09 August 2023

The post-contractual non-competition clause in a group of companies

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Extension of the post-contractual non-competition clause to group companies is becoming increasingly important for global companies. This article explains the conditions of validity.

Due to the interconnectedness of labour law relationships in corporate groups, employees increasingly gain insight not only into the business area of their employer company, but also into that of other companies within the group. For this reason, there is often a need in practice to extend the post-contractual non-competition clause to mother, subsidiary or sister company(ies). The question is to what extent such an extension is permissible and enforceable.

What are post-contractual non-competition clauses in general? Under what conditions can they be validly agreed?

In Switzerland, non-competition clauses in employment contracts are a very frequent point of contention in connection with the termination of employment relationships. The employer's primary aim is to protect employees from competing activities after they have left the company. In the worst case scenario, the employer is confronted with the situation after termination of an employment relationship that a former employee takes part of the customer base with him to a new employer or poaches it in the context of self-employment. In order to prevent this situation, the employee is prohibited from engaging in competitive activity for a certain period of time after the end of his or her employment. These post-contractual non-competition clauses conflict with the free economic development of the employee.

The prohibition of competition is standardised by law in Art. 340 to 340c CO. Accordingly, the employee may undertake in writing to refrain from any competitive activity after the end of the employment relationship. The conditions for the validity of such a non-competition clause are as follows:

  1. The employee must be capable of acting.
  2. The agreement on the non-competition clause must be in writing; a reference to unsigned regulations is not sufficient.
  3. The employee has gained insight into the customer base or into manufacturing or business secrets during the employment relationship.
  4. The use of such knowledge may cause substantial damage to the employer.
  5. The non-competition clause must be limited in terms of location, subject matter and time, which should prevent the employee's economic advancement from being unduly impeded.

In order to enforce these non-competition clauses, it is advisable to agree on a contractual penalty as well as the possibility of real execution (see on the formulation of post-contractual non-competition clauses our magazine article: How to phrase a (post-employment) non-competition clause? In addition, compensation for further damage can be claimed.

Why is there an interest in extending the statutory prohibition?

The law only provides for the possibility of prohibiting competition with the employer in Art. 340 CO. In the case of group structures, the question of extending the prohibition of competition to mother, subsidiary or sister company(ies) often arises, although these are not to be considered employers within the meaning of Art. 340 CO. The interest in an extension arises due to the economic affinity within the group. Through the mutual exchange of business secrets, the affiliated companies must be able to ensure that the employee, after leaving the company, does not use his or her knowledge acquired in the course of the employment relationship to cause damage to the group. This applies even more in the case of executive employees who frequently gain insight into business secrets of various group companies.

Is a contractual extension permissible?

The doctrine is clearly in favour of an extension of the wording ("employer") in Art. 340 CO. Accordingly, it can be assumed that the contractual non-competition clause can also include other affiliated companies and thus extend the prohibition to them. On the other hand, a blanket extension of the non-competition clause to the entire group is considered inadmissible by the doctrine. It should only apply to those companies with which the employee has worked and thereby also gained insight into the clientele or manufacturing or business secrets of the respective group company. A further prerequisite is that legitimate interests of the employer may actually be significantly affected - even if this is done indirectly through the group affiliation.

Can an extension also take place without a contractual basis?

The doctrine basically assumes the requirement of written form. However, the Zurich Labour Court has stated in a decision that in exceptional cases the non-competition clause can also extend to the group structure without a contractual basis. This is said to be the case if the employee keeps his job after a legal spin-off to a subsidiary, if the employment relationship in the group is practised "openly" according to the agreement, if the contract with the group parent company provides for the employee's employment in other group companies as well and this is also practised, as well as if the non-competition agreement has been concluded with a holding company.   Here, too, the precondition is always that the non-competition agreement complies with the aforementioned legal requirements and that the objective limitation is made. The non-competition clause cannot be extended beyond the area into which the employee gained insight.

Who is entitled to enforce the non-competition clause?

In principle, the assertion of compliance with the non-competition clause shall be made solely by the employer company within the meaning of Art. 340 CO, even if another group company is affected. However, a delegation of the claim is possible if this is expressly provided for in the employment contract.

What does the lapse of interest under Art. 340c CO mean for the post-contractual non-competition clause in the group?

According to Art. 340c para. 1 CO, the non-competition clause generally lapses if the employer demonstrably no longer has a substantial interest in maintaining it. Furthermore, according to para. 2 of the same provision, it lapses in the case of an employer's dismissal for which the employee has not given reasonable cause or in the case of an employee's dismissal after the employer has given reasonable cause.

In the case of group-wide structures, the non-competition clause also lapses if the competing group company concerned no longer has an interest in the non-competition clause or has given the employee reasonable cause, for which it is responsible, to terminate the employment relationship.

Our recommendations

If there is an interest in regulating such cross-company non-competition clauses, we recommend disclosing the group-wide interdependence in the contract and specifying the objects of the non-competition clause, as a non-competition clause is generally interpreted narrowly and, in case of doubt, against the employer. In addition, the general aforementioned statutory requirements, which further limit the prohibition, must be followed when drafting the employment contract.

Our employment law experts will be happy to assist you with questions on the post-contractual non-competition clause within group structures as well as with questions on other employment law issues.

This article was written with the assistance of our short-term trainee, Ms Margaret Klimenko. Many thanks!