Employment clauses are the collective term for non-solicitation, non-competition, and job clauses. All three types of clauses are regulated in the Employment Clauses Act.
The Employment Clause Act
The Employment Clauses Act entered into force on January 1st 2016. The Act applies to agreements on employment clauses entered into after this date.
What is a non-solicitation clause?
In short, non-solicitation clauses regulate the employee’s ability to have a business connection with the former employer’s customers and other business connections.
According to the Employment Clause Act, a non-solicitation clause is only valid when:
- The non-solicitation clause relates to customers and other business connections with whom the employee has had a business connection within the last 12 months before the time of termination.
- The employee has continuously been employed with the employer a least six months when the clause enters into force.
- The employee receives compensation for taking on the clause (see more below).
- The clause does not obligate the employee for more than 12 months after the employment relationship ends.
- The employee is informed in writing about the above points.
- The employee is entitled to a list of those of the employer’s customers and other business connections covered by the clause.
What is a non-competition clause?
Non-competition clauses regulate the employee’s ability to compete with his former employer, both directly and indirectly.
According to the Employment Clause Act, a non-competition clause is only valid when:
- The employee in question occupies a especially trusted position or has entered into an agreement with the employer regarding the employer’s exploitation of an invention made by the employee.
- The employee is informed in writing which conditions in the employment make it necessary to agree on a non-competition clause.
- The employee has continuously been employed with the employer a least six months when the clause enters into force.
- The employee receives compensation for taking on the clause (see more below).
- The clause does not obligate the employee for more than 12 months after the employment relationship ends.
- The employee is informed in writing about the above points.
- The non-competition clause may specify what constitutes competing business, but it is not a validity requirement.
Combined clauses
A combined clause is the term for an employee to be subject to both a non-solicitation and a non-competition clause.
The respective clauses must comply with the requirements for each of the two types of clauses, as described above.
However, combined clauses can only obligate the employee for a maximum of 6 months but trigger the same monthly compensation as an isolated non-solicitation or non-competition clause with a binding of 12 months.
What are job clauses?
Job clauses are entered into between the employer and other businesses to regulate the other businesses ability to employ certain employees. Since the Employment Clauses Act entered into force, the clauses can no longer be validly agreed, with very few exceptions.
They can, however, still be entered into in connection with negotiations on a possible business transfer. Here, a potential acquiring company might validly agree that the acquiring company may not employ specific critical employees for a period of six months after clause has been agreed.
The validity is not dependent on whether an agreement is reached on a business transfer or not. However, it is a requirement that the employer has employed the key employee in question for at least 3 months before the clause is agreed.
If an agreement is reached on a business transfer, the job clause can be maintained up to 6 months after the business transfer.
Compensation
To assume either a non-solicitation clause, non-competition clause or combined clause, the employee is entitled to compensation.
The compensation is calculated based on the employee’s total salary package and thus the salary with the addition of the tax value of a potential paid phone for private use, a company car, etc.
The compensation is paid as a monthly amount paid out throughout the clause’s binding period. However, the compensation for the first two months is paid as a lump sum together with the last monthly salary during the employment.
For isolated non-solicitation and non-competition clauses, the compensation depends on the length of the binding period. With a binding period of up to 6 months, the employee is entitled to payment of 40% of the salary when the employment ends. With a binding period of more than 6 months (12 months is the maximum length), the compensation increases to 60% of the salary when the employment ends.
For combined clauses, the employee is entitled to compensation equal to 60% of the salary when the employment ends – even if the maximum binding period here is six months.
Suppose the employee obtains other suitable work during the binding period. Then the salary from the new employer can be set off against the compensation. However, a compensation of 40% can only be reduced to a minimum of 16%. A compensation of 60% can be reduced to a minimum of 24%. The lump sum for the first two months of the binding period cannot be reduced.
Cancellation and lapse of employment clauses
Both non-solicitation and non-competition clauses can be cancelled with one-months’ notice by the employer. However, the employee is still entitled to compensation in the form of the lump sum for the first two months of the binding period if the employment ends less than six months after the clause has been cancelled.
If the employer terminates the employee without the employee having given reasonable cause to do so, then a non-competition clause or the non-competition part of a combined clause cannot be validly enforced. The same applies if the employee resigns because the employer has not fulfilled his obligations. However, a non-solicitation clause or the non-solicitation part of a combined clause will continue to be enforceable.
A non-competition clause or the non-competition part of a combined clause is not binding on the employee if it goes beyond what is required to safeguard the employer’s interests.
Who is covered?
The Employment Clause Act covers all employees on the Danish labour market and not just employees covered by the Salaried Employees Act, as was the case earlier. However, top level executives and others, who are not considered employees in Danish employment law, are not covered, with a few exceptions.
Clauses entered into before January 1st 2016
Employment clauses entered into before January 1st 2016 are, for the most part, still valid if they were valid under previous legislation.
At Advokatgruppen, we can advise you on implementing employment clauses, whether your employees’ existing clauses are valid and how they can be enforced.
