The non-competition clause in the employment contract

A non-competition clause is only valid if it fulfils the requirements of Article 340 et seq. of the Swiss Code of Obligations (CO). Accordingly, the key aspects are written form, the competing activity, insight into the clientele or into manufacturing and business secrets as well as damage to the employer.

Written form

Article 340, paragraph 1 CO requires the non-competition clause to be in writing. The formal requirements are low: simple written form is generally sufficient. The employee must therefore sign a corresponding agreement. The employer's signature, on the other hand, is not required as the employer is under no obligation.

Whether the non-competition clause is set out in the employment contract or in a separate document is irrelevant from a legal perspective. The only decisive factor is whether the employer has signed the corresponding clause. According to the prevailing opinion, a global reference to general terms and conditions of employment, collective labour agreements, employee handbooks or other regulations is not sufficient. Cantonal case law considers such a non-competition clause to be null and void.

Competing activity

In the context of a non-competition clause, an employer may prohibit its employee from engaging in competing activities. At first glance, the meaning of this term appears to be self-explanatory. In practice, however, there is a great need for clarification.

Firstly, a distinction must be made between a company-related and an activity-related non-competition clause. The former prohibits the employee from being employed by a competitor company at all. The latter is somewhat broader and relates to the previous field of work. Whether a competing activity exists is determined by the case law of the Federal Supreme Court depending on the services offered. This depends on the circumstances of the individual case.

A competing activity is affirmed if the old and the new employer offer similar services. This is the case if they are intended to satisfy the same or similar needs and are aimed at a target audience that overlaps at least in part.

Insight into the clientele or into manufacturing and business secrets

It is also necessary for the employee to have had insight into the employer's clientele or manufacturing or business secrets. This is stipulated in the second paragraph of Article 340 CO.

The clientele includes all parties who have done business with the employer over a longer period of time. The frequency is not important here - what is decisive is a certain regularity. The question of the intensity of the contact is also important in this context. The employer must have been able to familiarise itself with the needs and characteristics of the customers

Manufacturing and trade secrets, on the other hand, involve technical, financial or organisational knowledge. The employer wishes to keep this knowledge secret. They are only available to a certain group of people and are not accessible to the public. General industry knowledge and professional experience do not fall under manufacturing and trade secrets.

Significant damage to the employer

A further prerequisite for the admissibility of the non-competition clause is that the employer is harmed by the above-mentioned insights. There must be an adequate causal connection. The legal regulations work with a hypothesis here. It is sufficient if the new employer - or the employee himself - could exploit the information and knowledge obtained in a competitive manner. Whether the damage actually occurs is not relevant.

In everyday working life, it often happens that customers remain loyal to their employer because of their personal characteristics and skills. If these are more important to them than the identity of the employer, the required causal link is lacking. The non-competition clause is therefore void. This particular case constellation frequently occurs in liberal professions such as doctors, architects and lawyers.

Unfavourable impediment to economic advancement

If all of the above requirements are met, the prohibition agreed between the employee and employer is valid. In principle, it is also enforceable. In a further step, however, it must be examined whether the agreement unreasonably impedes the employee's economic advancement.

A non-competition clause under labour law is enforceable if it is reasonably limited. In Article 340a, paragraph 1 CO, the law requires a restriction in terms of territory, time and subject matter. This provision is intended to ensure that an employer does not place any unnecessary obstacles in the way of its former employee. Without a restriction, the ban would often be tantamount to a complete occupational ban.

Locally, the non-competition clause is limited to the employer's area of activity. It may not extend any further. Formulations that relate the prohibition of competition to the whole of Switzerland do not stand up in court. However, a territorial restriction that only affects a few cantons may be appropriate.

The law sets a maximum time limit of three years. In legal practice, however, this maximum limit rarely proves to be permissible. A time limit of a few months to two years is often considered appropriate.

The employer's interest in maintaining the confidentiality of the knowledge is of decisive importance for the assessment. This is assumed to be the case until a new employee has been trained, but may also continue beyond this period.

In turn, the non-competition clause may only restrict the employee with regard to competitive activities. This means that there must be a direct connection between the activities with the old and the new employer. The excessive - i.e. inappropriate - nature of a non-competition clause does not mean that it is void or ineffective. The judge has the option of reducing it to the permissible level in terms of location, time and subject matter.

The non-competition clause in the employment contract harbours a high potential for conflict. The employer's endeavours to protect its clientele and its secrets are in conflict with the employee's freedom of development and market competition. This tense relationship is a constant source of dispute. National courts regularly have to deal with the question of the validity of an agreed non-competition clause.

