Germany: Restrictive Covenants

General Principles

During an employment relationship, an employee is generally prohibited from engaging in any competitive activity to the detriment of the employer. The employee may not offer services and performances to third parties in the market area of the employer. A non-competition obligation not only prohibits the employee from competing in their own name and interests, but also from supporting a competitor of the employer.

Managing directors are subject to a non-competition obligation only as long as they are in office. Once an appointment as director is revoked, or when a director resigns from office, protection against competition for the remainder of a managing director’s service agreement only applies if expressly agreed to. The same concept of protection being tied to the appointment also applies to management board members. However, unlike employees and managing directors, management board members are subject to a full prohibition on entrepreneurial activity for the duration of their appointment, unless expressly permitted.

Post-Termination Non-Competition Restrictions

Post-termination, non-competition restrictive covenants are only enforceable under German law if:

• the employer can demonstrate it has a legitimate business interest that it is seeking to protect;
• the restriction goes no further (in regional and substantive scope and duration) than is necessary to protect that interest; and
• a minimum compensation has been promised to be paid for the duration of the non-compete covenant.

For employees, post-termination non-compete covenants are widely governed by statute; for directors and board members, they are instead handled through case law.

Legitimate business interests

Legitimate business interests include trade secrets, confidential information, trade connections and maintaining the stability of the workforce.

Scope and duration

The scope and duration of the restriction should be limited and reasonable. Whether a restriction is reasonable is determined at the end of the contract (or appointment, as the case may be).

The longest acceptable duration is two years. If the duration is too short (e.g., only three or six months), this may be an indication that the non-compete covenant is not targeted at protecting legitimate business interests.

To the extent that post-contractual non-compete covenants go beyond “legitimate business interests,” they are non-binding. This does not render the post-contractual non-compete covenant entirely null and void, but an employer cannot enforce the non-binding part (e.g., regional limitation to only a certain territory, rather than the entire country).

Compensation

In employment agreements, post-contractual non-compete clauses can only be enforceable if the employer offers a minimum non-compete compensation equal to 50% of the average total compensation last received by the employee. The assessment basis includes all types of compensation and benefits and cannot be limited to, for example, the employee’s base pay. A non-compete covenant that does not offer this statutory minimum compensation is considered to be non-binding. In such a case, the employee would potentially observe the non-compete covenant only if they do not have a new job and would, therefore, not present a competition risk.

In managing director and board member service agreements, there is no absolute minimum compensation requirement. Depending on the regional and substantive scope of the restriction, even a compensation of 50% of the base salary may be sufficient.

Other aspects

It is not possible to merely reserve the right to demand the conclusion of a post-contractual non-compete covenant at a later point in time or even at the time the contractual relationship ends. Similarly, the catalogue of conditions under which a post-contractual non-compete covenant shall or shall not apply is limited. However, companies can reserve the right to waive post-contractual non-compete covenants prior to the end of the contract. In employment contracts, the consequence of such a waiver would be that the obligation to pay non-compete compensation ends 12 months after the waiver is declared. In contracts with managing directors and board members, shorter waiver periods are acceptable.

Non-solicitation of customers/clients and employees

The above general principles also apply to non-solicitation restrictive covenants. Certain exceptions apply to the compensation aspect. In managing director/board member service contracts, protection against solicitation of customers/clients and enticement of employees may even be agreed to without promising compensation. This can be a good fallback position of a company that decides to waive the more far-reaching, fully compensated non-compete clause.

On the Horizon

While there are no major changes in sight when it comes to post-contractual restrictions in employment or director/board member agreements, the German Federal Cartel Office now targets non-solicitation arrangements between employers from an antitrust law perspective. The Federal Cartel Office has a leniency program that rewards the first voluntary disclosure with immunity from fines. If agreements have already been made that violate antitrust law, legal advice should be sought immediately to mitigate any potential damage.

Back to A Guide to Restrictive Covenants