The employee's non-competition obligation after the termination of the employment contract.

Legal Insight

June 2021

Daphne Sfyri, LL.M.

Summary: This article deals with the conditions for the validity of a clause in an employment contract that prohibits the employee from taking competitive actions after the termination of the contract (i.e. the employment contract).

During the term of the employment contract and until its termination for any reason, the employee is obliged to refrain from acts competitive to his employer (e.g. providing services to another competitive company, participation in a competitive company, etc.). The above obligation derives from the principle of good faith (652 CC) and need not be expressly agreed in the employment contract. The above obligation to refrain from competitive acts ceases to apply upon termination of the employment contract for any reason, whereupon the employee can now engage in competitive actions towards his former employer and, by extension, work for a competing company.

What happens, however, if the employee's employment contract contains a specific clause prohibiting competitive acts for a certain period of time after termination? How should this conflict of interest between the employer's freedom to conduct business and the employee's economic and professional freedom be dealt with? How much can inequality in bargaining power when agreeing the terms of an employment contract between an employer and an employee affect the validity of that term? 

To begin with, the legal issue that arises in simple terms is whether the validity of the non-competition clause after the termination of the employment contract can be challenged, if the employee has signed the employment contract and agreed to the specific terms. In Greek law there are no specific legislative provisions which specifically regulate the issue of the conditions under which a post-contractual non-competition clause may be concluded in the field of employment relations and, for that reason, the general provisions of the Civil Code apply. Accordingly, in accordance with the principle of freedom of contract and the general principle of pacta sunt servanda, those agreed clauses are in principle lawful and must be complied with. However, since the employment contract is not in essence a contract between equals, the employee may challenge the validity of the clause in question, since he is deprived of his professional freedom. In other words, the clause is in principle valid, but is subject to review of its unfairness by the competent court under Articles 178, 179 and 281 of the Civil Code. In other words, it is for the judge to decide whether a non-competition clause constitutes an excessive restriction on the employee's freedom, taking into account the specific circumstances, to assess and weigh up the conflicting interests of the parties.

The main criteria for reviewing the validity of an employee's post-contractual non-competition clause are analysed below, as they have been developed by the case law of the Greek courts and legal theory:

Α.The first and most basic condition for the validity of a post-contractual non-competition clause is that the employer must have a justified and unprotected professional interest, for the sake of which the contractual freedom of the employee should be restricted (see A.P. 1285/1984 ΕΕργΔ 1985, 575 et seq.) In other words, the exercise of the employer's right should not cause such a heavy blow to the person affected without this being counterbalanced by a similar substantial interest of the employer. The employer's legitimate and worthy business interest is the trade secrets of an undertaking, such as, for example, its clientele.

Β. Second, the non-compete clause should be locally limited. The broader the local limitation of the non-compete clause, the more severe the restriction on the employee's interests will be. For this reason it should also be justified. For example, suppose an employee works for an architectural firm which provides its architectural services exclusively and de facto only within the Cyclades. In that case, it is disproportionate to prohibit the employee from carrying out competitive activity throughout the whole of Greece, but the prohibition should be limited to the Cyclades, which is the centre of the company's activities. 

Γ. Thirdly, the non-competition clause should also be limited in time. A reasonable period of non-competition is considered to be one to two years, even without the provision of consideration (AS 1591/2002, AS 1285/1984 ΕΕργΔ 1985, 575, AS 1192/1992 ΔΕΝ 1993, 85).  

D. Fourth, the non-compete clause must relate to a specific type of activity. For example, a non-competition clause in a General Sales Manager, which prohibited him for one year from participating in any way in companies trading in cartons for liquid foodstuffs, was considered valid, as this prohibition extends to a very limited and narrowly defined context of business and professional activity and therefore does not constitute an exclusion of the employee from the labour market, leading to a complete impossibility of employment (MonPrath 1867/2005, OJ 2006, p. 224, with concurring remarks by Roussis).

Ε. Fifthly, it is accepted by some legal theory that a precondition for the validity of a post-contractual non-competition clause is the provision of reasonable compensation to the employee as consideration for his commitment to refrain from engaging in a particular activity. The above position is, however, highly controversial, since it has no basis in law, while in foreign jurisdictions where it has been applied, such as Germany, it has been expressly provided for in a specific provision. According to the prevailing view in case-law, the existence of a specific financial consideration is not a necessary condition for the validity of the relevant clause, but is taken into account as a criterion only when it is considered that the other conditions of the obligation, namely the duration, the territorial scope and the type of prohibited professional activity exceed the extreme limits imposed on private autonomy by morality (D. Zerdelis, Individual labour relations, Athens, 1999; I. Koukiadis, Labour Law, 1995, non-competition clauses; decision of the Athens Court of First Instance, No 94/2020; P 1285/1984, EErgD 1985, p. 575 ∙ ΠΠРΑθ 6446/2005 Αρμ. 2005, p. 2000 ∙ MonPrath 1867/2005, VIRGD 2006, p. In other words, the provision of an economic consideration may strengthen a non-competition clause which is in principle invalid.

In practice, it is also common for the employee's contract to provide for the payment of a penalty clause, which is forfeited in favour of the employer in the event of a breach of the relevant non-competition clause, without the need to plead and prove the employer's loss. The above penalty clause is in principle valid, but if the non-competition clause is found to be invalid, the invalidity of the non-competition clause will result in the invalidity of the agreed penalty clause (Article 408 CC). In any event, if the agreed penalty is disproportionately high, it will be reduced at the employee's request (Article 409 CC).

Finally, a related issue that is frequently raised is the following: What happens if, after the termination of the employment contract, a third competing company hires an employee bound by a valid post-contractual non-competition clause? What are the possible consequences of this action? First of all, it is accepted that the knowledge on the part of the third competing undertaking of the existence of such a clause is regarded as a mere indication of the existence of an unfair practice, i.e. the posting of labour. Knowledge of the existence of a post-contractual non-competition clause is presumed in the case of large companies which, by virtue of their position and status, are in practice accustomed to being bound by such clauses. However, in special circumstances, such an act may in fact take on an unfair character and, in that case, the injured undertaking may, under certain conditions, have a claim for compensation under the Unfair Competition Act against the third party employer and the employee. These special circumstances are reflected in the methods used by the third-party employer and the purpose of its decision (e.g. misleading, deceiving, defrauding, bribing an employee, attempting to exploit business secrets by an employee, Mich. - Theod. Marinos, Unfair Competition, 4th edition, The Posting of Labour, p. 272-273).

Therefore, we recommend that employees and companies exercise great caution before signing such non-compete clauses, as the decision on the validity or otherwise of the relevant clause will ultimately be decided by the Trial Judge and the validity of such an agreement cannot be excluded or confirmed a priori.