Most important points

• A non-compete clause is a contractual clause that prohibits one party from competing with another party, either during the term of the contract or for a certain period of time thereafter.

• Under employment law, a duty of loyalty applies anyway during the existing employment relationship not to engage in competitive business for one’s own account (Section 60 of the German Commercial Code (HGB) for vicarious agents by analogy). Post-contractual non-competition clauses with employees are only effective if the employer pays compensation for non-competition and the ban is reasonable (max. 2 years, not excessive in terms of territory/subject matter).

• Non-competition clauses for founders and shareholders are agreed in articles of association or participation agreements in order to prevent them from setting up a competing company in parallel or after leaving the company. Here too, the scope must be proportionate, otherwise the clause is invalid.

• A breach of a valid non-competition clause can trigger claims for damages or contractual penalties. For this reason, contractual penalties are often included in the clause to ensure compliance.

• Startups should structure non-compete clauses pragmatically: Sufficient protection of the company without unreasonably restricting the professional freedom of (former) employees or founders.

Non-competition clause in the current employment relationship

During the period of employment, the employee may not engage in any competing activities for himself or third parties that run counter to the interests of the employer, either by law or by virtue of his duty of service. This statutory prohibition of competition during the employment relationship is regulated in the German Commercial Code (§ 60 HGB) for commercial agents and is generally applied to all employees.

In concrete terms, this means that the employee may not work for a competitor company or run their own competing business during their employment. If they do, the employer can insist that they cease and desist and, if necessary, demand compensation or terminate the employment contract without notice.

This prohibition can be explicitly mentioned or specified in the employment contract (e.g. obligation to disclose secondary employment to ensure that no competing secondary employment is accepted).

Post-contractual non-competition clause for employees

If an employer wishes to prevent an employee from going to a competitor immediately after leaving the company or setting up a competitor company himself, he can agree a post-contractual non-competition clause with the employee. Strict conditions apply here in accordance with Sections 74 et seq. HGB APPLY:

• The ban must be agreed in writing and the employee must receive the agreement.

• It must be clearly limited in terms of territory, time (max. 2 years) and content to the extent necessary to safeguard the employer’s legitimate interests. A ban that is too broad (e.g. worldwide, for all activities, 5 years) would be disproportionate and therefore ineffective.

• The employer must pay compensation for the duration of the ban, at least 50% of the last contractual benefits received (including bonuses). Without this compensation, the ban is not binding for the employee (they can choose whether or not to comply with it).

• Purpose: Protection of legitimate company interests, e.g. safeguarding customer relationships or know-how that the employee could otherwise use directly with the competition.

Despite an agreed ban, employees can withdraw from the contract for certain reasons, for example if the employer later waives compliance or does not pay compensation.

Non-competition clauses for founders and shareholders

In start-ups, the founders often make a commitment to the company and investors not to compete. Such clauses can be found in the articles of association or separate shareholder agreements:

• During the period of affiliation: A shareholder (especially if also a managing director) may not operate a company in the same market segment on the side.

• After resignation/sale: For a certain period of time (1-2 years), it is often forbidden to found a directly competing company or to work for one in order to protect trade secrets and market position.

In contrast to employment law, there is no statutory obligation to pay compensation here, but courts also pay attention to the appropriateness of clauses in articles of association. A non-compete clause that is too broad could be ineffective as a violation of freedom of occupation. For this reason, non-compete clauses for founders are usually limited to the core business area and a moderate duration. Nevertheless, compensation is sometimes agreed, for example that a departing founder receives an ongoing payment for the duration of the prohibition.

Enforcement and contractual penalty

As a deterrent, a non-competition clause often contains a contractual penalty clause: for example, the employee must pay a certain amount of money or a percentage of the final annual salary for each case of non-compliance. This must be reasonable; excessive penalties can be reduced by the courts.

In the event of a breach, the injured party (employer or company) can also claim regular damages if it can be proven that the competitive activity has caused damage (e.g. poaching of customers, loss of sales). However, the contractual penalty is often calculated in such a way that it covers the typical damage as a lump sum.

Conclusion for practice

Non-compete clauses are a useful instrument to protect a company from disloyal competition. At the same time, they must remain fair if they are to endure and be accepted. Start-ups should:

• Exercise restraint in the employment contract: only agree a post-contractual non-compete clause for key personnel and include the statutory compensation for non-competition.

• Clearly define in founder agreements what is considered competition (e.g. specific market) and keep the duration as short as necessary.

• In the event of a violation, react consistently to send a signal that such agreements will be enforced.

This ensures that know-how is protected without unduly restricting talent.