20.10.2020
We all know that an unpaid “Non-Competition Covenant” is ineffective, but… What do judges understand by “Adequate Compensation”?
It is well known that the validity of the non-competition agreement after the termination of the employment contract would require, beyond the fact that the employer has an effective industrial or commercial interest in it, that in addition, the worker should receive an appropriate economic compensation so that he can ensure economic stability after the termination of the contract, avoiding the urgent need to find a new job with the limitations imposed by the non-competition agreement.
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Furió Párraga, Ascensión Non-competition agreement: What do judges understand by “adequate compensation”?
In order to clarify, as far as possible, the question of reference, this article aims to analyze the most recent sentences issued by the Labor Divisions of the Superior Courts of Justice, which focus their analysis on determining the criteria taken into consideration to determine whether this economic compensation is adequate or not.
We must keep in mind that the payment of the economic compensation can be made during the employment relationship or once it has been extinguished, although the position of our Courts seems to admit more easily the adequacy of the compensations paid, on a flat rate basis, at the time of the termination of the employment contract or those that are paid, on a monthly basis, once the contract has expired, as the fulfillment of the commitment acquired by the worker is confirmed, as opposed to the first ones, that is, those paid when the labor relationship is in effect, where the position of our Courts is more restrictive.
Sentences in relation to “Adequate Compensation”
In Ruling No. 893/2002, of September 15, 2002, the Madrid High Court of Justice considered appropriate an economic compensation not quantified and deferred in time, contained in the higher salary that the worker received over and above that established in the applicable Collective Labor Agreement, deducting the amounts accrued as commission, for a non-competition agreement of 18 months’ duration to carry out work in any related company or on its own account, or persons intervening within the framework of the economic community and the Helvetic Conference.
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In Ruling No. 553/2006, of September 13, 2006, the Madrid High Court of Justice considered adequate financial compensation equivalent to 40% of the fixed salary, to be received monthly, for a 2-year non-competition agreement, on the grounds that the employment relationship had lasted more than 3 years, and that the total amount received, as compensation “Non-competition Pact”, amounted to 42,386.84€. The Chamber considers that such amount should be refuted as adequate to compensate the noncompetition during the 24 months following the termination of the employment contract.
In Ruling No. 480/2008, of June 16, 2008, the Madrid High Court of Justice considered appropriate a gross monthly economic compensation of 450 euros, representing 12.5%-16.5% of the worker’s gross fixed annual salary for the years 2003 to 2005, both included, once again, on the basis of quantifying the total amount received during the term of the employment relationship.
In Ruling No. 151/2010, of March 1, 2010, the Madrid High Court of Justice considered appropriate a financial compensation of 626.05 euros per month, for a period of non-competition of two years after the termination of the employment contract, and the worker must reimburse the amounts paid for this concept, in the last five years.
In this sense, and with reference to the Judgment dated June 29, 2009, the Chamber understands that the amount of the compensation to be received for noncompliance does not have to coincide with the salary that the worker had been receiving, in asmuch as the limitation imposed on the worker of not working during the period agreed in competitive activities does not prevent him to dedicating to another activity not affected by the prohibition. Thus, in its Ruling of June 29, 2009, the Court considered appropriate a compensation whose percentage of the salary was between 22% and 26%, since the period of jurisdiction was one year and was limited to the Community of Madrid.
Therefore, in the case prosecuted by the judgment of March 1, 2010, a monthly compensation of 626.05 euros is considered appropriate, which multiplied by 69 months that the employment relationship lasted, which meant that the employee received a total of 43,197.45 euros as compensation for non- concurrency. The important thing is that the Chamber considers that this amount is adequate because it is based on the premise that it is not necessary to assess a fixed amount of compensation payable on termination of the employment contract, but rather a monthly amount without any limitation for the duration of the employment relationship. Therefore, obviously, the longer the employment relationship lasts, the greater the compensation will be, and the amount finally paid in full will be that which must be qualified as adequate or not, set in relation to the duration of the non-competition commitment period. Thus, it is understood that the total amount of 43,197.45 Euros received, which will compensate for the prohibition of competition for 2 years, resulting in an annual compensation of 21,598.73 Euros per year, or 1,799.89 Euros per month, which constitutes sufficient compensation in comparison with the salary that the worker received, at the rate of 22,538 Euros per year.
In Ruling No. 201/2010, of March 22, 2010, the High Court of Justice of Madrid considered appropriate a financial compensation of 250 euros per month, for a non-competition agreement of 2 years’ duration, in accordance with two criteria (i) the total amount received, for such concept, upon the termination of the employment relationship, calculated at 7,633.33 euros and (ii) the scope of the limitation introduced in the non-competition agreement, limited, exclusively, to the concurrent activities with the clients and projects of which the worker had become aware due to his relationship with the Company.
Following the same criterion, in Ruling No. 418/2011, of June 13, the Madrid High Court of Justice considered adequate financial compensation of 7,500 euros per year, according to three criteria (i) the total amount received during the term of the employment relationship, (ii) the duration of the non-competition agreement, limited to 12 months, and (iii) the scope of the limitation, limited to the province of Madrid.
Regarding what has been understood as adequate lump-sum compensation, at the time of termination of the employment contract or those paid, in instalments, on a monthly basis, once the contract has been terminated, as compliance with the commitment made by the worker is confirmed, according to Ruling No. 451/2008, of July 1, 2008, of the Madrid Superior Court of Justice, the amount would be equivalent to 50% of a fixed annual salary of 50. 90,000, amount considered to be inadequate by Ruling No. 4437/2009, of June 2, 2009, of the Superior Court of Justice of Catalonia, which quantified it at 50% of an annual fixed salary of 90,000 euros, deferred in monthly payments during the term of the agreement, to which the reduction of the amount received by the worker during any month by way of unemployment benefit or salary received for other services not in competition with the company will be applied.
As can be observed, in order to determine whether the compensation paid during the term of the employment relationship should be refuted as adequate, two main criteria are taken into account: (i) total amount received during the employment relationship vs. duration of the non-competition agreement, and (ii) scope of the limitation of non-competition: sectors, geographical scope, among others.
On the other hand, and in relation to the compensation paid at the time of termination of the contract, two criteria are taken into account: (i) the amount to be received vs. the duration of the non-competition agreement, to determine whether the amount deferred over time, during which the limitation will be in force, is deemed to be sufficient, and (ii) that no deductions are made from the amount to be received, unrelated to the non-competition.
Undoubtedly, we are facing a controversial issue for which there is no single answer, and we must examine, case by case, the different criteria that are weighted by our Courts and from that reflection, we must begin to determine, with greater or lesser success, if the compensation received or to be received could be considered adequate.
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Non-competition and permanency agreement
