When Employees Want to Join a Competitor: The Non-Compete Covenant

An employee’s move to a competitor can be delicate for a company, particularly where long-standing client relationships, confidential information or specialised know-how are involved. Legally, however, a clear principle applies: after the employment relationship has ended, former employees are in principle free to compete with their former employer. Restrictions are permissible only under certain conditions.

The duty of loyalty applies during the employment relationship

While the employment relationship subsists, employees must safeguard the legitimate interests of the employer. In particular, they may not perform remunerated work for third parties where doing so would breach their duty of loyalty or amount to competing with the employer.

An employee may, however, in principle prepare a future self-employed or employed activity. Before the end of the contract, though, the employee may not already compete actively with the employer, or solicit its clients or its employees. The timing is therefore often decisive.

After departure, competition is in principle permitted

Upon termination of the employment relationship, the general duty of loyalty in principle ends. Absent a valid post-contractual non-compete covenant, a former employee may therefore take up a competing activity and use their professional skills, experience and general industry knowledge in doing so.

A company cannot prevent a job change merely because the employee is highly qualified, has built up important client relationships, or because their departure is economically detrimental.

Non-compete covenant: only where there is a genuine need for protection

A post-contractual non-compete covenant may prohibit an employee from operating a competing business after leaving, from working for one, or from participating in one. Among other requirements, however, it is binding only if it was agreed in writing.

In addition, the employee’s specific role must have given them access to the client base or to manufacturing or trade secrets (Fabrikations- und Geschäftsgeheimnisse). The use of precisely this knowledge must be capable of causing the employer significant harm.

The employer must therefore be able to specify and prove what relevant knowledge the employee obtained and why its use would make significant harm possible. The Federal Supreme Court has held that technical, organisational or financial skills that can be acquired at any comparable company in the sector form part of professional experience and do not justify a non-compete covenant (cf. Federal Supreme Court judgment 4A_210/2018, consideration 4.1.2).

Client contact is also not always sufficient. A non-compete covenant cannot be based on knowledge of the client base where the client relationship exists mainly because of the employee’s personal abilities. In that case, any loss of clients is attributable to the employee as a person and to their performance, not to the exploitation of knowledge of the client base (cf. BGE 138 III 67, consideration 2.2.1, and Federal Supreme Court judgment 4A_286/2017, considerations 2.1–2.3).

The clause must be limited in place, time and scope

A non-compete covenant must be reasonably limited in terms of geography, duration and subject matter. It must not unfairly impair the person’s economic prospects, and may exceed three years only in special circumstances.

If there is no specific, or at least ascertainable, limitation as to place, time and subject matter, the clause has no effect.

When a non-compete covenant lapses

A non-compete covenant lapses if the employer demonstrably no longer has a substantial interest in maintaining it.

It also lapses if the employer terminates the employment without the employee having given a justified reason for doing so. The same applies if the employee terminates for a justified reason for which the employer is responsible. A justified reason does not require an actual breach of contract. It is sufficient that there is an event attributable to the other party which, viewed from a reasonable commercial perspective, gives substantial cause for termination (cf. BGE 130 III 353, consideration 2.2.1).

For physicians, lawyers and architects, personal skills may be paramount in the course of their work. Legal scholarship expressly states that a post-contractual non-compete covenant is not entirely excluded for these professions, but that, owing to the importance of personal skills, such a covenant may be non-binding.

What can be claimed in the event of a breach

In the event of a breach of a valid non-compete covenant, the employer may claim compensation for the resulting damage. If the parties have agreed a contractual penalty (Konventionalstrafe), the employee may in principle free themselves from the prohibition by paying it, unless otherwise agreed. Any claim for further damages remains reserved.

Where the competing activity itself is to be stopped, a contractual penalty is not sufficient. The employer must have expressly reserved in writing the right to have the contract-breaching state of affairs removed. In addition, its infringed or threatened interests and the employee’s conduct must justify such removal.