non compete agreement

Non-compete clause after the termination of the employment contract

The conclusion of non-compete clauses in employment contracts for the period after the termination of the contract inevitably brings into conflict on the one hand the professional interests of the employer and on the other the professional and economic freedom of the employee.

So, which of the two conflicting interests prevails and on what criteria? What happens in case that the prohibited competitive activities are not really detrimental to the undertaking? What happens when the clause restricts the employee excessively? What kind of responsibilities may arise for a third competing undertaking, in case it hires the employee? 

I. First of all, it is necessary to clarify that during the employment contract and up until its expiry or termination in any way, the employee is self-evidently obliged to abstain from competitive to the employer’s undertaking activities (e.g. service provision to another competing undertaking, development of the same business activity as the employer’s etc.). The above obligation derives from the principle of good faith (Art. 288 of the Civil Code) and there is no need for it to have been explicitly agreed in the employment contract.

However, the omission of competitive activities obligation ceases with the termination of the employment contract, when the employee has the right to be hired by a competing undertaking or to create a competing to the employer’s undertaking using the experience and knowledge acquired.

II. However, the parties are able to expand the competition prohibition for the period after the termination of the contract by making use of the contractual freedom (Art. 361 of the Civil Code) and concluding relevant clauses in the employment contract (as e.g. the term that the employee shall not be able to work or participate in the management of a competing undertaking or that he shall not be able to exercise the same competitive activity as the one of the employing undertaking etc.). As for the validity of those clauses, contrary to foreign legislation, Greek Law does not provide for particular requirements, therefore Greek case-law comes to fill this void by formulating certain criteria on the basis of which the validity of those clauses is reviewed and in particular:

i. The basic criterion for checking the legality of such a clause is whether it really serves the protection of legitimate professional interests of the person favoured by the clause, i.e. the employer, and does not simply seek to make the employee’s position difficult. The legitimate professional interest of the employer requires that the employee, due to his previous employment at the employer’s undertaking, is in a position to harm the previous employer’s interests with competitive activities. This could for example happen in case where the employee due to his position in the undertaking (e.g. senior executive, employee with important responsibilities etc.) has access to confidential information or gets in touch with customers and, as such, he can disclose business secrets or interfere with the employer’s clientele etc.[1]

ii. The non-compete clause must be reasonable with regards to the legitimate professional interests of the employer, whose protection is pursued, after relevant balance of the conflicting interests of the employer and the employee. 

For this balance, it is taken into account: a) the duration of the prohibition (e.g. a clause prohibiting the exercise of competitive activity indefinitely is invalid, as it excessively restricts the employee’s freedom), b) the local area (it is noted that the wider the local area e.g. all Greek territory, the heavier the restriction), and c) the type of the prohibition (the more the types of prohibited activities, the more burdensome the restriction). Furthermore, a crucial criterion for the validity of such a non-compete clause is also the provision or not of a reasonable compensation in favour of the employee. The compensation constitutes the employer’s consideration for the undertaking by the employee of the obligation to omit a certain activity for the employer’s benefit. However, according to the case-law, the existence of a specific financial consideration is not a necessary requirement for the validity of the relevant clause, but it is considered as a criterion, only when it is ruled that the rest of the terms of the commitment, i.e. duration, local area and the type of the prohibited professional activity go beyond the extreme limits set by principles of morality in public autonomy. In fact, it is noted that the provision of payment of compensation does not necessarily imply the validity of the clause, since in any case it must be reasonable and in accordance with the principle of proportionality.

III. Taking the above into consideration, the non-compete clause after the expiry or termination of the employment contract is in principle valid and binding for the employee, provided that, based on the conditions of the particular each time case, on the one hand it does not violate the constitutionally guaranteed freedom of work and the equally guaranteed right to free development of the economic or professional activity of the employee, on the other it is not contrary to the provisions of Articles 178 and 179 or sometimes 281 of the Civil Code, i.e. it does not contain an excessive and abusive restriction of the employee’s freedom and is not contrary to principles of morality.

When the prohibition clause is valid, the employee bound by it is obliged to respect the agreed and to abstain from any of the prohibited acts. In case of violation of a valid non-compete clause, the employee is obliged to compensate the employer, provided that: a) the employer has suffered damage by the actions of the employee, which harm the enterprise, b) the harmful behavior is an illegal and contrary to principles of morality act, c) there is intent of the employee (even dolus eventualis) and d) there is an objective causal link with his immoral and fraudulent behavior.[2]

It is noted that, because in practice it is particularly difficult for the employer to prove the specific damage suffered, it is common for the contract to provide for the payment of a penalty clause, which shall be forfeited in the event of a breach of the prohibition of competition, regardless of invocation and proof of damage (i.e. the employer is entitled to receive the amount provided for as a penalty, without having to invoke or prove damage). Of course, in this case, the employee has the opportunity to request from court to reduce the penalty clause to the appropriate measure, in case it is disproportionate (see also Art. 409 of the Civil Code).

On the contrary, if it is ruled that the non-compete clause is invalid, because it does not meet the criteria mentioned above and the principle of proportionality in general (see also Art. 25 par. 1 of the Constitution), then it is considered as non-written (see also Art. 180 of the Civil Code) and does not bind the employee.

IV. In the context of the same problematic regarding the employment of an employee in a competing undertaking after the termination of his employment contract and while he is bound by a valid non-compete clause, an issue may arise in case he is hired by a third employer. It is noted that, in principle, employees have the opportunity to seek more favourable working conditions, e.g. higher pay. Accordingly, employers have in principle the right to second workforce from other undertakings, without this act being unfair, even if their competitor is harmed. In fact, any knowledge on the part of the hiring employer of the existence of post-contractual non-compete clauses may be considered merely an indication – an aggravating factor for the existence of unfair practice, however, without constituting reliable evidence of the existence of  unfair practice.

However, with the assistance of special (objective and subjective) conditions, this act can take unfair character, i.e. to be considered as contrary to the general clause of article 1 of Law 146/1914 “on unfair competition”. According to that provision, any act done with the purpose of competition which is contrary to principles of morality is prohibited in commercial, industrial or agricultural transactions. For the application of this provision, an act (positive or negative), the intention of competition and the opposition of this act to principles of morality are required.

Under the above provision, it is therefore possible that the recruitment of the employee by a third employer may be considered as an act of unfair competition and more specifically as unfair seconding of labour on the third employer’s part, provided however that, there are special circumstances constituting this particular action as contrary to principles of morality.

This can happen e.g. in the event of a third competitor inciting an employee to breach his contractual obligations and the relevant non-compete clause for the purpose of competition or of recruiting the seconded employees for the purpose of getting from the latter information regarding the competitor’s/employer’s business secrets or of attracting, through the seconded, other employees or customers, in order to harm in this way the competitor’s/employer’s position in the market etc.).

If the conduct of the third party is unfair, the harmed undertaking has, under the assistance of the relevant conditions on a case-by-case basis, a claim for compensation under the provisions of the law on unfair competition against the third employer and the employee. However, no claim can be established against the new employer to not employ the employees. Moreover, there is no claim against the employee to stop working for the new employer. This is because, a claim prohibiting the employee to be employed by the new employer would violate the constitutionally guaranteed right to work.

V. In conclusion, both employers and employees must be very careful when concluding non-compete clauses for the period after the termination of the contract, as well as have the will and intention to negotiate the terms of such an agreement in good faith, in order for excessive restrictions and unfair practices to be avoided.

[1] Single-member Court of First Instance of Athens 1867/2005 (Labour Law Inspection 2006/224)

[2] Larissa Court of Appeals 738/2001, Justice 2003/529

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