As part of an analysis by Belzuz Abogados’ Labor Law department of contractual situations leading to legal disputes that it sees in its normal practice, we would like to comment on the recent Judgment by the Supreme Court concerning the amount an employee has to pay the Company if he breaches a post-contractual non-competition
covenant (Supreme Court Judgment of 26 October 2016).
To clarify the question, first of all we should remember that the existence of such clauses is covered by article 21.2 of the Statute of Workers, which requires two elements in order to be recognised as a necessary right: firstly, the Company must have a legitimate industrial or commercial interest, and secondly, the employee must be paid adequate financial compensation. The article also provides that these covenants cannot remain in force for more than two years in the case of qualified personnel and executives, or six months in the case of other employees, after the contract of employment ends.
The main problem confronting the employment courts has been the “adequacy” of the employee’s compensation required by article 21 of the Statute of Workers, since such an indeterminate legal concept has meant many claims are made to the employment courts, although since 2009 the Supreme Court has clarified that adequate compensation should be understood to mean “proportionate” to the amount received by the employee while employed by the Company, which, despite not fixing a specific percentage of salary, did clarify the question considerably.
However, in this case, what the Supreme Court is considering is the compensation that the employee should pay the company if he breaches the non-competition covenant, and to do this it has turned to the same rule of “proportionality”, ruling a covenant under which an employee who received 18,000 euros’ compensation and was obliged, in the event of breach, to compensate the company with a year’s gross salary (59,900 euros) to be abusive, disproportionate and contrary to good faith.
Thus, despite the fact that a post-contractual non-competition covenant was in force between the parties and included a “penalty clause”, in view of the lack of any proof of damages caused by the employee, a compensation clause in favour of the Company was annulled because it was deemed disproportionate and contrary to good faith (article 7.2 of the Civil Code).
As labour lawyers who specialise in complex contracts of employment, which frequently include this type of covenant, we think this court decision will have important repercussions, in that many contractual covenants currently exist that not only require the employee, in the event of breach, to return the money received, but also include an additional penalty clause similar to the one examined in the Supreme Court Judgment discussed.
We in the Labor Law department of BELZUZ ABOGADOS think that in a changing labour market in which Executives and qualified employees are constantly “moving on” the judgment referred to is extremely topical and applies to many on-going cases.
In conclusion, what we have said above about non-competition covenants concerns just one of the many questions that can arise in relation to covenants of this kind, such as the invalidity of provisions in which the Company unilaterally determines the effectiveness or otherwise of the covenant after the contract of employment has ended (a clause which was annulled by the Supreme Court Judgment of 15 January 2009, but which nevertheless continues to appear in contracts of employment) and other questions concerning adequate compensation or the concept of competition itself, which obviously require adequate professional legal advice in each specific case.
Director of the Labor Law department | Madrid (Spain)
Belzuz Abogados SLP
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