Background 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 (see also our previous news item). 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 (among others) aims to continue to allow employers to protect their market position (bedrijfsdebiet) while on the other hand reducing the unnecessary use of non-competition clauses.

Proposed changes

The non-competition clause is laid down in Article 7:653 of the Dutch Civil Code (DCC). 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 - partly - far-reaching changes with respect to the non-competition clause. These changes will be explained below. These changes 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 (12) months) after the employment contract is usually adhered to (which is generally considered reasonable), a longer term can also be validly agreed upon. An employee can, if desired, challenge the duration of the clause in court. However, it follows from the Bill that a clause entered into for a period longer than twelve (12) 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 (e.g. the clause must state in which area or within what radius the non-competition clause applies). If the geographical scope is not included, the clause is null and void. If the employee is of the opinion that the geographical scope is not sufficiently motivated, the employee can turn to the court. As set out below under (vi), the court may nullify a non-competition clause (wholly or partly) if the restriction is not necessary because of a substantial business interest. An employee may also claim that the non-competition clause should be wholly or partly nullified if the employee is unfairly disadvantaged by the clause in relation to the employer's interest to be protected.

  3. Substantiation of substantial business interest in employment contract for an indefinite period of time. In employment contracts for an indefinite period of time, the employer will have to motivate the substantial business interest of the non-competition clause in writing as well. As mentioned above, this requirement currently only applies to fixed-term employment contracts. Based on the Bill, the non-competition clause is also void if the substantial business interest is not motivated in employment contracts for an indefinite period of time.

  4. Compensation for the employee when the non-competition clause is invoked. Another far-reaching proposed change, is that 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. For example, if the non-competition clause is invoked for the maximum duration of one year, the employer owes the employee a compensation for the amount of six (6) monthly salaries. Employer and employee may agree on a higher compensation, but not on a lower one. If employer and employee do agree on a lower compensation, then this part of the non-competition clause can be nullified by a court. What is considered as “salary” within the meaning of this mandatory compensation will be determined by general administrative measure (Algemene Maatregel van Bestuur). The intention is to follow the system that applies to the transition payment: gross monthly salary, plus agreed fixed wage components such as holiday allowance, a fixed thirteenth month, a structural overtime compensation and a fixed shift bonus.

  5. Employer invoking non-competition clause. Pursuant to the Bill, the employer can only invoke the non-competition clause by informing the employee in writing and timely that he will hold the employee to the non-competition clause, and for how long. In principle, "timely" means one month before the end of the employment contract. This means that in principle, the employer must inform the employee in writing no later than one month before the end of the employment contract whether it will hold the employee to the clause and, if so, for how long. 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, and the employee is thus not bound by it.

  6. Possibility of (whole/partial) nullification. The Bill also 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.

Pursuant to the Bill, a termination agreement may deviate from some parts of - the to be amended - Article 7:653 DCC. For example, employer and employee - as mentioned above under (iv) - can agree on a higher compensation when invoking the non-competition clause. However, the obligation to limit the non-competition clause geographically (and substantiate this limitation) and the maximum duration of the clause (twelve 12 months after the end of the employment contract) cannot be deviated from - even by termination agreement.

In response to the Van Oostenbruggen/Patijn motion, the government will also 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. The commitment to the House of Representatives is that the outcome of this exploration will be delivered before next summer.

Transitional law

The non-competition clauses that were validly agreed upon before the entry into force of the Bill will remain valid. The proposed formal requirements for future non-competition clauses will not apply to existing non-competition clauses; the current subsections 1 through 3 of Article 7:653 of the DCC will continue to apply to these clauses. This means, among other things, that for the existing non-competition clauses the geographical scope and compelling business interest do not need to be motivated in the employment contract.

The existing non-competition clauses will, however, be subject to the provisions relating to the invocation of the clause and the payment of compensation if the employee is held to the non-competition clause. Thus, existing non-competition clauses will also become subject to the 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.

Subsequent procedure

It is possible to respond to the Bill until 15 April 2024. Given the far-reaching changes, we expect many reactions. It is possible that as a result of the responses to the Internet consultation, the Bill will still be amended and will be submitted in amended form to the House of Representatives. Either way, the Bill will still have to be debated by the House of Representatives and approved by the Senate before it enters into force.

Of course, we will continue to closely monitor developments regarding the Bill. Should you have any questions regarding the above news item, please feel free to contact us. We are happy to assist you.