Non-Compete Clauses in Employment Contracts

M. Strobel, Lawyer

competition

An employee may undertake in writing to not engaging in any competing activities with the employer after the expiry of the employment. This may include in particular to refraining from running a competing business for his own benefit or from working for or participating in such business.

However, such prohibition of competition is binding only if certain conditions are fulfilled: The employment relationship must allow the employee to get knowledge of the employer’s clients or manufacturing and trade secrets. And the use of such knowledge must be suitable to cause the employer substantial harm.

The prohibition must further be restricted with regard to scope, time and place in a way that it does not unfairly hinder the employee’s future economic activities. It may in general not exceed a maximum period of three years. The prohibition shall also not extend beyond the employer’s area of activity and the geographical limitation shall be restricted to the circle of customers or market in which the company is active.

A non-compete clause in an employment contract which does not meet all of these conditions is null and void. Non-compete clauses may also not apply to employees that provide services to clients that are characterized by a strong personal component. The difficulty here obviously is to define the professions / functions that imply such a strong personal component.

Employees who violate non-compete clauses have to compensate their employers for the loss incurred. Accordingly the employer has to prove the loss which is not always easy. A contractual penalty for the violation of the non-compete clause has therefore almost become a standard clause in many employment contracts with sales people, technical or other specialists and senior management members.
In the event of a violation of a non-compete clause, employers may demand payment of the specified amount of the penalty. The Swiss Supreme Court has ruled that such contractual penalty shall generally not exceed half of the annual salary. The amount must be a specified amount; the provision in the employment contract of only a maximum amount is not allowed.

Non-compete clauses have to be carefully examined since their validity will depend on the particular relationship between employer and employee. The key question thereby is: Does the non-compete clause hinder the employee’s economic future? Courts will be very reluctant to enforce a non-compete clause if the latter is the case.

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