.jpg)
One of the most important duties for the employee, one that has recently regained prominence with the introduction of new technologies, is the prohibition on competing with the company's activities. Alongside this general duty, the law provides for another scenario: the retention agreement, which, while not directly linked to the non-compete prohibition, is connected to it in that it ultimately serves to retain qualified employees within the company that trained them.
During the employment relationship:
As a general rule, multiple employment (holding jobs with more than one employer simultaneously) is permitted; however, the law prohibits employees from engaging in unfair competition even in such circumstances.
Case law establishes that unfair competition occurs where the employee's activities are deliberately directed at performing work of the same nature or sector of production for another employer or on a self-employed basis, without the consent of their employer, and where this causes actual or potential harm to the employer.
After termination of the employment relationship:
The obligation not to compete following the end of the employment relationship arises by agreement rather than from the contract itself. It may be agreed as an individual agreement between the parties, whether at the time the employment contract is entered into, during its term, or at the point of termination, and even, subject to stricter limits, after that termination, provided the agreement is causally linked to the employment relationship.
The employer must have and be able to demonstrate a genuine commercial or industrial interest justifying the agreement, failing which the non-compete clause may be rendered void. Furthermore, any obligation placed on the employee to refrain from competition must be technically or commercially justified, which requires that the employee possess knowledge of the company's organisational or production methods, personal relationships with clients or suppliers, or similar information that could constitute genuinely harmful unfair competition.
The employer must pay the employee an economic compensation, which must be clearly specified. The Workers' Statute requires that this compensation be adequate, with the amount to be determined by the parties. A non-compete agreement may not have a duration exceeding two years for technical staff or six months for other employees, and it takes effect immediately upon termination of the employment relationship.
IN THE EVENT OF BREACH BY THE employee:
By entering into the agreement, the employee undertakes a negative obligation, that is, to refrain from carrying out any activities that compete with their former employer. Any breach by the employee will therefore consist in engaging in activities prohibited under the post-contractual non-compete clause.
Where the employee personally competes with their former employer, a court may order the closure of the relevant business. In practice, however, it is extremely difficult to obtain an immediate injunction requiring the employee to cease the prohibited activity, and it is generally necessary to fall back on a claim for damages.
Breach of the agreed obligations by the employee gives rise to a duty to pay damages, provided that the existence and amount of the loss, as well as its causal link to the employee's conduct, can be established. The key difficulty lies in determining the amount of compensation:
1. The amount may be expressly stipulated in the agreement, typically requiring the employee to repay the company the financial compensation received under the clause. Where no fixed amount is specified, the sum may be determined at the court's discretion, weighing all relevant factors available to it.
It is not necessary for the financial compensation agreed for compliance with the non-compete obligation to match the amount stipulated for breach, meaning the latter may be higher and may include an additional element for damages and losses.
2. The amount may be determined after the non-compete agreement is entered into: Article 1255 of the Spanish Civil Code permits the compensation figure to be set, whether before or after any breach by the employee has occurred, by virtue of the general principle of freedom of contract. If the employee only partially breaches the obligation, the amount of compensation must also be reduced proportionately.
Inclusion of penalty clauses:
It is also possible to include penalty clauses, which serve a coercive or guarantee function by incentivising the employee to comply with the obligation not to engage in competitive activities. Such a clause would provide a pre-agreed assessment of potential losses and would relieve the employer of the need to prove the existence and extent of those losses should a breach occur.
IN THE EVENT OF BREACH BY THE EMPLOYER:
A post-contractual non-compete clause is only valid when all legally required conditions are fully met: the maximum duration of the non-compete clause, the existence of a genuine industrial and commercial interest, and an adequate financial compensation paid to the employee in recognition of the restrictions such an obligation places on their professional opportunities.
The case law of the Supreme Court has clarified the extent to which an employer may unilaterally withdraw from the clause, noting that it constitutes a bilateral, reciprocal obligation, meaning that its performance cannot be left to the discretion of one party alone (Article 1256 of the Spanish Civil Code). The employer must therefore provide a notice period in order to mitigate any harm caused to the employee. Failure to do so would give rise to a liability to pay compensation.
