May a non-competition clause be entered into with any employee?

WHAT IS A NON-COMPETITION CLAUSE?

During the employment, a duty of loyalty applies, which means, among other things, that an employee is not allowed to engage in competing activities while still employed. When the employment ends, however, an employee is generally free to take up employment in or start up a competing business unless he or she has undertaken to comply with a valid non-competition clause.

A non-competition clause is an agreement between the employee and the employer that, when the employment ends, the employee is not allowed to engage in competing business or take up employment in a competing business.
 
Non-competition clauses are related to the nature of the work performed and therefore do not prevent the employee from taking up employment with or performing work for his or her current employer's customers. This falls within the scope of a non-solicitation clause, which is not addressed in this news item.

RULES ON NON-COMPETITION CLAUSES

Non-competition clauses entered into after 1 January 2016 are governed by the Restrictive Employment Clauses Act.

The Restrictive Employment Clauses Act sets out a number of mandatory conditions that must all be met for an agreed non-competition clause to be valid. It requires that the employee:

• holds a position of very particular trust or enters into an agreement with the employer on the right to use an invention made by the employee;
• receives written information on the conditions in the employee’s employment that render it necessary to enter into an agreement on a non-competition clause;
• has been in the employment of the employer for a continuous period of at least six months;
• receives compensation pursuant to section 8 of the Act for the period during which the non-competition clause applies;
• is not bound by the non-competition clause for more than 12 months from the end of employment; and
• receives written information on the conditions referred to in bullets 1) – 5).

The validity requirements only apply to employees and therefore do not apply to agreements on non-competition clauses with executives.

In the following, the requirement according to which the employee must hold a “position of very particular trust” is explained in more detail.

A POSITION OF VERY PARTICULAR TRUST?

A non-competition clause can only be validly agreed with employees who hold a position of very particular trust.

Before the effective date of the Restrictive Employment Clauses Act on 1 January 2016, non-competition clauses for salaried employees were governed by section 18 of the Salaried Employees Act (funktionærloven) then in force. It was then a requirement for validity that the salaried employee held a “position of particular trust”. When the Restrictive Employment Clauses Act was introduced, it was emphasised in the legislative history that the change from a “position of particular trust" to a “position of very particular trust” was a stricter requirement as compared to the previous legal situation. The change also meant that a similar requirement as to the nature of the position now also applies to employees who are not covered by the Salaried Employees Act. 

According to the legislative history, the purpose of the change was to ensure that, in relation to employees who are covered by the Salaried Employees Act as well as those not covered by the Act, it would be clear that very special circumstances are required for an employer to enter into an agreement with an employee on a non-competition clause. 

According to the legislative history, the requirement means that the employee, through his or her position, must possess or acquire knowledge that can be used to the detriment of the employer by a competitor if the employee were employed by that competitor or if the employee should start competing business. The requirement also means that the employee must be able to get hold of information that is considered a crucial part of the business’s business model. Examples of such knowledge include confidential information about accounts, supplier agreements, customer registers, price agreements, discount schemes, etc.

According to the legislative history, the positions aimed at are positions of high level of skills or management positions. However, this is not exhaustive, so other positions may also be covered depending on the circumstances.

In relation to employees who are not covered by the Salaried Employees Act, the legislative history further states that such an employee who is entrusted with other tasks than the other employees not covered by the Act cannot, for this reason alone, be considered to hold a position of very particular trust. It is therefore not sufficient in itself that, for example, a builder also prepares offers for customers.

Whether an employee holds a position of very particular trust therefore depends on a specific overall assessment of a number of different factors, including, among other things:

• the size of the business and the market;
• the employee's seniority in the business;
• the employee's authority and autonomy, including the right to decide and grant, e.g., discounts to customers;
• the nature of the employee's customer contact;
• the employee's knowledge of the employer's pricing and discount policy, insight into customer composition and structure and/or supplier composition and structure;
• the employee's knowledge of confidential information and knowledge that could harm the employer's business;
• the extent to which the business protects the information and knowledge in question; and
• whether the employee would otherwise be able to access the information, including through general industry knowledge.

It is for the employer to prove that the position constitutes a position of very particular trust.

For the non-competition clause to be valid, the position of very particular trust must be held by the employee for the entire duration of the employment. If the content of the position changes during the employment so that the employee no longer holds a position of very particular trust, the non-competition clause is considered terminated by the employer according to the legislative history.

If the validity requirements under the Restrictive Employment Clauses Act are not met, the non-competition clause will be invalid, and the employer cannot prevent the employee from taking up employment with a competitor. However, an employee is still not allowed to use the employer's trade secrets, as this is protected by the Danish Trade Secrets Act (lov om forretningshemmeligheder).

EXAMPLES FROM CASE LAW

Case law after the introduction of the stricter requirement for an entrusted position under the Restrictive Employment Clauses Act is extremely limited and, as far as is known, only one reported judgment addresses the issue.

The judgment in question is the Western High Court judgment of 5 April 2023, BS-26827/2022. In the case, the High Court found that a technical manager in one of the local departments of a prototype housing firm was to be considered to hold a position of very particular trust, and the agreed non-competition clause was therefore valid. 

On the basis of an overall assessment, the District Court found that the employee in his position as technical manager had gained such knowledge of the business’s customers, price agreements with various suppliers and subcontractors, etc., that his overall knowledge in the area could be exploited to the detriment of the business by a competing business, and that information about prices and discount agreements with suppliers was to be considered a crucial part of the business’s business model, as the information must be assumed to constitute significant competitive parameters. The High Court upheld the District Court’s reasoning.

The decision illustrates a number of crucial factors that must be taken into account when considering whether a position is one of very particular trust.

In earlier case law, there are several examples of special sales staff holding - at the time - a position of particular trust pursuant to section 18 of the Salaried Employees Act then in force. Earlier case law also shows that particular weight is given to whether the employee has special professional or commercial insight into matters related to the employer and whether this is of significant value to competitors. This must be assumed to be potentially relevant factors also now under the Restrictive Employment Clauses Act due to the explanatory notes in the legislative history.

In U.1978.321H, the Supreme Court found that a salesperson held a position of particular trust pursuant to section 18 of the Salaried Employees Act, as the salesperson had knowledge of the employer's calculations, prices and customers and had direct contact with the customers, and as his knowledge in this area could be of significant value to the employer's closest competitors. 

Similarly, in U.1996.36Ø, the High Court found that a salesperson held a position of particular trust pursuant to section 18 of the Salaried Employees Act. In its reasoning, the High Court referred to the fact that the salesperson was given a list of the employer's cost prices, which was not even known to the sales manager, and that the salesperson to a not insignificant extent was allowed to grant special discounts when acquiring orders.

In the Western High Court case, U.1981.731V, a department manager in a motor tyre firm held a position of particular trust due to his knowledge of the price and discount policy of the business. It was also emphasised that the department manager's knowledge could be of significant value to the competitors of the business.

POUL SCHMITH RECOMMENDS

Although employers may wish to prevent competition from former employees, it is important that employers are aware of when a non-competition clause can be validly agreed with an employee and that careful consideration is given to the particular employee with whom such clause is agreed. 

In this connection, it is also important that employers consider whether the employee's position meets the requirement for being “a position of very particular trust” before a non-competition clause is agreed.

Furthermore, employers should be aware that employees are entitled to compensation for the non-competition clause and that an employer will often be required to pay a one-off compensation even if the clause is terminated immediately before or in connection with the employee's termination of employment (and thus not used).

Our team of specialists has extensive experience in advising on non-competition clauses. If, as an employer, you need assistance with the above, please do not hesitate to contact us.

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