On 23 March 2015, the Minister for Employment put forward a revised bill in relation to restrictive covenants. The bill implements parts of a growth package proposed in June 2014. The bill is expected to be submitted to Parliament on 29 April 2015. It will then be debated in Parliament and the primary part of the bill is expected to become effective from 1 July 2015.
The June 2014 growth package suggested limiting the use of restrictive covenants as this is considered beneficial for the growth and productivity of the economy if employees can easily change jobs and use their knowledge in other companies without limitations.
The most relevant sections of the bill
Significantly, the bill combines the rules regarding no-hire, non-competition and non-solicitation of customer's clauses and removes them from the scope of the Danish No-Hire Clause Act (concerning employers’ use of no-hire clauses) and the Danish Salaried Employees Act.
The key sections of the bill are as follows:
- All employees are covered by the act, cf. section 1 (2). Therefore, the provisions of the act apply to a clause regardless of whether the clause limits a salaried employed worker or another kind of employee (this differs from the current rules).
- No-hire clauses are prohibited, however current exceptions with regards to business transfers and temporary workers still apply, cf. section 2 and 3.
- For an employee to be bound by a non-competition clause, the employee is required to hold a "post of very special responsibility". This is a tightening of the present rules in the Danish Salaried Employees Act which require the salaried employed worker to hold a "post of special responsibility", cf. section 4 (2). Furthermore, it must be clear from the written agreement in which circumstances the employee is bound by a non-competition clause, cf. section 4 (3).
- According to the new rules, to be bound by a non-solicitation of customers clause, it is a requirement that the employee has been in commercial contact with the customer within the last 12 months.
- These customers must also be identified by the employer on termination of employment, and the employer must produce a list of the customers, cf. section 5 (2) and (3). The employer cannot therefore subsequently add more customers to this list. This is another area where the new rules differ from the present rules.
- Where the employee is bound by both a non-competition and a non-solicitation of customers clause in the same period, this is characterised as a "combined employment clause" and tightened rules apply. These rules include, amongst other things, that the employee must be employed for more than 6 months to be bound by such a clause, and that combined clauses cannot apply for more than 6 months following resignation, cf. section 6 and 7.
- Non-competition clauses as well as non-solicitation of customers clauses may only apply for a maximum of 12 months after resignation, cf. section 7, no. 2.
- The employee must receive a monthly payment of 40% (compared to 50% today) of their monthly salary at the time of resignation if the clause has a duration of up to 6 months, cf. section 8 (1).
- If the clause has a duration of between 6 and 12 months or the clause is combined, the compensation increases to 60% of the employee's monthly salary, cf. section 8 (2) and 9 (1).
- Compensation for restrictions applying during the first 2 months after the employee's resignation must be paid as a lump sum on termination. This is regardless of whether the employee has obtained other appropriate work, cf. section 8 (3)-(4) and section 9 (2)-(3). The lump sum requirement is therefore applied to non-solicitation of customers clauses (as opposed to the current rules), but is limited to 2 months (compared to 3 months under the current rules).
- In relation to non-competition or non-solicitation of customers clauses being upheld for a maximum of 6 months after resignation and where the employee obtains other appropriate work, the compensation from the 3rd to the 6th month must be at least 16% of the employee's monthly salary at the time of resignation, cf. section 8 (1). This contrasts with the current rules which allow the employer to make a full deduction in these circumstances.
- In relation to combined employment clauses being upheld for a maximum of 6 months after resignation, and where the employee obtains other appropriate work, the compensation from the 3rd to the 6th month must be at least 24% of the employee's monthly salary at the time of resignation, cf. section 9 (1). The same applies to non-competition or non-solicitation of customers clauses which are upheld for a maximum of 12 months. In this case, the compensation from the 3rd to the 12th month must be at least 24% of the employee's monthly salary at the time of resignation, cf. section 8 (2). This contrasts with the current rules which allow the employer to make a full deduction in these circumstances.
- The act can be circumvented through a collective agreement.
- It is intended that the principles found in the Danish Contracts Act section 38 shall continue to apply by means of implementation in the bill, cf. section 12. If the employer terminates the employee's employment without fair reason or if the employee resigns his/her employment because of the employer's failure to fulfil its obligations, any non-competition clause and the non-competition clause in a combined employment clause will be invalid.
Bird & Bird comments
As at today's date, the bill has not been formally passed and so some elements might change when it is debated.
The new rules will only apply to future employment contracts. Employment contracts agreed up to and including 30 June 2015, which contain non-competition, non-solicitation of customers and/or no-hire clauses, will continue to be valid.
The proposed bill has already been criticised. By moving the protection found in the Danish Contracts Act section 38 (which also applies to managing directors), to the bill (which only applies to employees), managing directors will be deprived from the current protection found in section 38.
Whether the bill will be passed is currently uncertain, given that a parliamentary election is pending in Denmark.
Bird & Bird will monitor the development of this matter closely and will provide a further update when possible.