The post-contractual covenant not to compete of the employee, self-employed person, director, partner and agent. A brief overview.
The post-contractual covenant not to compete is certainly a very delicate element in an employment relationship and one that, depending on the addressee of this obligation, has different requirements as to form and substance. The purpose of this article is to provide the reader with an overview of this institution by briefly analysing how and with what limits this bond may bind the employee, the self-employed, the administrator, the partner and the commercial agent.
- Employee
The employee's covenant not to compete is governed by Article 2125 of the Civil Code. This article expressly provides that the covenant must, on penalty of nullity:
- (a) be made in writing;
- (b) establish a constraint contained within certain limits of subject, place and time;
- (c) provide for a consideration in favour of the employee.
With reference to (a), there are no particular issues to be addressed. The pact shall̀ be undersigned (and preferably initialled on each page) by the employee. Moreover, although according to traditional case law, the non-competition agreement does not require a double signature pursuant to Art. 13.41 of the Civil Code.[1]However, it is prudently recommended that such a post-contractual undertaking be specifically approved in writing in order to avoid possible disputes, also in view of a possible change in the above-mentioned jurisprudential orientation.
As for point (b), the time limits of the post-contractual agreement are defined in the second paragraph of Art. 2125 of the Civil Code as 5 years for executives and 3 years for other cases. It should be emphasised that the terms set forth in Article 2125 of the Civil Code constitute the maximum limits for the duration of the covenant, and the payment of the compensation due to the employee must also be calibrated to the actual duration of the covenant agreed upon by the parties.
The evaluation of the adequacy of the place within which the activity is prohibited is in close connection with the object of the activity carried out by the employee and, to this end, the indication of an excessively broad space may lead to the nullity of the covenant itself. On this point, there are controversial case law precedents, with one part of the case law considering that the pact extended to the entire national territory is null and void, inasmuch as it excessively restricts the employee's possibility of re-employment.[2] Other pronouncements, on the other hand, have considered valid EU-wide covenants,[3] in that the activity had been precisely specified so as not to excessively restrict the employee's working and professional capacity.
About the quantification of remunerationcase law assumes as an assessment criterion the congruity of the same to the sacrifice borne by the worker in the individual case[4]in holding that the sum paid to the worker must be proportionate to it.[5]
Clearly, since the concept of fairness is a very abstract one, it is very difficult to apply objective criteria to it. In any event, although there is no unambiguous and objective criterion for establishing the congruity of the covenant, case law holds that a consideration in the region of 15%-35% of the gross annual remuneration may be considered congruous.[6]
Secondly, the quantum in addition to being congruous it must be predetermined and/or predeterminable. Jurisprudence has held null and void, insofar as it was indefinite, a covenant that provided in favour of the employee a tot euro for each month until the termination of the relationship, as this covenant did not allow the employee to determine ex antealready at the time the agreement was signed, a minimum amount.[7]
In order to find a solution to the problems illustrated above and in order to attempt to stipulate a non-competition agreement that is effectively valid and with a reduced possibility of being challenged, one could hypothesise to include as an indemnity recognised to the employee, a percentage sum whose value increases with the lengthening of the relationship and which is linked to the gross sums paid to the employee in the last year of the relationship or, in a more favourable case, in the twelve months following the signing of the agreement.
- Self-employed
The covenant not to compete signed by a self-employed person,[8] is regulated by Article 2596 of the Civil Code.
The limits provided for by this rule are as follows:
- must be proven in writing
- it is valid if confined to a specific area or activity;
- may not exceed a duration of five years.
As can be seen, points a), b) and c) are similar to those already discussed above, to which we refer in full.
The essential difference is that Article 2596 of the Civil Code, unlike Article 2125 of the Civil Code, does not provide for any sanction for the failure to provide for consideration in favour of those who contractually submit to competitive restraints. Therefore, the fact that the non-competition agreement does not provide for any consideration is of no relevance, being in this respect, in any event, valid, effective and unenforceable.
However, very often one encounters problems related to the incorrect classification of self-employed workers, who, due to the way they carry out their activities within a company, may not have been properly classified as employees. For these figures, the problem could arise whereby, once the relationship has ceased, they intend to bring an action before the Employment Court to ascertain the subordination of the relationship and, with it, the invalidity of the non-competition agreement, since it lacks one of the essential elements provided for by Article 2125 of the Civil Code (namely, remuneration).
In any event, it is emphasised that the provision of a paid non-competition agreement in favour of such persons could be used by them as a further element to prove the subordinate nature of the relationship.
- Company director
Like self-employed persons, the non-competition agreement signed by a director is also subject to the limits set forth in Article 2596 of the Civil Code and, therefore, there is no requirement that he be remunerated.
With reference to the director's non-competition in reporting courseit is solely regulated formerly Article 2390 of the Civil Code, for directors of joint stock companies, which provides as follows:
"[1] Directors may not be unlimited partners in competing companies, nor engage in a competing activity on their own behalf or on behalf of third parties, nor be directors or general managers in competing companies, unless authorised by the shareholders' meeting.
[2] For failure to comply with this prohibition, the administrator may be removed from office and is liable for damages."
In contrast, for limited liability companies, there is no explicit prohibition for directors to act in competition during their term of office [9]with the consequence that it is the articles of association of the company that may freely provide whether the director may or may not perform such activities.
- Partners of limited liability companies
S.r.l. partners are not required to refrain from activities that compete with the company in which they hold shares. Indeed, in the Italian system, competition is only prohibited formerly Article 2301 of the Civil Code to partners in general partnerships and general partners in limited partnerships
If a non-compete obligation is also intended for partners, it could be:
- have the partners sign a non-competition agreement;
- sign a shareholders' agreement, whereby all shareholders undertake not to engage in activities in competition with the company and whose contents are in any case those provided for in Article 2596 of the Civil Code.
It should be noted that the shareholders' agreement is also valid for a maximum of five years and must therefore be renewed upon its expiry.
- Agency contract
The agency contract expressly regulates the non-competition agreement in Article 1751-bis of the Civil Code.
This issue has already been dealt with in this blog, so please refer to the following article (The non-compete obligation in the agency contract: during and after termination of the relationship).
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[1] Traditional jurisprudence has ruled out the applicability to the non-competition agreement of the provisions relating to vexatious clauses, on the ground that Art. 2125 lays down more stringent conditions than those set forth in Art. 1341, and in view of the peremptory nature of the hypotheses contemplated in para. (2) of the latter provision (see Turin Tribunal, 8.2.1979).
[2] Trib. Monza 3.9.2004.
[3] Cass. 21.6.1995 no. 6976; Trib. Milan 22.10.2003.
[4] On this point Cassation 1998 No. 4891.
[5] Cass. Civ. 1998 no. 4891; Trib. Milan 27.1.2007.
[6] E.g., a consideration quantified in 15% of the total amount of the remunerations paid to the employee in the last two years of the relationship against a non-competition obligation of two years' duration was deemed congruous) Trib. Milan, 22.10.2003.
[7] Trib. Venezia 31.5.2014.
[8] IMPORTANT. In this category does not include the commercial agent, for which there is a separate discipline, regulated in Art. 1751-.encore, which is not subject of examination for this opinion.
[9] In fact, before the reform brought about by Legislative Decree No. 6 of 2003, Article 2475 of the Civil Code made explicit reference to Article 2390 of the Civil Code. Now the reference has been eliminated.
