In this 5th and final part of the FAQ, we will cover questions related to restrictive covenants.

What types of restrictive covenants are allowed?

Under Danish law, an employer is entitled to enter into restrictive covenants with its employees. An employer may opt for either

  1. a non-competition clause (prohibiting the employee from competing with the employer);
  2. a non-solicitation of customers' clause (prohibiting the employee from doing any business with the employer's customers or other business associates); or
  3. a combined non-competition and non-solicitation of customers' clause.

What is the maximum term of the restrictive covenants?

The term of the restrictive covenant may be no longer than 12 months after the effective date of termination of the employment if the employer has opted for either a) a non-competition clause or b) a non-solicitation of customers' clause.

If a combined non-competition and non-solicitation of customers' clause is chosen, the maximum term allowed is six months after the effective date of termination.

Please note that less strict rules apply to the very top executive management of a company, see the question "what about executives' restrictive covenants" below.

Does the employer have to comply with certain formal requirements for the restrictive covenant to be enforceable?

Yes, there are strict formal requirements that must be met in order for the restrictive covenant to be enforceable. In addition to complying with the maximum terms allowed, see above, the following formal requirements apply:

  • The clause must be included in a written agreement containing the following information:
    • The employee must have at least six months' seniority at the time of termination.
    • The employee must be compensated during the term of the clause (see "how is the compensation for the restrictive covenants calculated and paid" below).
    • A non-competition clause may only be imposed on an employee holding a "very special position of trust" (in Danish: "en helt særlig betroet stilling"). The clause must include a description of the elements of the employment making the non-competition clause necessary.
    • A non-solicitation of customers' clause may only apply to customers (and business partners etc.) with whom the employee has had business relations during the 12 months preceding the date of termination or dismissal.

Please note that less strict rules apply to the very top executive management of a company, see the question "what about executives' restrictive covenants" below.

How is the compensation for the restrictive covenants calculated and paid?

The compensation for a non-competition or a non-solicitation of customers' clause must be equal to at least 40 per cent of the monthly salary if the term of the clause is no longer than six months.

If the term of the clause is more than six months – or if the employee is subject to a combined non-competition and non-solicitation of customers' clause – the compensation must be equal to at least 60 per cent of the monthly salary.

Should the employee succeed in finding other suitable employment during the term of the restrictive covenant, the employee is only entitled to reduced compensation of at least 16 per cent if the employee was originally entitled to at least 40 per cent of the salary and reduced compensation of at least 24 per cent if the employee was originally entitled to at least 60 per cent of the salary.

However, regardless of any other income, the employee is always entitled to full compensation (at least 40 per cent or 60 per cent) during the first two months of the term of the restrictive covenant. This compensation must be paid as a lump sum on the effective date of termination.

The compensation is based on the employee's full salary on the effective date of termination. When calculating the compensation amount, the employer must include the value of any employer-paid pension, benefits, bonus, etc. in addition to the employee's base salary.

What about executives' restrictive covenants?

Less strict rules apply to the very top executive management (i.e., only the executive officers registered with the Danish Business Authority who are responsible to the board of directors of the company, typically only the CEO and potentially a CFO).

First of all, legislation does not set out a maximum term for non-competition and/or non-solicitation of customers' clauses.

Secondly, there is no compensation requirement (or other formal requirements) that must be adhered to in respect of executive officers.

However, the terms of a non-competition and/or non-solicitation of customers' clause must be reasonable. As such, payment of compensation and the term of the restrictive covenant may be decisive when determining whether a non-competition and/or a non-solicitation of customers' clause is unreasonable (or enforceable).

Are non-competition clauses enforceable against an employee/executive regardless of the circumstances of the termination?

No. Under Danish law, a non-competition clause cannot be enforced against an employee (or executive) who has been dismissed by the employer without having given any reasonable cause for such dismissal, or who resigns from his/her position and the employer's omission to perform its obligations has given the employee (or executive) reasonable cause for such resignation.

By way of example, if an employee (or an executive) is dismissed by the employer due to redundancy, such employee/executive has not given any reasonable cause for the dismissal. In such case, the non-competition clause cannot therefore be enforced against the employee/executive.

What about non-solicitation of employees' (non-poaching) clauses?

An employer cannot enter into non-solicitation of employees' clauses (i.e., clauses prohibiting or restricting the recruitment or soliciting of other employees) with an employee (or an executive).

It is, however, possible to use non-solicitation of employees' clauses in relation to business transfers to a limited extent if the clause is entered into between employers during business transfer negotiations. The non-solicitation of employees' clause may only comprise employees who have at least 3 months' seniority.

The term of the non-solicitation of employees' clause can be no longer than six months after the clause has been entered into (and the clause can be upheld no more than six months after the completion of the transaction/business transfer).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.