duration, geography, penalties - to name a few), the new bill reels in on these fronts. In fact, parties we’re previously not required to actually define the scope of this provision. Now, parties must define the below.

What does a non-compete clause include?

• Type of work: The specific kind of work or roles the clause applies to.
• Named competitors: Competitors the individual is prohibited from working with.
• Geographical restrictions: Areas where the individual cannot engage in competitive activities.
• Time period: The duration of the restriction.
• Penalties: Possible consequences for non-compliance.

It is important to note that lawmakers have capped the time period restriction at 1 year from the end date of the employment agreement.

Are non-compete clauses always enforceable?

The enforceability of non-compete clauses varies by case. Courts examine these clauses to ensure they are reasonable in duration and geographic scope and do not overly restrict an individual's ability to work. Overly broad or punitive clauses may be deemed unenforceable. Tailoring the clause to align with regional legal standards and balancing the interests of both parties is essential.

Summary

A non-compete clause means that an individual (or entity) is restricted from engaging with competitors of the contracting party, often found in employment agreements. Recent Dutch legislation, expected in Q1 2025, mandates that these clauses be specific in scope—defining the type of work, named competitors, geographical limits, and capping the duration at one year post-employment.