Non-competition clause in a work contract

Legal principles governing non-competition clauses

Conditions

According to art. 340 I CO, an employee with capacity to act may give the employer a written undertaking to refrain from engaging in any activity that competes with the employer once the employment relationship has ended and in particular to refrain from running a rival business for his own benefit or from working for or participating in such business.

The prohibition of competition is binding only where the employment relationship allows the employee to have knowledge of the employer’s clientele or manufacturing and trade secrets and where the use of such knowledge might cause the employer substantial harm (art. 340 II CO).

Art. 340a I CO specifies that the prohibition must be appropriately restricted with regard to place, time and scope such that it does not unfairly compromise the employee’s future economic activity; it may exceed three years only in special circumstances. In other words, the clause prohibiting competition may not exceed the boundaries of what is justifiable by employers’ interests.

A non-competition clause in an employment contract which fails to meet all of these conditions renders the clause null and void.

Consequences of a Violation

Employees who violate non-competition clauses are required to compensate their employers for the consequent loss (art. 340b I CO). This means that the employer must prove that he has suffered a loss in connection with the breach of the non-competition clause.

When a non-competition clause providing for a contractual penalty is violated, employers are entitled to demand payment of the specified amount of the penalty. It is not possible to make a general statement regarding the maximum amount of such contractual penalty. According to the Swiss Supreme Court, the contractual penalty should generally not exceed half of the annual salary.

Employers may only demand cessation of the infringement if they have expressly reserved the right to do so in writing (art. 340b III CO). However, Courts will generally only comply with such requests by means of interim measures (i) if the damage or threat to the employer’s interests are insufficiently protected by the contractual penalty and (ii) if the employer’s interests take precedent over those of the employee.

Specific issues

As already observed, the prohibition must be appropriately restricted with regard to place (art. 340 II CO). This means that the prohibition should not extend beyond the territory over which the employer deploys its activity. This geographical limitation must be understood to mean the circle of customers or market in which the company is active. According to the Swiss Supreme Court, it is possible to extend the prohibition to the entire world in highly specific fields, where the market is global, provided that the prohibition only applies for a short period of time.

Whether or not the employer remunerates his employee in consideration of his acceptance of the restraint is also an important point. Thus, Courts are more willing to recognize the validity of non-competition clauses when the employee is adequately compensated.

A controversial issue is to determine whether a non-competition clause is valid when only incorporated in internal regulations or in a employee handbook and not directly in the working contract. The majority of authors believe thatnon-competition clauses are not valid when only incorporated in internal regulations or handbooks, especially when the employee is not adequately compensated.

The “personal ability” criteria

In recent decisions, Courts have introduced a new criterion which substantially restricts the scope of non-competition clauses. Indeed, the Swiss Supreme Court considers that wen an employee creates a personal relationship with a client by providing services which are essentially based on his own personal skills, and that these skills are more important for the client than the name or identity of the employer, the non-competition clause is not applicable to this particular employee. Therefore, non-competition clauses do not apply to employees providing to clients services characterized by a strong personal component. The crucial question is of course to determine what exactly are the professions implying “a strong personal component” by the employee. Courts already have had the opportunity to confirm that lawyers and doctors typically worked in occupations involving a strong personal component, but this criterion obviously applies to many other professions.

Conclusion

To conclude, each non-competition clause must be carefully examined as its validity will depend on the particular circumstances of the relations between the employer and the employee. In analysing this relation, the crucial question can be summarised as follows: does the non-competition clause compromise the employee’s economic future or not? If it is the case, Courts would probably not enforce the non-competition clause.

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This website aims to provide general information regarding Swiss law and should not be regarded as a legal opinion. For more specific advice, do not hesitate to contact us.