Restrictive Covenants: … better safe than sorry …

Restrictive Covenants: … better safe than sorry …

 

In this newsletter we will focus on the following topic: how to protect the Company from competition after the termination of key employees.

It’s advisable that a Company, if it wants to protect itself  against competitive conduct after the termination of an employment relationship, must sign an ad hoc non-competition covenant with its key employees.

Pursuant to Article 2125 of the Italian Civil Code a non-competition covenant must comply with certain requirements, regarding prescribed form, limited object and proper consideration, aimed at compensating the employee for the restriction of his/her professional activity.

?       Specifically, the non-compete agreement must

  • be provided by a written document signed by the employer and the employee
  • describe the restricted business/activities
  • be limited in time, e. up to five years for executives and up to three years for all other employees
  • be limited in territorial scope
  • provide for a specific remuneration.

?       Italian Law does not give any specific parameter for the quantification of remuneration. Guidance comes from case law.

The adequacy of the compensation is assessed on a case-by-case basis, taking into account the specific features of the non-compete clause; generally speaking a compensation equal to a sum in the range of 15% to 30% of annual salary, for any restricted year, is considered fair.

Theoretically, the non-competition indemnity may be paid in monthly instalments during the period of employment, or upon termination of the employment relationship as a lump sum

However, it is suggestable paying it at the end of the employment relationship, not during it.

This is because, according to prevalent case law a payment made during the employment relationship cannot be considered adequate compensation given that the total amount of the compensation will be depend on the duration of the employment relationship.

?       There are not strict legal requirements regarding the restricted business and territory.

As a general rule, the restrictions cannot be “excessive”, i.e. limit too hardly the possibility of the employee to find another job position adequate to his expertise and professional skills.

In addition, there must be a balance between the restriction and the compensation.

The more the non-compete covenant reduces the chances of the employee to find a job, the higher the compensation should be.

?       It is quite usual to read some covenants providing for the possibility for the employer to withdraw from the covenant at the end of the employment relationship.

It must be pointed out that most of case law declares these clauses unlawful because the employee remains subject to the covenant at the employer’s will, and the employer  is discretionarily entitled to make the covenant null.

?       In case of breach of the covenant by the employee, the employer can claim an injunction to obtain to prevent the employee to keep working in the interest of the Competitor and/or can claim to obtain a compensation for damages.

As it is quite hard to prove effective damages and their quantification, it’s advisable to set in the non-competition covenant a minimum fixed sum to be paid by employee in any case of breach and the possibility for the Company to obtain by the Judge also a higher compensation if proved.

Edited by Stefano Trifirò, Damiana Lesce and Valeria De Lucia

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