Non-compete clauses: rules, duration, compensation

What is a non-compete clause?

A non-compete clause (konkurrenceklausul) is an agreement that limits an employee's right to take work with competitors or start a competing business after the employment ends. The clause must protect the employer's legitimate business interests, typically customer knowledge, trade secrets and specialist expertise.

Non-compete clauses are governed by the Employment Clauses Act (ansættelsesklausulloven, Act no. 1565 of 15 December 2015), which applies to clauses entered into on or after 1 January 2016. Clauses entered into before that date follow the earlier rules, including section 18 of the Salaried Employees Act.

Who can be subject to a non-compete clause?

The Employment Clauses Act applies to employees. A non-compete clause can only be agreed with an employee who holds a specially trusted position. A general clause imposed on all employees without an individual assessment is invalid.

Managers, specialists and salespeople with customer contact are typical candidates. Note that a managing director is normally not an employee within the meaning of the Act; here a clause is instead assessed under the general rules of contract law, including section 38 of the Contracts Act.

Formal requirements: when is a non-compete clause valid?

For a non-compete clause to be valid, the following conditions must, among other things, be met:

1. In writing

The clause must be agreed in writing and specifically. The employee must have a separate, signed basis describing the clause.

2. Information about the conditions

The agreement must state that the conditions for the clause are met, including that the position is specially trusted, and it must state the employee's right to compensation.

3. A requirement of 6 months' employment

A non-compete clause can only be enforced once the employment relationship has lasted at least 6 months at the time of termination.

4. Geographic and substantive limitation

The clause must be limited to what is necessary. Very broad clauses covering the whole world or all industries will typically be set aside by the courts.

Maximum duration

A non-compete clause may run for at most 12 months from the end of the employment. A shorter duration can be agreed, and the courts can reduce a disproportionately long clause to a reasonable period.

The compensation requirement: what is the employee entitled to?

It is a statutory requirement that the employee receives compensation for being bound by a non-compete clause, under section 8 of the Employment Clauses Act. The compensation is calculated from the pay at the time of termination and depends on the duration of the clause, and on whether the employee finds other suitable work.

Minimum rates

Duration of the clause	Without other suitable work	With other suitable work (from month 3)
Up to 6 months	At least 40% per month	At least 16% per month
Over 6 and up to 12 months	At least 60% per month	At least 24% per month

A lump sum for the first 2 months

The compensation for the first 2 months after termination is paid as a lump sum no later than at termination, regardless of whether the employee finds other work. The lump sum is at least 40% (clause up to 6 months) or 60% (up to 12 months) of the monthly pay and cannot be reduced.

The duty to mitigate and the reduction

From month 3, the employee is obliged to actively seek other suitable work (the duty to mitigate). If the employee finds such work, the ongoing compensation is reduced to the minimum rate of 16% or 24% respectively. The employer can therefore never go lower than 16% (up to 6 months) or 24% (up to 12 months) in the ongoing payment.

Combined non-compete and customer clause

A non-compete clause can be combined with a customer clause. A combined clause may, however, run for at most 6 months from termination. The compensation for a combined clause is at least 60% of the monthly pay, reduced to at least 24% if the employee finds other suitable work. Here too, the first 2 months are paid as a lump sum (at least 60%) that cannot be reduced.

Customer clause

A customer clause prohibits contact with certain customers after termination. It can only cover customers the employee has had a business connection with within the last 12 months before the termination, and at termination the employee must receive a written list of the covered customers. The requirement of 6 months' employment and the same compensation rates as for the non-compete clause also apply here.

When does the binding effect end?

Even a valid non-compete clause can end or be set aside in several situations:

• The employer can cancel the clause with one month's notice to the end of a month. The employee is, however, still entitled to the lump sum for the first 2 months if the termination occurs within 6 months of the cancellation of the clause.
• The employment has lasted less than 6 months at termination: the clause cannot be enforced.
• The courts can set aside an unreasonable or overly far-reaching clause, wholly or partly, under section 38 of the Contracts Act.

Whether a clause continues to bind after an employer-initiated dismissal depends on the agreement and the specific circumstances. Seek advice if you have been dismissed and are in doubt before you take competing work.

Consequences of a breach

If the employee breaches a valid non-compete clause, the employer can demand:

• Damages for a documented loss
• A contractual penalty (konventionalbod), if agreed in the clause (a fixed amount per breach that does not require proof of loss)
• An injunction against continued competing activity

In addition, the compensation paid can be reclaimed from the time of the breach, and the future compensation lapses.

Frequently asked questions

Can a non-compete clause be agreed in connection with a severance agreement?

Yes, a non-compete clause can be agreed or specified in connection with departure. The Act's rules on compensation and duration still apply, and a clause agreed on departure requires compensation at the statutory rates.

Does a non-compete clause apply if I resign myself?

Yes, a non-compete clause applies as a rule regardless of who terminates, provided the conditions are met and the compensation is paid. If you resign because the employer has given you reasonable grounds to do so (for example a material breach), you are, however, as a rule not bound.

Can the self-employed be subject to non-compete clauses?

The Employment Clauses Act applies only to employees. The self-employed and consultants are not covered by the Act, but can agree competition restrictions in their contracts. These are assessed under the general rules of contract law, including section 38 of the Contracts Act, and the Marketing Practices Act.

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The content of this article is for guidance only and does not constitute legal advice. Consult a lawyer for advice on your specific situation.