Definition and Types of Restrictive Covenants
Under German law, the freedom to include restrictive covenants in an employment agreement is limited by statutory law. 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 whether to ignore the restrictive covenant overall, without being compensated. Therefore, the content of restrictive covenants must be drafted very carefully.
The following restrictive covenants are recognised and may be enforceable under the law:
- non-compete clauses;
- non-solicitation of customers;
- non-solicitation of employees (also called non-poaching covenants).
Enforcement of Restrictive Covenants – Process and Remedies
If the restrictive covenant is agreed upon lawfully, it can be enforced by the labour courts. There is a possibility of obtaining injunctive relief, whereby the employee can be forced to stop any competing activities. Furthermore, the employer is not obligated to pay any compensation during the time of violation of the restrictive covenant. The employee has to compensate the employer for any damages which result from the violation of the restrictive covenant. However, in most cases, it will be difficult for the employer to demonstrate and prove the amount of the damages. The parties also have the opportunity to agree upon a contractual penalty for each violation. This has the advantage that the damages incurred by the employer do not need to be demonstrated, as the amount of the contractual penalty is realised upon any violation.
Use and Limitations of Garden Leave
The employee has a right to work for the employer and therefore cannot be released unilaterally by the employer without a justified reason (criminal acts of the employee, concerns of the employer regarding the protection of its business and trade secrets or any competing acts of the employee). In practice, employees are nevertheless 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. The employer is, however, entitled to offset any outstanding vacation against the release. Generally, during the time of release the employee may not perform any competing activities as the employment relationship is still ongoing, and the statutory non-compete still applies. However, in case of an irrevocable release, the employer should explicitly state that the non-compete shall continue to exist. In theory, employees can challenge garden leave through an interim injunction, but in practice this rarely occurs.