Many Dutch non-competition clauses in an employment contract contain a provision that means that an employee, who starts working for a competitor after his employment contract, has to pay a fine to the former employer. Often also a fine per day that the breach of the non-competition clause continues.
Such a non-competition clause may also be included in a settlement agreement, or in a share agreement, if the employee has received shares from the employer. Often this also applies to a non-competition clause. In a court case before a Dutch subdistrict court, an employee’s lawyer can ask the court to dismiss the employee from the non-competition clause. On the other hand, the employer’s employment lawyer may ask the employee to be fined for violating the non-competition clause. In some cases, the judge can restrict a non-competition clause, or rule that it is not valid. In many cases, a lawyer will ask the court to mitigate the fine in case of violation.
Below is an example of 2 cases in which the Dutch judge ruled on mitigation of the fine at the request of the lawyers.
Competition clause in employment contracts
For example, such a clause reads as follows:
Employee shall not, both during and in the event of termination of employment, for a period of 12 months following termination, engage in any activity directly or indirectly in competition with the employer, whether for remuneration or free of charge, for companies which carry out competitive activities or provide goods/services as an employer or by not working at their own expense and risk, thereby creating competition with the employer.
Competition clause in a settlement agreement
A settlement agreement or termination agreement often states that obligations from the employment contract that are intended to continue to apply after the termination of the employment contract also continue to apply.
Dutch judges can moderate the contractual penalty at the request of a Dutch attorney employment law if fairness so requires
Many employees think that such a clause or the related fine will be lifted if they go and work somewhere else, for example at a competitor.
In practice, this is sometimes disappointing. After all, in many cases the court rules that a non-competition clause has a (limited) period of validity, e.g. one year, so that this clause is not excessive.
However, if the violation is established, a judge may mitigate the fine if a lawyer requests this on behalf of the employer. Pursuant to Section 6:94 (1) of the Dutch Civil Code, the court may mitigate a contractual penalty ‘if equity so requires’. It is not permitted to exclude this judicial power of moderation in a contract.
For example, the court may moderate the penalty if:
- the stipulated fine
- is excessive in relation to the damage caused by the infringements (HR 11 February 2000, NJ 2000, 277).
- leads in the given circumstances to an excessive and therefore unacceptable result (HR 27 April 2007, NJ 2007, 262 et seq.).
Unacceptable result: the Dutch cantonal judge must consider all the circumstances of the case
In doing so, the judge will have to take into account all the circumstances of the case, including:
a. the nature of the contract,
b. the content and scope of the clause,
c. the ratio between the actual damage and the amount of the fine,
d. the circumstances in which the clause was invoked.
Status of employer and employee
An example of a successful appeal by a Dutch labour lawyer on moderation of the fine can be found in the following judgment. On 5 March 2013, at the request of a Dutch attorney specializing in employment law, the Court of Appeal of The Hague reduced a fine – already mitigated by the Subdistrict Court – for violation of a non-competition clause by a further almost 75%. The Court of Appeal of The Hague added to the above that it follows from HR 13 July 2012, NJ 2012, 459 that ‘the capacity of the parties’ may also be taken into account.
Moderate fine on non-competition clause in The Netherlands
The fine on the non-compete clause was four times the employee’s gross monthly salary in case of violation. In addition, a fine of € 1,000 per day applies for each day that the violation took place and continues. The agreed gross monthly salary was € 2,550 (excluding holiday allowance). Ultimately an amount of € 219,000 was due. At the request of the employee’s lawyer, the Subdistrict Court in The Hague had already mitigated the fine to € 39,150 (18% of € 219,000).
Employee terminates employment contract for a better position
The Court of Appeal of The Hague considered it important that the employment contract between the parties was terminated by notice given by the employee, while there was no reason for the employer to terminate the employment contract. As a result of the termination, the employee had been able to achieve a considerable improvement in his position.
Application of the penalty clause leads to an excessive result
The employee’s Dutch employment law lawyer had extensively documented that his client was not able to pay the amount of €39,150. The lawyer also indicated that recovery of that amount would lead to the bankruptcy of the employee.
On the basis of this, the court of appeal came to the conclusion that the application of the penalty clause in the given circumstances leads to an excessive and therefore unacceptable result. The court of appeal mitigated the fines to a total amount of € 10,000.
€ 389,000 in fines not reduced
There’s another way. This is evident from a judgment of the Arnhem-Leeuwarden Court of Appeal of 7 January 2020. The Court of Appeal ultimately ruled on appeal that the ex-employee had to pay € 389,000 in fines. That was mainly a follow-up fine of € 1,000 per day.
Deliberate competition: employee had deliberately started a company that competes with his employer
Previously, the Subdistrict Court had ruled, following the statements of the employment lawyer of the employer, that there was no question of an excessive and therefore unacceptable result. The fact that the employee had deliberately started a company that competes with his employer played a role in this. In doing so, he had approached relations of the employer, despite a judgment of the preliminary relief judge. The court had ruled that this behaviour was contrary to the non-competition and relationship clause. The court of appeal found that the employee’s lawyer had failed to substantiate the circumstances he invoked. The employee’s employment lawyer had also failed to provide any evidence regarding the turnover and financial situation.
Conclusion on fine and non-competition clause: employment lawyer must be able to substantiate claims
These judgments show that proceedings against the amount of an agreed fine, for instance on the basis of a non-competition clause, can be useful under certain circumstances; in the first case, at the request of the attorney at law, the fine was ultimately reduced from € 219,000 to € 10,000 in 2 instances. The employee’s lawyer must be able to substantiate this with financial data.
Apart from this, the question is whether a penalty clause (e.g. a ban on ancillary activities) will stand up at the subdistrict court under all circumstances. Sometimes the employment contract fails to specify the purpose of the fine. A penalty clause may therefore be contrary to the third paragraph of Section 7:650 of the Dutch Civil Code. This section of the law is intended, among other things, for offences committed during the term of the employment contract and of a disciplinary nature. Such a penalty clause may be null and void.
Contact with Dutch attorney at law in Amsterdam about non-competition clause and fines
For more legal advice on competition clauses and fines, please contact our experienced lawyer who is also an employment law specialist in Amsterdam, Mr. P.Chr. Snijders.