The interests of both parties must be carefully and comprehensively weighed up. There is not always a clear answer as to whose need for protection is more important. It is also conceivable that the restrictions compensate each other. In this case, the non-competition clause is also considered reasonable. Either way, such a clause can have unpleasant consequences for both the employer and the employee.

Consequences of a breach

Many employees are not even aware of these consequences. They sign such agreements carelessly and unsuspectingly disregard valid non-competition clauses. In this case, the law (Article 340b CO) provides for three different sanctions: Contractual penalty, damages and real execution.

Contractual penalty

The contractual penalty is the type of sanction with the greatest practical relevance. It is included in most non-competition clauses and obliges the competing employee to pay a certain amount. Alternatively, the payment of a certain number of monthly wages or a percentage of the annual salary can also be stipulated.

In principle, the parties are free to decide on the amount of the penalty. However, the following also applies here: if the amount is excessively high, the judge can adjust it at his discretion. If nothing else is agreed, payment of the contractual penalty exempts the employee from the non-competition clause (Art. 340b, paragraph 2 CO). However, this exemption can be excluded by the employer through appropriate wording.

The damage suffered by the employer often exceeds the amount of the contractual penalty. In this case, the employee must pay the difference - provided that he is at fault.

Compensation for damages

If the employee breaches the non-competition clause, he is legally obliged to pay compensation for the damage incurred (Article 340b, paragraph 1 CO). The amount of damages depends on the employer's financial situation. It is calculated by comparing the actual sum with the sum to be assumed if the non-competition clause is complied with. This primarily concerns lost profits and losses suffered.

The burden of proof for the damage and a causal connection lies with the employer. However, precise proof is very difficult. In practice, compensation therefore plays a rather subordinate role.

Enforcement in reality

Sometimes the disadvantage suffered by the employer is so great that compensation through the payment of a contractual penalty and damages is impossible. In these cases, the employer can demand that the employee give up their competing activity. If the strict requirements are met, the employer can enforce this claim in court and under threat of enforcement. Enforcement in reality is therefore the most severe of the three sanction options.

Non-competition clauses are not only found in labour law. From a legal perspective, they represent a contractual agreement to which general contract law applies. The principle of contractual freedom therefore also applies. In practice, this means that such clauses may be agreed in all contractual relationships. They therefore also apply to other occasions and business transactions.

In partnership agreements, they protect companies from competing activities of former shareholders. In licence agreements and contracts for work and services, they ensure that the specialist knowledge acquired cannot be exploited. And in exclusive distribution and franchise agreements, they prevent the subsequent poaching of customers. Non-compete clauses are also common in agency law, rental and lease agreements and company acquisitions.

For all these non-competition clauses, the standards applicable to the respective contractual relationship must always be applied first. General contract law is subordinate. The transfer of special statutory provisions to other types of contract is excluded. The prohibition of analogy applies. Article 340 et seq. CO can therefore only be applied to the non-competition clause in the employment contract. However, they can point the way in the context of an interpretation.

In most cases, the non-competition clause expires when the contractually agreed duration of the non-competition clause expires (Article 114, paragraph 1 CO). It is also possible to terminate the non-competition clause by means of a unilateral or bilateral cancellation agreement. Further (relatively compelling) reasons are listed in Swiss labour law in Article 340c CO. In these cases, the non-competition clause is cancelled before the deadline expires.

Cancellation due to lack of interest

This is the case, for example, if the employer loses interest in maintaining the non-competition clause. This can regularly be assumed in the case of the discontinuation of individual production branches, the closure of the business and the disclosure of facts that were originally kept secret. The possibility of significant damage no longer exists - and not just temporarily. The employee must provide proof of the lack of interest.

Discontinuation due to termination

If the employer terminates the employment relationship without good cause, the non-competition clause is also null and void. There is no comprehensible reason for the employer's decision based on the employee's personal circumstances. This could include persistent illness, poor performance or disloyal behaviour.

The employee's dismissal can also lead to the cancellation of the non-competition clause. This occurs if the termination of the employment relationship is due to a cause for which the employer is responsible. This does not have to be a breach of contract. Poor working conditions, unfulfilled promises and unworthy treatment can also constitute good cause.

Legal advice from a lawyer for labour law

A non-competition clause can lead to unpleasant surprises - for both the employer and the employee. It is therefore advisable to seek the advice of a labour law lawyer. They will find legally compliant formulations, check the admissibility and appropriateness of a non-competition clause and tell you what you need to look out for.

GetYourLawyer will support you in your search for a specialist who will provide you with expert advice and do their utmost for you. Make your enquiry and find a lawyer who suits you and your individual case.