Under no circumstances may the employer unilaterally cancel this non-compete clause. The clause can only be brought to an end, and the employee restored to full freedom to work, by mutual agreement between the employee and the employer, or if either party fails to comply with the agreed terms. In the absence of such agreement, the employee may bring a claim before the employment tribunal seeking an order requiring the employer to pay the agreed amounts.
NON-COMPETE AND EXCLUSIVITY CLAUSES FOR SENIOR EXECUTIVES:
For employees on standard employment terms, the prohibition on working for other companies and the option of a full-dedication clause are governed by the Workers' Statute. For senior executives, however, these matters are addressed through the non-compete clause set out in Royal Decree 1382/85, which regulates the special employment relationship applicable to senior management.
Two conditions are always required:
1. The employer must have a genuine commercial or industrial interest in the restriction.
2. The employee must receive adequate compensation in return.
Adequate compensation should be understood as the amount agreed between the employer and the employee as fair consideration for restricting the employee's freedom to provide services to any company, whether or not it operates in the same sector as the former employer. That said, a court may assess whether the compensation is genuinely sufficient to justify such a restriction.
A retention clause entitles the employer to claim damages if the senior employee has received specialist professional training funded by the company and leaves before the agreed term expires.
This means that, unless the employer grants authorisation or a contrary written agreement is in place, the employee may not enter into other contracts before the agreed term expires.
Where the restriction on competition continues after the employment relationship has ended, this constitutes a post-contractual non-compete agreement, which may not extend beyond a period of two years.
How to draft a post-contractual non-compete clause:
The wording of a post-contractual non-compete clause is critically important. We strongly recommend that you contact our lawyer to ensure the clause is legally valid and enforceable.
Given that this is a highly fact-specific area of law, we set out below some relevant case law for reference:
Invalidity of the clause
In the Supreme Court judgment of 15 January 2009 (case no. 3647/2007), and numerous others, the courts have rejected the validity of an employer's unilateral waiver of a post-contractual non-compete agreement, relying on the reasoning set out in the Supreme Court judgment of 24 September 1990 (case no. 284/1990). That judgment explains that a non-compete compensation clause "is compensatory in nature; a breach by either party gives rise to a claim for damages".
In the Supreme Court judgment of 14 May 2009 (case no. 1097/2008), the Supreme Court clarified that a non-compete agreement does not lose its effect even where the employment relationship is terminated by withdrawal from contract by the employee or the company during the probationary period. When referring to the compensation received, the judgment speaks of a "sum", but also explains that "a post-contractual non-compete agreement creates legitimate expectations for both parties, for the employee (compensation to offset the disadvantage of having to pursue a different activity after the contract ends and for the agreed period, for which they may not be suitably qualified)".
The Supreme Court judgment of 25 October 2010 (case no. 3325/2009) holds that the limitation period for recovering compensation paid to the employee in the event of a breach begins to run from the moment the employer could have brought the action, that is, from the point at which they became aware of the breach. In that case, a "non-compete allowance" had been paid during the term of the contract to compensate for any competitive activity during the twelve months following termination. Even so, the judgment refers throughout to "economic compensation" or "sums received", with no suggestion that such payments constitute salary.
In the Supreme Court ruling of 8 November 2011 (appeal no. 409/2011), which consolidates earlier case law, the Court explains that this clause cannot be rescinded by a unilateral decision of the employer. In support of this conclusion, the Court reasons that "the non-compete clause generates for the employee not only the expectation of compensation, but also the need to prepare for a future or potential new activity with new prospects".
The Supreme Court ruling of 20 June 2012 (appeal no. 634/2011) holds that a declaration of nullity of a post-contractual non-compete clause entails the employee's obligation to return to the employer the compensation received from them. The Court considers the amount paid to be wholly insufficient to prevent the employee from competing with their former company, upholds the nullity of the clause in question, and rejects the argument that the presumption of a salary-related nature of the compensation could apply in such a case.
Partial nullity of the non-compete clause giving rise to an obligation to repay all amounts received
In this ruling 184/2012 of the High Court of Justice of Catalonia, dated 13/01/2012, the Court determines that the amounts received by the employee during the employment relationship in respect of the post-contractual non-compete clause need not all be repaid; rather, the clause may be limited to amounts received during the last two years. In other words, the Court declares the clause partially null and void, accepting that claims may be brought in respect of the final two years only.
