One important employee obligation which has recently regained importance due to the introduction of new technologies (code, blockchain, computer programs or software, etc) is the prohibition of competition with the activity of the company concerned.
Written by Josep Conesa
Labour and bankruptcy lawyer
Along with this generic duty, the law contemplates another assumption: the permanence agreement. This agreement, despite not being directly related to the prohibition of competition, is connected to it given that, ultimately, it's aim is to retain qualified employees or paid students.
NOn-competition DURING THE TERM OF THE CONTRACT:
The general principle is that an employee may work for different companies. However, unfair competition occurs when one is working in the same field, carrying out the same activity.
The jurisprudence understands that unfair competition occurs in cases in which the activity of the employee aims to intentionally carry out professional tasks of the same nature or branch of production, either for another employer or for themselves, without the consent of their employer and which causes actual or potential harm to the employer.
NON-COMPETITION AFTER THE TERMINATION OF THE EMPLOYMENT CONTRACT OR RELATIONSHIP IN SPAIN:
Anyone can work wherever he wishes after the contract is terminated.
The obligation of non-competition after the employment relationship only arises in Spain through an agreement. It can be agreed as an individual agreement between the parties, either at the time of entering into the employment contract, during its term, at the time of its termination, and even (although with greater limits) after its termination.
EFFECTIVE INTEREST
The employer must have and prove an effective industrial or commercial interest that justifies entering into the agreement, under penalty of the potential invalidity of the non-competition agreement. Furthermore, the requirement for the employee to abstain from competition must be technically or commercially justified, for which it is necessary that said employee be in possession of such knowledge about the company's organisational or production techniques, personal relationships with customers or suppliers, etc. that it could constitute unfair competition and effective detriment.
ECONOMIC COMPENSATION FOR POST-CONTRACTUAL non-COMPETITION AGREEMENT
The employer must pay the employee adequate economic compensation for this agreement, and that compensation must be quantitatively determined and set by the parties of the agreement. However, the jurisprudence in Spain has settled that, as a minimum, the compensation must be more than 10% or 15% of the employee's annual remuneration.
Form of Remuneration
- Monthly Compensation: The company may choose to pay a fixed monthly amount during the term of the agreement.
- Lump Sum Payment: Alternatively, the company may make a one-time payment at the end of the employment relationship.
- Percentage of Salary: The compensation can be a percentage of the employee's salary during the last year of employment.
DURATION OF THE NON-COMPETE CLAUSE:
The non-compete agreement will not last more than two years for technicians and six months for other employees and it comes into force immediately after the termination of the employment relationship, even if the termination of the contract was as a result of unfair dismissal from the company with whom the employee made the agreement.
CLAIM AGAINST THE EMPLOYEE FOR NON-COMPLIANCE OR NON FULFILMENT OF THE CLAUSE:
The employee recognises, through the non-compete agreement, an obligation to refrain from carrying out activities which are in competition with those of his or her former employer. Therefore, a breach of this agreement on the part of the employee amounts to his or her performance of the activities which are prohibited by the post-contractual non-compete agreement.
When it is the employee themself who competes with their former employer, the judge may order the closure of the corresponding establishment. However, it is notably difficult to try to get the employee to immediately refrain from carrying out the activity initiated and prohibited by the agreement, meaning that it is necessary to revert to compensation for damages.
Failure to comply with the obligations agreed by the employee will lead to the duty to compensate damages, as long as the reality and amount of the damage can be proven, as well as the causal relationship between the damage and the employee's conduct.
AMOUNT OF DAMAGE COMPENSATION FOR a NON-COMPETE CLAIM IN SPAIN:
A problem lies in the way in which that compensation should be set or determined:
- It can be expressly determined in the agreement: normally the return to the company of what was paid as financial compensation; on other occasions, the amount will be indeterminate, it can be set by virtue of judicial discretion and weighing up, this, the elements of justice within its reach.
It is not necessary for the amount of the economic compensation agreed for non-competition and the compensation agreed for the event of non-compliance to coincide, meaning that it is possible for the compensation to be higher and include an excess for damages. - It can be set after the non-competition agreement: Article 1255 of the Spanish Civil Code, thus, allows the amount of compensation to be set by virtue of the general principle of freedom of contract, before or after the breach of the employee has been verified. If the employee partially breaches the obligation, the amount of compensation must also be reduced proportionally.
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Incorporation of penal clauses: It is even possible to incorporate penal clauses that would fulfill a coercive or guarantee function, encouraging the employee to fulfill the obligation taken on to not carry out competitive activities. This penal clause would evaluate in advance the damages that could be caused and would exonerate from proving the existence and amount of the damages that have occurred.
