The Dutch Minister of Social Affairs and Employment recently announced the preparation of a bill to modernise non-compete clauses, with the aim of tightening their rules of use. If the bill is adopted, the regulations for using such clauses would be more in line with legislation in (neighbouring) EU countries.

Current regulation

The adoption of legislation on the non-compete clause goes back to 1907, has remained mostly untouched since then and is currently laid down in section 7.653 of the Dutch Civil Code. The non-compete clause can only be agreed in writing with an employee of age. If those conditions are met the non-compete clause is valid, but that does not mean the non-compete can also be enforced. Dutch law provides for options for a court to mitigate the scope of a non-compete if the restriction puts the employee at an unfair disadvantage. Moreover, the court may award compensation to the employee in return for continued applicability of the non-compete, but courts rarely do so (instead, they tend to mitigate the scope to reach a fair outcome).

In 2015, the government tightened the options for using non-compete clauses. Since then, a non-compete clause may not be agreed in a fixed-term contract as a starting point, except in case the employer has substantial business interests to include such clause and provided that the employment contract includes a written justification. This requirement does not apply to employment contracts for an indefinite period.

Cause for change

In 2021, research firm Panteia conducted a study on how the non-compete clause works in practice.[1] This identified a clear problem. The study shows that the use of the non-compete clause is so common that it can lead to an unjustified restriction on employees. This affects the proper functioning of the labour market, as it restricts employee mobility and staff hiring. In her letter, the minister stresses that a non-compete clause may only be used to genuinely protect a necessary business interest (as it was always intended) and may not be included as a standard clause in employment contracts to discourage employees from seeking employment elsewhere. The latter is now often the case, as the Panteia research identified.

Proposed changes to legislation

The minister announced that a bill will be prepared to “modernise” the regulations on non-compete clauses, which would include the following changes:

• statutory limitation of duration of the non-compete restriction;
• the geographical scope must be included, specified and justified in the non-compete clause;

• employers will also have to justify “the substantial business interest” of including a non-compete clause for permanent employment contracts (as is already the case for fixed-term contracts); and

• when enforcing the non-compete clause, an employer will, in principle, have to pay compensation set at a percentage of the employee’s last earned salary.

Government fall’s impact on anticipated bill

On 7 July 2023, the Dutch administration led by long serving Prime Minister Rutte fell. Elections are set to be held late November 2023. Up until the formation of a new administration, the current administration will act as a “caretaker administration”.

This also affects new legislation. Topics (especially bills) that are politically sensitive can be declared controversial by the House of Representatives and/or the Senate, meaning that the legislative process will be suspended until a new administration has taken office. If the subject “non-compete clause” is declared controversial, the anticipated changes are not to be adopted anytime soon (if at all). These developments are ongoing.

Endnotes

[1] Bartsch, Grijpstra en Houweling (2021), de werking van het concurrentiebeding, Panteia Zoetermeer.