New legislation on Indirect Restrictive Covenants in Job Clauses.

By Søren Narv Pedersen, Dahl law firm (snp@dahllaw.dk), 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^[1] setting out requirements for the validity of non-competition clauses and non-solicitation of customer clauses^[2]. In addition, the Danish Contract Act^[3] 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[4] 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

              ii) agreements 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,[5] 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[6].

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 damages unenforceable.

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.

Author’s remarks:

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 clear.