1 Background
On 12 June 2008 the Danish Parliament (Folketinget), passed a bill on non-solicitation clauses (the Act). The Act came into effect on 1 July 2008. However, non-solicitation clauses agreed prior to this date will remain valid until 1 July 2009.
The purpose of this briefing is to provide a brief description of the consequences of the Act, in particular the impact of the Act as regards the inclusion of non-solicitation clauses in employment agreements and in connection with transfers of undertakings.
This briefing does not address non-solicitation clauses in agreements entered into with temp agencies or agreements between companies outside the scope of transfers of undertakings
2. The Act
2.1 Purpose and definitions
The purpose of the Act is to restrict the use of non-solicitation clauses.
Non-solicitation clauses are defined as follows:
1. Agreements entered into between an employer and other companies with a view to preventing or restricting the possibilities of an employee to obtain employment with another company; and
2. Agreements entered into between an employer and an employee with a view to preventing or restricting the possibilities of other employees to obtain employment with another company.
2.2 Agreement and compensation
Section 3 of the Act provides that in order for a non-solicitation clause to be valid, the employer must enter into a written agreement with both the employee and the colleagues that are to be covered by the non-solicitation clause. The agreement must include specific information on how the employee's job prospects are restricted by the non-solicitation clause.
If the employer has not entered into agreements with all employees covered by the valid non-solicitation clause of a former employee – or if the agreements are defective - the employer cannot invoke the non-solicitation clause towards (i) the former employee or (ii) towards the employees recruited by the former employee. Thus, the clause will be invalid both as regards the former employee and as regards any employee that the former employee may seek to recruit.
According to section 4 of the Act, employees covered by a non-solicitation clause are entitled to receive compensation during the period after resignation in which the non-solicitation clause is in force. Such compensation must constitute at least 50 % of the salary at the time of resignation. The employer is entitled to set off any other income earned by the employee during the period in which the clause remains in force. To the extent the employee receives compensation under a customer clause and/or a non-competition clause, the right to compensation in respect of the non-solicitation clause will lapse. The non-solicitation clause may be terminated by the employer giving one (1) month's notice to expire at the end of a month. The rules governing non-solicitation clauses correspond to the existing rules regarding non-competition clauses and customer clauses applicable to salaried employees.
2.3 Executive Officers
The Act does not extend to "genuine" executive officers. However, considering the requirements set out in the Act - to the effect that all employees concerned must have entered into an agreement in order to be covered by a non-solicitation clause - it is to be assumed that it will not suffice merely to enter into an agreement with the executive officer with a view to prevent the executive officer from recruiting former colleagues. The employer will have to enter into agreements with all relevant employees that the employer wishes to prevent the executive officer from recruiting. As a consequence hereof, it is recommendable that the number of employees to be covered by a non-solicitation clause is limited.
2.4 Non-solicitation clauses and transfers of undertakings
According to section 8 of the Act it is possible to enter into non-solicitation clauses in connection with negotiations regarding transfers of undertakings without awarding compensation in respect of the clause to the employees concerned and even without informing the employees of the clause.
Generally, such non-solicitation clauses may be maintained solely for six months from the time of concluding the agreement. However, if actual negotiations remain ongoing, it is possible to renew the clause on a current basis. If the negotiations lead to a transfer agreement, the parties have the option to re-negotiate the non-solicitation clause and thereby potentially extending the duration of the clause for up to six months after the actual transfer date (closing).
It is to be assumed that non-solicitation clauses can be entered into with several parties which will be relevant in connection with auction processes.
According to the definition of non-solicitation clauses set out in section 2 of the Act and the wording of the exemption concerning transfers of undertakings in section 8 of the Act, generally only the transfer of assets from one employer company's to another company/person is directly covered by the Act.
2.5 Non-solicitation clauses agreed prior to 1 July 2008
The Act applies to non-solicitation clauses entered into from 1 July 2008. However, also non-solicitation clauses agreed at an earlier point in time are affected as such clauses will become invalid from 1 July 2009 if they fail to meet the requirements set out in the Act (agreements with all employees concerned, compensation, etc.).
2.6 Non-solicitation clauses and the Act on Employment Certificates
Some uncertainty still prevails as to whether a non-solicitation clause constitutes a material term that must be included in the employee's employment agreement. This applies, in particular, to clauses agreed between companies which are not disclosed to the employees concerned. A court case concerning this issue is currently pending, and the Minister for Employment has already pronounced that if the Court does not find that such clause constitute a material term, new legislation will be introduced.
It is to be assumed that non-solicitation clauses agreed in connection with negotiations/agreements regarding transfers of undertakings subject to the Act – irrespective of the fact that such clauses remain undisclosed to the employees – will not be contrary to the duty to inform provided for in the Act on Employment Certificates. This assumption is based on the fact that the Act does not include an information requirement and, as lex specialis, it prevails over the Act on Employment Certificates.
To the extent that a non-solicitation clause is agreed in connection with negotiations/agreements regarding transfers of undertakings structured as a share transfer - that as mentioned above are not assumed to be covered by the Act - there is a risk that an employee may be entitled to compensation under the Act on Employment Certificates. However, this presupposes that it be established by case law or legislation that a non-solicitation clause constitutes a material term.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
