Non-compete clauses – No Compensation for Abstention – Severability Clause

Non-compete provisions valid for the period after an employment relationship has ended are invalid unless the agreement provides for a compensation payment of 50% of the employee’s former salary during the entire duration of the post-contractual non-compete obligation. This decision by the German Federal Employment Court (docket no. 10 AZR 448/15, dated March 22, 2017) was made after a plaintiff filed a claim for monthly compensation for abstention after she had her employment contract terminated.

The employment contract itself contained a paragraph in which the parties had agreed on a non-compete for a period of two years after the end of the employment relationship. During that period, the employee would not be allowed to work with any company that competes directly or indirectly with the employer. Failure to comply would result in an obligation on the employee to pay a fine of EUR 10,000.00. The agreement did not provide for a compensation payment. The contract’s collateral clauses contained a severability clause which required the parties to the contract to replace invalid provisions with valid provisions that resemble the original intentions of the parties as closely as possible.

Having abided by the non-compete provision, the plaintiff claimed retroactive payment of monthly compensation for abstention from competition. While both the Employment Court and the State Employment Court granted the claim, the Federal Employment Court denied the claim. Non-compete clauses containing no provision for abstention compensation are invalid and do not entitle any contractual party to any claim. As the court held, both parties are interested in knowing whether or not such a clause is valid at the beginning of the post-contractual period. Such knowledge cannot be gained on any side by looking at the contract alone; instead, legal assessments are required.

A severability clause may not alter the invalidity of the original contractual clause, rendering the non-compete provision valid. As the clause was invalid from the beginning, it did not entitle the plaintiff to any compensation for abstention. By issuing this decision, the Federal Employment Court made clear that commonly-used severability clauses which alter an invalid prohibitory non-compete clause into a valid clause connected with a claim for compensation are also invalid.