New legislation on Indirect
Restrictive Covenants in Job Clauses.
Narv Pedersen, Dahl law firm (firstname.lastname@example.org), Denmark
As of July 1, 2009, Denmark now has a regulation of the so-called Job
Clauses – i.e. restrictive covenants entered into between the employer and
parties other than the employee restricted by the covenant.
Prior to the introduction hereof, only restrictive covenants entered
into with the employee affected had been regulated by law. For instance the
validity and enforceability of non-competition clauses and
non-solicitation-of-customer clauses has for a long time been governed by sections
18 and 18a of the Danish Salaried Employees’ Act setting out requirements for the validity of non-competition
clauses and non-solicitation of customer clauses. In addition, the Danish Contract Act states in section 38, subsection 2 that a
non-competition clause (but not a non-solicitation of customer-clause) is
rendered invalid if the employee (or a director) is dismissed by the employer,
provided that the dismissal was not reasonably justified by the conduct of the
employee (or director).
In 2006, however, it became clear that the protection found in these
acts did not cover agreements entered into between others than the employee in question (i.e. “indirect” clauses).
This was the case in the so-called WM-Data judgment, in which the Danish
Maritime and Commercial court
in a lawsuit between two companies granted the claimant liquidated damages
according to a service agreement due to the defendant’s recruitment of two of
the claimant’s employees. The judgment gave rise to significant media coverage
and was criticised, especially by the labour unions, for accepting
short-circuiting the protection found in the Danish Salaried Employees’ Act and
the Danish Contract Act. This was particularly the case due to the fact that
the two recruited employees in fact had been dismissed by the claimant and that
a non-competition clause entered into directly with the two employees therefore
would have been rendered invalid under section 38, subsection 2 of the Danish
Contract Act (see above),
Therefore the Danish Act on Job Clauses was instituted, introducing
requirements for indirect restrictive covenants.
The Act on Job Clauses defines job clauses as:
i) agreements entered
into between an employer and other businesses, if the purpose or intention of the agreement is to
prevent or restrict an employee from obtaining new employment; and
entered into between an employer and an employee, if the purpose or in- tention of the agreement is to prevent or
restrict other employees from obtaining new employment
(non-solicitation of employees clauses).
Which requirements have to be fulfilled for a job clause under the Act
to be valid?
As a general rule,
the Act imposes an obligation to have the clause accepted by the employee affected by the clause in order for it
to be valid.
In addition, the clause must contain information relating to how the clause restricts new employment,
including the identity of the employer(s) that the employee is prevented from
becoming employed with (or conditions for obtaining such employment, for
instance payment), the duration of the prohibition etc.
The employee affected by the clause must also be granted a right to
compensation for a minimum of 50% of the salary during the period where the
clause restricts or prevents the employee from taking up new employment -
a requirement that is also contained in the Salaried Employees Act, section 18
and 18a, see above.
If these requirements are not fulfilled, the job clause is rendered
invalid and unenforceable, both in relation to the contracting party (in the
case of business clauses, the other business, and in the case of non-solicitation
of employees causes, the employee restricted in recruiting others) and in
relation to the restricted employee, thereby rendering claims for liquidated
Also non-solicitation of employees-clauses are governed by the act, and
the employer is therefore in fact required to include such clauses in the
contracts with the employee restricted in recruiting others as well as
obtaining acceptance from all those employees that the restricted employee is
prevented from recruiting. As stated, and these employees affected shall in
addition be granted a right to compensation.
Based on this, the use of such clauses is expected to be reduced
significantly by the act.
Job clauses contained in asset or share transfer agreements
In connection with business transfers, it is normal that the parties
enter into non-solicitation agreements; the seller in order to avoid that the
employees are offered better terms and conditions by the buyer should the
negotiations fail, and the buyer in order to protect the newly acquired
employees should the business transfer in fact be concluded.
The Act therefore contain exemptions to the requirements of acceptance
by the employees affected and payment of compensation, if a job clause is
entered into during negotiations relating to a transfer of business. If so, a
job clause can then be entered into for a 6 months period, without having to
observe the requirements stated above.
Often, the subject of a business transfer – i.e. whether to transfer
shares or assets – depend on the discoveries made under the due diligence, and
the parties might therefore not know at the stage of disclosure in which form
the transfer is going to take place. In this connection it is important to
point at that although the act undoubtedly applies to asset sales (due to the
fact that the employer in this case will be a party to the non-solicitation
agreement), it is uncertain whether the act also applies to share transfers
(due to the fact that the party to the non-solicitation clause in this instance
will be the shareholder of the employer). It is, however, most likely that the
act (as well as this exemption) also applies to share transfers.
With the introduction of the Act on Job Clauses and its impending
expansion to even more agreements, Denmark has a regulation dealing with all indirect
restrictive covenants. The Act sets up a number of legal requirements that must
be met in order for such clauses to be valid, and it is therefore of utmost
importance to employers who consider entering into such clauses to carefully
review the Act. This is particularly the case regarding agreements on business
transfers. It is, however, important to note that on a lot of issues, the Act
is quite ambiguous, and that the scope of application of the Act is not very