Think twice: non-solicitation clauses permissible?
In our practice, we see many different types of contracts in which agreements are made to prevent employees from transferring to another company, such as a competitor or hirer. There are countless reasons for such agreements, including the scarcity in most labour markets. Law practitioners tend to assess these agreements under general contract and labour law. Recent developments have called for a broadening: these agreements should also be assessed under the cartel prohibition.
To ascertain a non-solicitation clause as effectively as possible, employers often opt for a double approach: a non-solicitation clause is included in the employment contract and in the commercial contract with the other company (a contractor, cooperation partner, etc.).
Dutch labour law in principle allows the inclusion of a non-solicitation clause in employment contracts for an indefinite period. Such an agreement can generally also be concluded with self-employed contractors (freelancer or zzp-er). However, labour law limits the freedom of contract in case employees are hired out by their employer to perform work at a customer (the hirer) under the management and supervision of the hirer. In the Netherlands, the so-called hindrance prohibition (belemmeringsverbod) of the Placement of Personnel by Intermediaries Act (Wet allocatie arbeidskrachten door intermediairs or 'Waadi') applies in that case. This means that under Dutch law, in principle, the supplier may not hinder the conclusion of an employment contract (or freelance construction) between its employee and the hirer after the end of the employee's assignment. It is permitted, however, for the supplier to prescribe in the assignment's contract that the hirer will owe a reasonable fee for the services rendered in connection with the hiring, recruitment and training of the employee.
Regarding the mirror provision in the commercial contract between employer and contractor or cooperation partner, freedom of contract is central under general contract law. An assessment under competition law is now being added to this.
Competition authorities announce enforcement
Until recently, non-solicitation clauses were not on the radar of competition authorities within Europe. This has changed: the European Commission and also the Netherlands Authority for Consumers & Markets ("ACM", the Dutch regulator) have made clear that non-solicitation agreements between companies can lead to infringements and the imposition of substantial fines. They do so following the example of the US, where non-solicitation agreements ("no poach" and "no hire") have long been subject to supervision by the authorities. Meanwhile, the Hungarian, Portuguese and UK competition authorities, among others, have imposed large fines.
Cartel prohibition and enforcement
Under the cartel prohibition, agreements between companies that have the object or effect of appreciably restricting competition in the market are prohibited. In this case, the labour market is seen as a market in which employers compete for staff. The ban on cartels therefore applies regardless of whether the companies involved compete on their sales markets.
The rationale behind this is that non-solicitation agreements can have a detrimental effect on the proper functioning of the labour market. It is recognised that in the short term, non-solicitation agreements can also have beneficial market effects, such as keeping consumer prices low – especially in an increasingly tight labour market with constant increases in labour costs. In the long term, however, non-solicitation agreements reduce competition for staff, which limits innovation and reduces the incentive for efficiency. Moreover, non-solicitation agreements lead to lower wages and harm other working conditions. In the long run, this harms society as a whole.
This does not prejudice the fact that there are situations where non-solicitation clauses are justified in contracts between companies.
- Acquisitions and joint ventures would be difficult to bring about if the buyer or joint venture could not be protected from competition by sellers or the parent companies. The European Commission's Notice on Ancillary Restraints provides guidance on the assessment of non-solicitation agreements in this context.
- European block exemptions also exist for non-solicitation clauses in specific forms of cooperation such as specialisation contracts.
- In situations where non-solicitation agreements do not appreciably restrict competition, the de minimis provision (Section 7 of the Dutch Competition Act – Mededingingswet) and an EU De Minimis exemption apply. These will not often apply in practice.
However, in most cases, non-solicitation agreements will have to be assessed under the individual exemption of Section 6 of the Dutch Competition Act and/or Article 101(3) of the Treaty on the Functioning of the European Union. The conditions are strict and the company or companies must be able to demonstrate that all the cumulative conditions are met. In essence, this concerns the issue of whether (i) there is an efficiency benefit, (ii) the non-solicitation agreement is necessary to realise that benefit, (iii) a reasonable proportion of those benefits is passed on to end-users, and (iv) there is sufficient remaining competition. The answer to whether a non-solicitation arrangement is permissible depends very much on the specific situation.
In any case, a non-solicitation agreement should be as limited as possible. For instance, it should be limited in duration (e.g. during the cooperation but not subsequently) and personnel dimension (only for employees with specific technological knowledge and skills). The non-solicitation agreement should be drafted in such a way that competition is minimally restricted. Attention should also be given to what alternatives exist that are less restrictive of competition, such as agreeing on reasonable financial compensation.
Non-solicitation agreements in violation of the cartel prohibition risk high fines and nullity of the clause in question, making the non-solicitation agreement effectively worthless. A fine can be imposed on both companies to the agreement.
- Non-solicitation agreements should be addressed from multiple angles: contract law, labour law and competition law.
- Non-solicitation agreements that are completely unrelated to a legitimate cooperation ('naked no-poach') are in principle not allowed.
- Non-solicitation agreements may be exempt. This is subject to strict conditions; therefore one should assess on a case-by-case basis what is justified and limit the clause in scope of protection (e.g. duration, activities).
- Reciprocal non-solicitation agreements usually go beyond what is necessary and are generally not permitted.
- The standard inclusion of non-solicitation agreements in general terms and conditions is risky. This is especially true when an industry uses a model general terms and conditions that includes a non-solicitation clause.
- With the burden of proof for a justification resting on the companies involved and a situation often difficult to reconstruct subsequently, it is useful to describe the considerations and market situation at the time in the agreement or your own file.
- Put non-solicitation agreements on your agenda. Create a matrix of potential risks.