When faced with the termination of key employees, the issue of non-compete covenants quite often is placed on the agenda. In this regard, one of the most commonly asked questions is how the scope of such agreements can be tailored to encompass as large an area as possible. We introduce the relevant guidelines, as held in a recent Court of Appeal ruling.
What was the content of the Court of Appeal ruling?
In a late 2014 ruling, the Court of Appeal upheld the validity of a non-competition clause prohibiting an employee from joining a competitor’s company once his contract had been terminated. This is the first time that case law has ruled so clearly on the extension of the scope of application of the French-inspired non-competition clause. The employee in the case in question was seeking compensation on the basis of the non-competition clause contained in his previous employment contract, which prohibited him in particular from entering into the employment of a competitor company once his contract had been terminated. For the employer, the non-competition clause was null and void, while according to the employee, it exceeded the provisions of article L. 125-8 of the Labour Code, which prohibits employees from carrying out independent activities similar to those of their employer after the employment relationship is terminated. According to the Court, the extension of the scope of application of the non-competition clause to include any salaried employment, and not simply operating an independent competitor company, was permissible, provided that this did not place the employee under excessively stringent obligations.
Which restrictions are possible under Luxembourg law?
In this particular case, the Court was of the view that the employee’s freedom to work had not been excessively restricted, given that:
- The employee was able to work for or apply for positions with non-competitor companies;
- There was a time limit on the prohibition (a period of 12 months in this case, with effect from the effective termination date of the contract);
- The prohibition was attached to financial remuneration (monthly compensation amounting to 25% of the most recent basic monthly salary).
Moreover, according to the Court, the employee’s freedom to work is not restricted if the geographical area covered by the non-competition clause is not too extensive. In this
case, the Court narrowed the geographical area to the Grand-Duchy of Luxembourg, along with Alsace and Lorraine. The result of this ruling is that an enhanced non-competition clause will be considered entirely valid if, on the one hand, the employee’s freedom to work is fully protected, and, on the other, if the mutual concessions of both parties are fairly balanced.
Court of Appeal, 3rd Chamber, 13 November 2014, n° 39706