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Restrictive Covenants in Germany

1. Definition of Restrictive Covenants

During an employment relationship, the employee is not allowed to work for any competitor pursuant to Sec. 60 German Commercial Code (HGB). However, after the expiration of the notice period, the employee is no longer bound by the statutory non-compete. Therefore, it might become necessary to agree upon a post-contractual restrictive covenant with the employee.

Under German law, the possibility of agreement to restrictive covenants is limited and a post-contractual restrictive covenant is only binding, if

  • the agreement is in writing and the employee received an originally signed copy,
  • the employer has a justified commercial interest in the content of the restrictive covenant,
  • the justified interests of the employee are not unlawfully restricted,
  • the covenant does not exceed a period of two years, and
  • the employer pays a compensation for the duration of the post-contractual restrictive covenant in the amount of at least 50 % of the prior overall earnings of the employee.

If the justified scope of the post-contractual restrictive covenant is exceeded, the employee may choose whether to adhere to the legitimate part of the restrictive covenant and to be compensated or to ignore the restrictive covenant overall without being liable. Therefore, the content of restrictive covenants must be drafted very carefully.

The employer may waive the post-contractual restrictive covenant. However, the obligation to pay the necessary compensation continuous for a period of twelve months, although the employee is not longer bound by the restrictions. Only in case of a termination for cause with immediate effect, is the employer is entitled to withdraw from the restrictive covenant. Therefore, if the employer no longer has an interest in the post-contractual restrictive covenant, he should waive those rights and obligations as soon as possible.

Especially with respect to the obligation of compensation payment in the amount of 50% of the last overall remuneration, the post-contractual non-compete is expensive in Germany and should therefore only be used with respect to key employees.

2. Types of Restrictive Covenants

a. Non-Compete Clauses

Non-compete clauses can be divided into clauses, which regulate any activity of a former employee for competing companies (company-related), and clauses, which regulate the kind of activities of a former employee (activity-related).

b. Non-solicitation of customers

Such clauses regulate that a former employee is hindered to actively pitch to and contact former customers of the employer in order to transfer the business from the former employer to him/her or a company the employee works for.

c. Non-solicitation of employees

Such clauses regulate that a former employee is hindered to actively solicit other employees of the former employer to terminate their employment and to start working with him/her or a company the employee works for.

3. Enforcement of Restrictive Covenants—process and remedies

If the restrictive covenant is agreed upon lawfully, it can be enforced in front of an employment court. There is a possibility of obtaining an injunctive relief. The employee can be forced to stop any competing activities.

4. Use and Limitations of Garden Leave (definition and applicability)

The employee has a right to work for the employer and therefore cannot be released unilaterally by the employer without justified reason. In practice, employees are often released from their duty to work after a termination notice until the end of the applicable notice period. During such release, the contractual remuneration of the employee needs to be paid.

Generally, during the time of release the employee may not perform any competing activities. The employment relationship is still ongoing and the statutory non-compete still applies.

For more information on these articles or any other issues involving labour and employment matters in Germany, please contact Tobias Pusch, Partner at Pusch Wahlig Legal (www.pwlegal.net) at pusch@pwlegal.net
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