BAG: Post-contractual prohibition on competition invalid without a waiting allowance

Post-contractual prohibitions on competition that do not provide for compensation for this period, i.e. a waiting allowance, are null and void. That was the verdict of the Bundesarbeitsgericht (BAG), Germany“s Federal Labour Court, in its ruling of March 22, 2017 (Az.: 10 AZR 448/15).

Employment contracts can include post-contractual prohibitions on competition. In this case, the employee commits to not working for a competitor for a specified period time after the employment relationship has come to an end. In return for this commitment, he receives compensation referred to as a „waiting allowance“ (Karenzentschädigung). According to the Bundesarbeitsgericht“s recent ruling, a post-contractual prohibition on competition is invalid in the absence of a waiting allowance. Even if the general terms and conditions include a severability clause, this will not render the prohibition on competition effective.

In the instant case, the plaintiff had worked for the defendant for several years. Both parties had agreed to a post-contractual prohibition on competition without a waiting allowance in the employment contract. The so-called „Nebenbestimmungen“ (ancillary provisions) included a severability clause, according to which the contract remains effective in the event that a provision is invalid. Were this to happen, the invalid provision was to be replaced by a similar provision that most closely reflects the will of the parties within the scope of what is legally possible.

While the plaintiff did observe the prohibition on competition after the employment relationship came to an end, she also sued for payment of a monthly waiting allowance. Her claim was initially successful before the courts of lower instance, but ultimately failed before the BAG.

The ruling clearly demonstrates that the lack of a waiting allowance and the resulting invalidity of the prohibition on competition have consequences for both parties, since neither party is able to derive rights from an invalid prohibition on competition.

The BAG held that the employer had not been entitled to insist on its former employee not working for a competing firm. However, the plaintiff, who had nonetheless adhered to the prohibition on competition, was for her part not entitled to compensation. The Court went on to say that a severability clause could not make up for the violation of sec. 74 of Handelgesetzbuch (HGB) [Germany“s Commercial Code], not even to the sole benefit of the employee, and that a decision needed to have been made no later than immediately following the end of the employment relationship regarding compliance with the prohibition on competition. The BAG ruled that to this end it must be clear from the agreement whether this is valid or invalid. It also noted, however, that an evaluative decision needs to be taken in cases involving a severability clause.

If there is a post-contractual prohibition on competition in place, both the employer and the employee should ensure that it has been agreed in manner that is legally correct. Lawyers who are experienced in the field of employment law can offer advice.

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