Clause

What is a clause?

A clause can limit or cancel a contract or agreement’s validity. Clauses are often used, e.g. in many employment agreements or manager contracts. They determine, what an employee may undertake after the employment ends. It is also used to determine the rules for resale in a sales agreement.

The most common examples of clauses are non-compete clauses, non-solicitation clauses or job clauses. These provide the framework for what an employee is allowed to do after their resignation or dismissal.

Non-compete clause

Non-compete clauses specify the kind of job an employee is allowed to work in after their resignation. They are also known as non-competition clauses. 

A non-compete clause is an extension of the duty to act in good faith. It can, for instance, be a clause in an employment agreement specifying, what companies or industries is permitted to work for after resigning. 

Non-competition clauses also specify that an employee may not take up work for a competitor within a certain time frame (12 months at the most). This is done to guarantee confidentiality, among other things. A company is defined as a competitor if it offers the same services and products.

A non-competition clause gives the employee the right to be compensated, as long as the clause lasts. The compensation amounts to 40 % of the salary if the clause lasts 6 months and 60 % of the salary if it lasts for 12 months. Thus, it can be quite costly to incorporate non-competition clauses in employees’ contracts.

As an employee, one should pay attention that such obligatory clauses do not tie you to one position and as a result prevent a positive salary development. For employers, this means preventing an employee from leaving with valuable information and taking up work at a competitor.

Job clauses and other types of clauses

Job clauses are agreements, that an employer enters into with one or more companies to prevent the exchange of employees between each other. These often mutual agreements are also referred to as company clauses, employee clauses and non-solicitation agreements.

Customer clauses are agreements stating that an employee may not take up employment at one of his employer’s business relations for a certain amount of time after their resignation, for example vendors and business partners. Customer clauses are also only valid for a maximum of 12 months.

Training clauses are agreements stating that an employee is subject to a number of obligations if an employer pays for their training. They either have to pay back some of the expenses or have to remain in employment for a certain period of time after the training ends.

Buyback clauses oblige an employee to sell back shares that have been bought as a part of the employment.

Non-solicitation clause

A non-solicitation clause can also apply to an agreement between an employee and a company. This prohibits an employee from soliciting his former employer’s customers.

Non-solicitation clauses are one of three restrictive covenants that appear frequently in business contracts. The other two are non-compete clauses and non-disclosure agreements.

A non-solicitation clause dictates that an employee isn’t allowed to utilize a company’s clients, customers and contact lists, if they leave the company. In essence, this means that you are prohibited from poaching your former employer’s clients by using knowledge and connections you’ve gained from your employment in the company.

In practice, non-solicitation clauses can be difficult to enforce, because they can be very subjective and have to be considered reasonable under common law.