IN CASE OF BREACH BY THE employer:
The post-contractual non-compete agreement is only valid as long as the requirements determined by law are faithfully fulfilled: maximum duration of the non-competition agreement, the existence of an effective industrial and commercial interest, and adequate economic compensation to the employee for the deprivation of opportunities caused by the agreement.
The jurisprudence of the Supreme Court at the time introduced nuance to the right of the employer to freely breach the agreement, arguing that it was a bilateral, reciprocal obligation, which means that compliance cannot be left to the discretion of one of the parties (Article 1256 Civil Code ). It is therefore necessary for the employer to grant a period of notice to mitigate the damages that could be caused to the employee. Otherwise, the employer should pay compensation.
In no case can the employer unilaterally annul this non-competition agreement. Therefore, the company has the obligation to pay the corresponding amount. Only in the event of an agreement between the employee and the employer, or of any of the agreed deadlines not being met, will the effects of the non-competition agreement be terminated, recovering the full freedom of work. If there is no agreement, the employee can go to the Social Court to order the employer to pay the agreed amounts.
THE NON-COMPETe AGREEMENT AND PERMANENCE FOR THE CEO:
For CEOs, the prohibition of working with other companies and the possibility of establishing a full-time agreement, provided for in the Employees' Statute for employees subject to common regulations, are included for senior management personnel in the non-compete agreement contained in Royal Decree 1382/85 that regulates the special relationship of Senior Management or CEOs.
Two factors are always required:
1.- That the employer has an effective commercial or industrial interest in it.
2.- That the employee is paid adequate compensation in consideration.
By adequate compensation, we must mean that which is agreed upon by the employer and the employee as fair compensation given the restriction of the freedom of the employee to provide their services to any company, whether or not it has the same economic activity as the previous employer. However, the judge can assess whether or not it is really adequate to restrict such freedom.
A permanence agreement is one which indicates that the employer is entitled to compensation for damages if the CEO has benefited from a professional specialisation charged to the company, and leaves said company before the established term.
This means that, in the absence of authorisation by the employer or written agreement to the contrary, the employee cannot enter into contracts before the end of the established term.
In the event that the prohibition of competition is prolonged once the special relationship has expired, we are dealing with a non-compete agreement, and this agreement cannot extend over a period of more than two years.
CONTACT OUR ENGLISH SPEAKING LAWYER IN BARCELONA - SPAIN FOR ANY ADVICE:
How to agree the non compete agreement
In the Supreme Court decision of January 15, 2009 (case no. 3647/2007) and many others, the validity of a business's renunciation of the post-contractual non-compete agreement is rejected, citing the reasoning in the Supreme Court decision of September 24, 1990 (case no. 284/1990). There, it is explained that the clause regarding compensation for non-competition "has an indemnity nature; non-compliance by any party leads to compensation for damages."
In the Supreme Court decision of May 14, 2009 (case no. 1097/2008), it is clarified that the agreement does not lose effectiveness even if the employment relationship ends due to the worker's or the company's withdrawal during the probation period. Referring to the received compensation, it mentions "amount," but it is also explained that "the post-contractual non-compete agreement generates expectations for the worker (compensation to offset the harm that may arise from having to engage, after the contract has ended and during the agreed time, in a different activity, for which he may not be prepared)."
The Supreme Court decision of October 25, 2010 (case no. 3325/2009) holds that the limitation period to return the economic compensation paid to the worker, in case of non-compliance, starts from the moment the employer could exercise the action, by having knowledge of such non-compliance. A "non-compete bonus" was paid during the validity of the contract to compensate for competitive activity during the twelve months following the end of the contract. Nevertheless, it always refers to "economic compensation" or "amounts received," without any mention of a potential salary nature.
In the Supreme Court decision of November 8, 2011 (case no. 409/2011), which gathers doctrine from others before it, it is explained that this agreement cannot be rescinded by a unilateral decision of the employer. Arguing in favor of this conclusion, it is reasoned that "the non-compete agreement generates not only the expectation of compensation for the worker but also the need to prepare for a future or possible new activity with new expectations."
The Supreme Court decision of June 20, 2012 (case no. 634/2011) maintains that the declaration of nullity of the post-contractual non-compete agreement implies the obligation of the worker to return to the employer the compensation that he received. It considers the amount paid to prevent the worker from competing with his former company as very insufficient, accepts the nullity of the agreement in question, and rejects that in such a case, the presumption of the salary nature of the compensations can operate.
In the judgment 184/2012 of the High Court of Justice of Catalonia, dated January 13, 2012, it is determined that the amounts received by the worker during the employment relationship under the concept of post-contractual non-compete agreement do not have to be fully returned, but the agreement can be limited to the amounts received in the last two years. In other words, it declares that the clause is partially null, accepting that the last two years can be claimed.
