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Global employment briefing: Switzerland, October 2018

  • Switzerland
  • Employment law

03-10-2018

Non-compete clauses in employment contracts under Swiss Law

In the working world today it is increasingly rare to find employees spending their entire career with the same employer. This raises the question of employee departures, especially when they have had access to sensitive information. How do you avoid the harmful effects of someone leaving and then being hired by a competitor? What are the limits? How do you draft or analyze a non-compete clause? Is it (partially) binding? The following analysis aims to provide a succinct answer to these questions.

In general

Under the Code of Obligations (CO) an employee may give a written undertaking to their employer to refrain from competing with it in any way at all after the end of the contract, in particular from running a rival business for their own account, working for one or holding an interest in one.

There are three conditions for a non-compete clause to be binding (these will be considered in more detail below):

  1. the clause must be in writing
  2. the employment contract must allow the employee to know the employer’s clients, manufacturing or trade secrets
  3. use of this information must be likely to cause the employer substantial harm

If any one of the above conditions is not met the clause is entirely invalid, and both the employee and the new employer may avail themselves of this.

1. Conditions

In writing: The employee’s signature must be set at the bottom of the document containing the clause; mere reference to another text (specifically to staff regulations) is not sufficient. If compensation is specified for the employee, the clause is a bilateral undertaking and must be signed by both parties.

Manufacturing or trade secrets: To qualify as manufacturing or trade secrets knowledge acquired by the employee, it must relate to specific technical, organizational or financial issues the employer wishes to keep secret. Knowledge that can be acquired in any company in the same sector forms part of the employee’s professional experience and has nothing to do with secrets.

Clients: Clients in this legal sense cannot be construed as any potential or occasional client of the employer. The ban on competing only covers the core of people who make regular use of the employer’s services and are loyal to the company, i.e. clients the employer has acquired by special efforts and who in a sense form its goodwill. The employee must also be able to thereby cause the employer substantial harm by poaching clients.

Substantial harm: Satisfying this condition merely requires the possibility of an effective loss based on the ordinary course of events and general experience of life. The Federal Supreme Court has ruled that a single client may constitute such harm if the client is an important one.

2. Limits on non-compete clauses

Limitation: The ban must be limited as to place, time and type of business in a way that does not unfairly compromise the employee’s economic future; only in exceptional circumstances may it exceed three years. An excessive clause is not invalid, but will be reduced by the court.

Precision: A clause is not admissible if it deprives the employee of their right to engage in economic activity in accordance with their training by covering an entire sector or market. The clause must therefore contain a detailed description of the prohibited competing activity.

3. Consideration from the employer

Unlike other countries, the law in Switzerland does not (at present) require consideration to be paid in exchange for refraining from competition. Nevertheless, some legal scholars indicate that an employee who complies with their commitment would be entitled to ask their former employer to pay fair compensation taking all the circumstances into account. Payment of consideration by the employer in exchange for the clause does not allow the parties to agree a ban on competition that would exceed the limits mentioned above: these are absolute. It should also be mentioned that under the Ordinance against Excessive Remuneration in Listed Companies Limited by Shares, compensation for a ban on competition that concealed compensation for departure could be canceled.

4. Compensation for loss and contractual penalty

An employee who breaches the ban on competition must compensate the employer for the resulting loss. Where the non-compete clause contains a contractual penalty, unless agreed otherwise the employee may be released from the ban upon payment of the amount specified. However, the employee must pay compensation for any loss which exceeds this amount. The judge must reduce the amount of any contractual penalty which is disproportionate.

5. End of the ban on competition and exception

The ban on competition lapses where it is determined that the employer no longer has any real interest in it being upheld. The ban also lapses if the employee terminates the contract for cause on the part of the employer or the employer terminates the contract in the absence of cause on the part of the employee.

6. Risks under civil and criminal law

Civil: Provided the various conditions for a non-compete clause to be valid are met, the former employer can file suit demanding that the employee stops working for the new employer. This procedure involves several stages; the first may be a ruling from the competent court without even hearing the employee or the new employer. It is therefore a particularly effective measure.

Criminal: The Federal Act on Unfair Competition makes it an offence to incite employees to disclose or obtain by fraud their employer’s manufacturing or trade secrets. The punishment is imprisonment for up to three years or a fine. The Swiss Penal Code also protects manufacturing and trade secrets. The punishment is imprisonment for up to three years or a fine. Offences are only prosecuted if a complaint is filed. Both parties involved are liable to punishment: the one who reveals the secret in breach of obligation and the one who makes use of the disclosure.

7. Conclusion

A non-compete clause is an effective tool in the fight against economic loss when an employee joins a competitor. Care must be taken when including one in an employment contract or exit agreement to ensure that it is binding and does not exceed the limits set down in law. As these limits depend very much on the individual case, we recommend great care in drafting; if using a template, do not just copy one from an uncertain source.

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