Non-Compete Clause

A non-compete clause enables employers to forbid employees, after leaving their job, to compete with the employer’s company - either by running their own business, or by working for or owning part of another business competing with the present company.

Conditions for Non-Compete Clauses

Prohibiting the right to compete is a tricky area set between the conflicting priorities of business interests and the employee’s right to professional development. For this reason, great attention is given to the conditions regarding validity, impact, and infringement.

Statutory provisions concerning competition prohibition are laid down in the Swiss Code of Obligations (Art. 340 to 340c). However, the admissibility of the prohibition can only be judged on the basis of the individual circumstances of the employment contract parties. In order that a non-compete clause can even be enforced, the following conditions and more must be fulfilled (not a definitive list):

  • Prohibition to compete was agreed in writing (in the employment contract or in a separate agreement. References to corresponding provisions, e.g. in the staff regulations, do not suffice).
  • The employee has insight into the client base or to facts requiring secrecy.
    • “Insight into the client base” means insight into the organization’s base of long-standing loyal clients. Prohibition to compete does not however apply when the client relationships are primarily shaped by the personality and skills of the employee.
    • Secret facts are deemed as those that are only accessible to a limited circle of people and which provide a significant competitive edge in that field of activity. Information and expertise that can easily be obtained are not considered secret.
  • The use and dissemination of this particular knowledge must be capable of substantially harming the company although it is unimportant whether the company is actually harmed or not: The mere risk of disadvantage is enough.
  • Non-compete clauses are (from the perspective of time, geography, and content) limited to an appropriate extent.
  • A non-compete clause does not hinder the professional advancement of the employee in a too unreasonable way.

In order to offset the disadvantages incurred to employees by a non-compete clause, compensation payment is sometimes agreed. This payment from employers compensates the employee for the duration of the competition prohibition.

What Happens When the Non-Compete Clause is Violated?

Violation by an employee of the non-compete clause results in liability to pay compensation. Due to the difficulty of proving any actual harm, a breach of contract penalty is usually agreed which must be paid even if no damage has actually occurred. If the damage caused amounts to more than the penalty, employers can demand added compensation. Any amount can be agreed for the breach of contract penalty but it generally covers several months’ salaries.

When Does the Prohibition Cease?

The prohibition ceases

  • When the employer has no further interest in upholding the prohibition (e.g. if the employer discontinues that field of business)
  • When the employer dismisses the employee for reasons that are not attributable to the employee (e.g. economic or organizational reasons)
  • When the employee resigns for reasons attributable to the employer (e.g. sexual harassment, relocation of the place of work, non-compliance with fixed promises)
  • When the employer waives the non-compete clause

Alternative to Non-Compete Clause: Customer Poaching Ban

If a non-compete clause needs to be agreed because the employee has insight into the customer base, one alternative is to agree a ban on customer poaching. While preventing the employee from stealing customers, it does not prevent the employee from continuing in their profession.

Sources

Bräunlich Keller, Irmtraud. (2011). Arbeitsrecht. Vom Vertrag bis zur Kündigung. Zürich: Beobachter-Buchverlag.

Ruedin, Philippe, Urs Christen & Irmtraud Bräunlich Keller. (2010). OR für den Alltag. Kommentierte Ausgabe aus der Beobachter-Beratungspraxis. Zürich: Beobachter.

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