Non-competition clause

Newsletter - July 2016

As a rule, after termination of an employment contract, the employee is free to work for another employer but must not, however, act in a disloyal manner. As an exception, the employee may be bound by a non-competition clause which will prevent him/her from freely taking on a new job. Three recent court decisions have clarified the consequences of the invalidity of such a clause.

The non-competition clause: principles and conditions of validity

The clause may be concluded at the time of the initial employment contract or later by amendment, but it must be in writing. If the employment contract does not contain it, it may result from a collective agreement if compulsory and provided the employee is informed when s/he is hired (Employment Division of the French Court of Cassation – 8 January 1997).

To be valid, the clause must meet the following four cumulative requirements laid down by case-law. It must:

– be essential to safeguard legitimate business interests (e.g. a waiter/waitress in contact with clients, a travel agency manager, etc.),
– be limited in time,
– be limited in space,
– be compensated.

A clause unlimited in time, or excessively long for the type of job, and a clause forbidding the employee from working in an overly large area, may be held unlawful. Generally speaking, the judge will verify the applicability of the clause based on the company’s imperatives and the employee’s freedom. It may not deprive the employee of employment or defeat the principle of freedom of employment.

The financial compensation may not be derisory. It is usually proportional to the employee’s salary and to the period of non-competition. Such compensation is only paid when the clause is applied and must not vary depending on how the contract is terminated (Employment Division of the French Court of Cassation – 14 April 2016).

Particular care should be taken when drafting the clause as the employer may not decide unilaterally to waive it unless the contract so provides. Therefore, an employer wishing to exempt his/her employee from the obligation not to compete, when neither the contract nor the collective agreement contain any such provision, may see his employee demand its application.

L’illicéité Unlawfulness and invalidity of the non-competition clause

If a clause does not comply with the criteria established in the above decisions, the court sanctions its unlawfulness by invalidating the clause. Hitherto, the courts considered that the nullity of the clause caused the employee a prejudice.

Reparation for the prejudice was then automatic, whether or not the employee complied with the non-competition clause after termination of the contract. However, damages varied in amount depending on his/her compliance or non-compliance with the clause.

Recent decisions

In a decision of 13 April 2016, the Employment Division of the French Court of Cassation went back on prior decisions and overturned the case-law. An employee may no longer invoke an automatic prejudice, as was formerly the case, and must now prove the existence of a loss caused by the invalidity of the clause.

While this possibility still exists where the employee complies with the clause, it would seem difficult for him to rely on the invalidity of the clause if he did not respect it after the end of the contract.

In a second decision of 17 May 2016, and then in a third decision of 25 May 2016, the Employment Division of the French Court of Cassation confirmed the judge’s sovereign power to decide on the existence of a prejudice and its assessment.

In the case, the court considered that the employee, who had taken over a business competing with that of his former employer, in breach of the non-competition clause, although invalid, could not claim a prejudice caused, by definition, by the invalidity of the clause.

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