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Restrictive Covenants – key considerations for employers in Germany – November 2022

11 October 2022

Our German employment experts outline considerations for restrictive covenants, including the main non-competition and the non-poaching covenants in Germany.

What are the key types of restrictive covenants in your jurisdiction?

The main types of restrictive covenants in Germany are the non-competition covenant and the non-poaching covenant, aiming to prevent an employee poaching former colleagues.

Whereas the first type is the subject of a more or less detailed statutory regulation dating back to the 19th century (!), the second is not regulated by law and has not been conclusively clarified by case law on many points. In order not to overload this overview of restrictive covenants, we will therefore limit ourselves in the following to the post-contractual non-competition clause.

Does the employer have to pay compensation to the employee in relation to the restrictive covenants?

The reply is clearly "yes" for the post-contractual covenant not to compete. The employer principally has to pay at least 50 % of the "contractual benefits last received by the employee" for the duration of the post-contractual covenant not to compete. 

The determination of what has to be included in the calculation basis for the compensation, and what not, can give rise to complex questions. Consequently, employers often make faults in this context, having as a consequence that the non-competition covenant is "not binding" for the employee (this is already the case if the compensation is only one Euro below the amount corresponding to the case law's understanding). 

"Not binding" means that the employer cannot invoke the non-binding non-competition clause and that the employee has the right to choose whether to respect the non-competition clause and receive the compensation or not to respect the clause and, accordingly, not receive the compensation.

Are there limits to the post-employment restriction period and to the geographical area of the restrictive covenants?

For the post-contractual covenant not to compete, the restriction period is limited to a statutory maximum of 24 months.

If the geographical area covered by the post-contractual covenant not to compete is too wide, the clause is "not binding" for the employee. If that is the case it has to be checked for each individual case.

According to the law, the prohibition of competition is "not binding" insofar as it does not serve to protect a legitimate business interest of the employer. It is also "non-binding" insofar as, taking into account the compensation granted, it contains an unreasonable impediment to the advancement of the employee in terms of place, time or object. Therefore, in order to decide whether the breadth of the geographical area of the restrictions is justified, not only the amount of the compensation but also the length of time of the post termination restriction and the breadth of the activities that the employer is trying to restrict have to be taken into account. Of course, the German courts have established some principles in this context.   

Can the employer unilaterally revoke the agreed restrictive covenant at the end of the contract or otherwise avoid its application?

Yes, this is principally possible in Germany, but not under very favourable conditions for the employer:

The employer may, before the redundancy or termination of the employment, waive the non-competition clause by written declaration with the effect that he shall be released from the obligation to pay the compensation upon the expiry of one year from the declaration. This means that such a waiver releases the employee with immediate effect from his obligation to comply with the non-competition obligation whereas the employer shall not be released from his obligation to pay the compensation until the expiry of one year after the declaration of waiver has been made. 

What remedies are available to the employer when an employee breaches their restrictions?

If the employee violates the post-contractual non-competition clause, he loses the right to compensation for the duration of the violation. 

In addition, the employer may seek an injunction from the court to stop the competition. 

Furthermore, if the employer is no longer interested in the further fulfilment of the non-competition agreement after the infringement, he can withdraw from the non-competition agreement altogether. 

Finally, the employer can claim damages. The claim for damages extends in particular to compensation for lost profits. 

Restrictive Covenants Webinars
We will be hosting a series of restrictive covenant webinars, learn more and register here.

Further Reading