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Unfair competition: the post-termination non-compete covenant
In this article, we briefly explain a little-known contractual provision relating to unfair competition which may be of considerable value to businesses whose employees, having received specialist training and become essential to the company, are subsequently recruited by competitors or decide to establish their own competing business.
This provision is known as the post-termination non-compete covenant. Its purpose is to restrict an employee from leaving the company to work for a direct competitor. Where such a covenant applies, an employee who breaches it may be required to repay the agreed financial compensation or pay the contractual penalty provided for in the agreement, making it a significant deterrent.
What is a post-termination non-compete covenant?
In essence, a post-termination non-compete covenant involves the employer paying financial compensation to the employee during the course of the employment relationship in consideration for the employee’s agreement not to compete following the termination of employment.
(a) Monthly payments together with the employee’s salary.
(b) A fixed lump sum agreed either at the commencement or upon termination of the employment relationship, paid together with any statutory or contractual termination payments.
The purpose of the covenant is to prevent a former employee from engaging in business activities that directly compete with those of the former employer by making use of its customer base, confidential know-how, training or professional experience acquired during the employment relationship, thereby causing actual or potential financial harm to the business.
What does the Spanish Workers’ Statute provide regarding post-termination non-compete covenants?
Spanish law expressly recognises post-termination non-compete covenants in Article 21.2 of the Spanish Workers’ Statute (Estatuto de los Trabajadores), subject to the following essential requirements:
1.-Maximum duration. The covenant may not exceed two years for technical employees and six months for all other employees following the termination of the employment relationship.
2.-Legitimate business interest. The employer must have a genuine industrial or commercial interest in enforcing the covenant. In practice, this means that the restriction must be limited to activities carried out for businesses that compete directly with the employer.
3.-Adequate financial compensation. The employee must receive appropriate financial compensation. Where the compensation is paid monthly, it should appear separately on the employee’s payslip under the heading “Non-compete compensation”. An employer cannot simply relabel an existing element of remuneration as compensation for the non-compete covenant. For example, replacing an employee’s regular variable remuneration with a payment described as “non-compete compensation” would be invalid.
FAQ on post-termination non-compete covenants
What is a post-termination non-compete covenant?
A post-termination non-compete covenant is an agreement under which an employee undertakes not to carry out competing activities after the employment relationship has ended. In return, the employer must provide appropriate financial compensation.
Are post-termination non-compete covenants enforceable under Spanish law?
Yes. They are expressly recognised under Article 21.2 of the Spanish Workers’ Statute (Estatuto de los Trabajadores), provided that the legal requirements regarding duration, legitimate business interest and financial compensation are satisfied.
What conditions must be met for a post-termination non-compete covenant to be valid?
To be enforceable, the covenant must:
-protect a genuine industrial or commercial interest of the employer;
-be limited to a maximum of two years for technical employees and six months for other employees; and
-provide the employee with adequate financial compensation.
How long can a post-termination non-compete covenant last?
Under Spanish law, the maximum duration is two years for technical employees and six months for all other employees, calculated from the termination of the employment relationship.
Does the employer have to pay the employee for agreeing to a non-compete covenant?
Yes. The employer must provide adequate financial compensation in exchange for the restriction. Without appropriate compensation, the covenant may be declared unenforceable.
Do you need legal advice? Please visit our practice areas relating to unfair competition and post-termination non-compete covenants:
