The legal boundaries of competing with your (former) employer

All employees have probably thought of it at some point: starting their own business. Where an employment contract provides stability and consistency, being your own boss provides freedom and flexibility. But how does that work in a legal sense? Can an employee start his own business during his employment? And what about after the end of that employment? In response to one of our recent cases, we have decided to write a blog article on this topic to inform everyone in a likewise position. 

Competition during the term of the employment contract
The basic assumption is that a person is free to engage in ancillary activities during his/her employment contract. However, this freedom can be limited by both legal and contractual provisions. 

Behaving as a ‘’good employee’’

First of all, a restriction may arise from the law which states that you should behave as a ‘’good employee” towards your employer. This standard is broad, but essentially means that you, as an employee, must refrain from conduct that is potentially harmful to your employer. For example, competing with your employer is considered not to be in line with behaving as a good employee.  ”Competing” should be interpreted broadly: this includes not only performing competitive work, but also, for example, advertising for your own company. Therefore, as long as your employment contract continues, you are not allowed to engage in similar activities or to advertise them.

Contractual prohibition of ancillary activities

In addition, employment contracts often contain a clause stipulating that employees are completely prohibited from carrying out ancillary activities or that this is only permitted after obtaining written permission from the employee. The rationale behind such a clause is that employers want to prevent their employees from engaging in competing activities or exhausting themselves for the benefit of another. This could have adverse effects on the employer’s business. Breaching such a contractual obligation can have far-reaching consequences. In fact, it is not unusual for the sanction for violating such a prohibition to be a summary dismissal. 

Competition after termination of employment contract 
If you intend to engage in competitive work after the termination of your employment with your current employer, there are two distinguishable situations. First of all, it is possible that your employment contract or the applicable collective bargaining agreement includes a non-competition clause. In addition, it is possible that there are no contractual restrictions on competitive work. In that case, however, competition may still be impermissible under certain circumstances. Both options are explained below. 

There is a non-competition clause 

If your employment contract or the applicable Collective Labour Agreement (CAO) contains a non-competition clause, this contractual provision will be leading to the question of what is and is not allowed after the end of the employment. The content of a non-competition clause varies from case to case.* It is therefore important to look closely at this specific provision to assess the extent to which you may not engage in competition with your former employer after the end of the employment. Standard restrictions include limitations on the geographical scope and limitations on the duration of the clause. In addition, it may be important to determine which competitive activities are covered by the prohibition according to the clause.  

* Please note that a non-competition clause in an employment contract may not be valid under certain circumstances. However, this blog post does not elaborate on this issue.

There is no non-competition clause 

The basic principle is that an employee can simply compete with his former employer after his employment without a non-competition clause. However, case law shows that under special circumstances this can be regarded as ‘unlawful employee competition’, as a result of which such competition is not permitted. This is the case when the following conditions are met: 

  1. The employee has helped to build up the sustainable business assets of the former employer under the employment contract;
  2. These sustainable business assets are systematically and substantially broken down by the former employee;
  3. The employee does this using tools that the employee was provided confidentially by his former employer for this purpose. 

These three conditions are completed together by looking for additional circumstances that lead to the conclusion that unlawful employee competition has occurred. There is no exhaustive list of additional circumstances that may be relevant. Some examples are: misusing knowledge, experience and personal goodwill gained with the former employer; taking away customers or staff; making false, unfavorable, harmful or derogatory statements; referring to the former employment or preparing for competition during the employment. Several additional circumstances must usually be present for a finding of unlawful employee competition to be made. 

When there is no non-competition clause, the question of whether competition with the former employer is permitted after the end of the employment must therefore be assessed on the basis of the conditions applicable in the specific case.

There are many circumstances to consider if you, as a (former) employee, intend to start your own business. This already starts when you are still employed by your employer. During your employment, you should always ‘’behave as a good employee’’. In addition, you may need to take into account a contractual clause that prohibits or limits the performance of outside activities during your employment. You may also have to take a non-competition clause into account after your employment ends. If there is no such clause, you may, in principle, compete with your former employer, unless the activities are to be considered as unlawful employee competition. 

Hopefully this information will give you some peace of mind in the exciting, but sometimes complicated process of starting your own business. If you still have doubts about your legal position in your specific case, please do not hesitate to contact us.

This article was written by Tigi Busstra and Laurens de Korte. Tigi and Laurens are both law students at the University of Amsterdam.