Contractual Penalty in case of infringing the Non-Competition Clause
A non-competition clause is often included in an employment contract if an employee is of particular importance to the company. To ensure the employee’s compliance with this clause it often also stipulates a contractual penalty. This penalty should, however, not be excessively high, as otherwise the court may reduce the amount.
The contractual penalty as part of the non-competition clause
If a non-competition clause is agreed in the employment contract between employer and employee, a contractual penalty is also often agreed upon. This is put in place to encourage the employee to observe the non-competition clause. Should, however, the employee ignore this agreement they will have to pay a contractual penalty to their (former) employer. If this amount does not suffice to cover the damage incurred by the employer, the latter is entitled to sue the employee for the additional damage.
The Amount of a Contractual Penalty
In principle the penalty can be fixed freely between the contractual partners. The law only states that the amount should not be excessively high. The upper limit is usually set at approximately three times the employee’s monthly salary. In case of special circumstances the court may reduce the amount of the penalty. For instance, the Federal Court considers a short employment period or lacking evidence of the damage incurred from the employer’s side reasons for such a reduction.
Elimination of the Contractual Penalty
If the non-competition clause is eliminated, then the same shall also apply to the accompanying contractual penalty. The law has made provisions for three of such cases. The non-competition clause becomes invalid when the employer can no longer prove to have a significant interest in such a clause. The second of the reasons stated by the law entails the situation where the employer terminates the employee’s employment without the latter having given the employer any justified reasons for doing so. Any behaviour of one of the parties may be considered a ‘justified reason’, when – objectively speaking – this behaviour makes it impossible for the other party to continue to fulfil the contract. In addition, the non-competition clause lapses when the employer terminates the employee’s contract for justified reasons.
