Retroactive cancellation of non-competition compensation in the event of infringement of a non-compete clause

At a glance

• A post-contractual non-competition clause agreed with the managing director of a limited liability company (GmbH), which provides for the retroactive cancellation of compensation for non-competition in the event of a violation of the non-compete agreement, is valid.
• The managing director is not unfairly disadvantaged by this.
• This was determined by the Federal Court of Justice in its ruling of 23 April 2024.

For the first time, the Federal Labour Court has ruled that the retroactive cancellation of compensation for non-competition in the event of a violation of the non-compete agreement, is valid. This only applies to managing directors.

Facts of the case

According to the employment contract, the defendant was subject to a post-contractual non-competition clause of two years. The payment of a monthly compensation for the duration of the non-competition clause was stipulated as compensation for compliance with the post-contractual non-competition clause. The parties also agreed that a breach of the non-competition clause would lead to the retroactive cancellation of the compensation for non-competition.

On 31 May 2012, the defendant was dismissed as managing director of the plaintiff. On 17 June 2013, the defendant took up a position as managing director at a competitor of the plaintiff. He claimed payment of the outstanding compensation from the plaintiff.

Decision of the Court

In the view of the Court, the retroactive cancellation of the waiting allowance was effectively agreed as it did not place an unfair burden on the defendant.

The Court based its decision on its established case law, according to which there is no obligation to grant the managing director compensation for non-competition if a post-contractual non-competition clause is agreed with a managing director. If such compensation is nevertheless promised, the parties are free to agree its amount. This freedom of negotiation also includes determining the retroactive cancellation in the event of a breach of the non-competition clause.

Practical note

The decision expands the scope of the employer's leeway when agreeing post-contractual non-competition clauses in employment contracts with managing directors.

The principles of this decision are not likely to be transferable to employees. Here, the contractual freedom of the parties is restricted by special statutory provisions. The compensation for waiting periods is therefore not freely negotiable, but rather legally binding.