Compensation for non-compete
Compensation for non-compete / Karenzentschädigung
May 25, 2022
Compensation for non-competition is understood to be the payment which must be paid as compensation for a post-contractual non-competition obligation of an employee. This principle applies also in labour law even though it is enshrined in the German Commercial Code (HGB). The payment is a form of compensation for the "waiting period", i.e. it is a "waiting period compensation" for the time during which one is not working in one's traditional or former industry. According to section 74 HGB, a non-competition clause is only binding if the employer undertakes to pay at least half of the benefits of the last benefits received for the duration of the ban (maximum two years).
Who has a right to compensation ?
The law speaks in sections 74 cont. HGB, not about employer and employee, but rather about "Principal" and "commercial employee". All employees, but also socially and economically dependent freelancers, for example, are included in the group of "commercial employee", i.e. those who are entitled to compensation for a non-competition clause, which is why compensation is assigned to labour law. A compensation may also have to be paid to departing shareholders or directors. Case law rejects an analogous application of sections 74 cont. HGB for this case. This means that a post-contractual non-competition clause and the associated compensation can be contractually agreed between the parties. Since a non-competition clause represents a significant encroachment on the freedom of profession and can be reviewed in court for its "fairness", compensation for non-competition represents an important compensatory factor in labour law.
Requirement of written form and maturity
The agreement of the non-competition clause as well as the associated compensation for non-competition including its amount must be captured in writing. Contrary to the somewhat misleading wording in section 74 of the German Commercial Code (HGB), which speaks of compensation "for each year of the prohibition", the compensation is to be paid at the end of each month (section 74 (1) HGB).
Calculation of the compensation
According to section 74 (2) HGB, "at least half of the most recent contractual remuneration received by the commercial employee" must be paid. In the case of commissions or changing remuneration, the sum in calculated based on the average income of the last three years. In case of a shorter employment contracts, the time from the entry into force of the relevant contractual provision is taken into account (section 74 b (2) HGB).
The person who benefits from the compensation must have his or her earnings credited during this period. Amounts which he maliciously refrains from acquiring are also credited. Such crediting shall only take place if the acquisition exceeds a limit which is reached when the compensation plus new acquisition sums up to 110 % of the last contractual remuneration. The compensation will therefore be reduced by the amount of compensation plus new acquisition minus 110% of the last salary.
For example, if the last pay was 4000 euros and the compensation 2000 euros and then a new acquisition of 3000 euros is added, 2000 + 3000 - 110% of 4000, i.e. 5000 - 4400, is 600 euros. The compensation of 2000 euros is therefore reduced by 600 euros to 1400 euros.
If the non-competition obligation forces the “commercial employee” to move, the rate is 125%. In order for this compensation to be calculated, the assistant must inform his "principal" of the amount of his income.
Waiver of compensation
The "Principal", i.e. regularly the employer has the possibility, in the event of termination of employment to "withdrawing" the agreed compensation (together with the non-competition clause). To do so, he/she must waive the non-competition clause by written declaration before termination. If he/she does so before termination of the employment or service relationship, the employer(s) will be released from the obligation to pay the compensation after one year from this declaration (section 75a HGB).
Otherwise, the “Principal” may not refer to an agreement under which the “commercial employee” waives his or her right to compensation (section 75d HGB). In this respect, the statutory provisions cannot be contractually waived at the expense of the employee.