Post-Contractual Non-Compete Clauses

The post contractual non compete in German employment law

A post contractual non compete clause (nachvertragliches Wettbewerbsverbot) prevents a former employee from working for a competitor or setting up a competing business for a period after the employment ends. During the employment, employees are already prohibited from competing with their employer. After it ends, they are free to compete unless a valid post-contractual restriction has been agreed. German law makes such restrictions expensive and formal: they are only binding if the employer pays compensation for their duration, and they must satisfy strict formal and substantive requirements. Many clauses used in practice, particularly those copied from other jurisdictions, are void or non-binding.

The rules are found in §§ 74 to 75f of the Commercial Code (Handelsgesetzbuch, HGB), which originally applied to commercial employees and now apply to all employees through § 110 of the Trade Regulation Act (Gewerbeordnung, GewO) (§ 110 GewO). Managing directors of a GmbH are not employees for this purpose, and different principles apply to them, as explained below.

Formal requirements

A post contractual non compete must be agreed in writing, and the employer must hand the employee a document signed by the employer containing the agreed terms (§ 74(1) HGB). Copies, scans or an exchange of emails do not satisfy the written form, and the employer should keep proof that the signed document was handed over. The clause is usually included in the employment contract, but it can also be agreed later, for example in a separate agreement during the employment.

The restriction is void if the employee is a minor when it is agreed, or if the employer requires a promise on the employee's word of honour, and an agreement by which a third party undertakes that the employee will refrain from competition is also void (§ 74a(2) HGB). The general rules on contracts contrary to public policy remain applicable.

The compensation requirement

The central requirement is compensation (Karenzentschädigung). A post contractual non compete is only binding if the employer undertakes to pay, for the duration of the restriction, compensation that for each year of the restriction amounts to at least half of the contractual benefits last received by the employee (§ 74(2) HGB). The compensation is paid monthly. Variable remuneration, such as commissions and bonuses, is included on the basis of the average of the last three years (§ 74b HGB). Benefits that only reimburse expenses are not included.

The Federal Labour Court (Bundesarbeitsgericht, BAG) has interpreted "contractual benefits" broadly, including annual bonuses and similar special payments even if granted as voluntary benefits. It has also held that benefits from a virtual share or option programme that the employer itself promised are part of the contractual benefits relevant for calculating compensation, while share rights agreed directly with a parent company are generally not (BAG, judgment of 27 March 2025, 8 AZR 139/24, decision text). Employers with equity incentive programmes should therefore check how these affect the cost of their post contractual non compete covenants.

Void or non-binding: the consequences of defects

German law distinguishes between void and non-binding restrictions. A clause that provides for no compensation at all is void, and neither party can rely on it. The BAG held that a severability clause in the contract cannot cure or remove this consequence (BAG, judgment of 22 March 2017, 10 AZR 448/15, decision text). A clause that provides for compensation below the statutory minimum, or that is conditional on the employer's later decision, is not void but non-binding: the employee can choose, at the start of the restricted period, whether to comply and claim the compensation or to ignore the restriction.

A restriction is also non-binding to the extent that it does not protect a legitimate business interest of the employer, or that it unreasonably impedes the employee's career in terms of place, time or subject, taking into account the compensation (§ 74a(1) HGB). It cannot extend beyond two years after the end of employment. A legitimate interest typically exists where the employee had access to trade secrets or close customer relationships; a general interest in avoiding competition is not sufficient. Restrictions covering all activities for any competitor worldwide are particularly vulnerable.

Crediting other income and waiving the restriction

The employee must allow income earned elsewhere during the restricted period, or income maliciously not earned, to be credited against the compensation, to the extent that the compensation and the other income together would exceed the last contractual benefits by more than one tenth; if the employee had to move residence because of the restriction, the threshold is one quarter (§ 74c HGB). The employee must provide information on such income on request.

The employer can waive the restriction before the end of the employment by written declaration, but it is only released from the obligation to pay compensation one year after the declaration (§ 75a HGB).

A waiver after the employment has ended requires the employee's consent. If the employer gives notice of dismissal, the employee can declare within one month that he or she does not consider him or herself bound, unless there was a significant reason relating to the employee's person or the employer offers to pay full remuneration during the restriction (§ 75(2) HGB). Extraordinary termination for cause can also give the terminating party a right to free itself from the restriction.

Managing directors

For managing directors of a GmbH, §§ 74 ff. HGB do not apply directly. The Federal Court of Justice (Bundesgerichtshof, BGH) assesses a post contractual non compete for a managing director under the general rules on contracts contrary to public policy and the constitutional freedom of occupation: the restriction must protect a legitimate interest of the company and must not unreasonably restrict the director's career in terms of place, time and subject.

According to its case law, a GmbH does not have to promise compensation to its managing director at all; if it does, the parties can freely agree the amount and may also agree that the compensation lapses retrospectively if the director breaches the restriction (BGH, judgment of 23 April 2024, II ZR 99/22, decision text).

The BGH also emphasised that a restriction exceeding permissible limits can only be reduced by the courts as regards its duration; if it is excessive in other respects, it is void as a whole. Restrictions for managing directors therefore need careful drafting as well, in particular with regard to the scope of activities and territory. Many companies nonetheless provide for compensation to increase enforceability and acceptance.

Alternatives: non-solicitation and trade secret protection

Because a full post contractual non compete is costly, employers often consider narrower instruments. A customer non-solicitation clause, which prevents the former employee from actively approaching the employer's customers, is generally treated like a non-compete and also requires compensation if it restricts the employee's professional activity. Clauses that prevent the poaching of other employees raise their own questions. Simple confidentiality obligations, by contrast, do not require compensation, provided they do not amount in substance to a restriction on competition.

Trade secrets are protected by the Trade Secrets Act (Geschäftsgeheimnisgesetz, GeschGehG) independently of any non-compete. However, information only qualifies as a trade secret if it is subject to reasonable secrecy measures by its lawful owner (§ 2 GeschGehG). Employers should therefore combine contractual confidentiality clauses with practical measures such as access restrictions, labelling and exit procedures for returning documents and devices. For many employees, these measures provide adequate protection without the cost of compensation.

Non-competes in transactions and for sellers

Different rules apply to non-competes agreed by sellers of a business in share or asset purchase agreements, or by shareholders in joint ventures. These are not governed by §§ 74 ff. HGB but by the general rules on public policy and by competition law, which only accept restrictions that are necessary to protect the value of the acquired business, typically limited in duration, territory and products.

Where a seller also continues as an employee or managing director of the target, it is important to separate the transactional non-compete from the employment-related one, because the latter may trigger compensation obligations. In management buy-outs and incentive programmes, leaver provisions and restrictive covenants should be coordinated to avoid inconsistent obligations.

Enforcing a post contractual non compete

If a former employee breaches a binding restriction, the employer can stop paying compensation for the period of the breach, claim injunctive relief, including through interim injunctions, and claim damages, although proving damage is often difficult. Contractual penalties are common and permissible within limits in standard form contracts.

Employers should act quickly when they learn of a breach, as delays can undermine the urgency required for interim relief. Former employees, in turn, can claim the compensation monthly if they comply. In cross-border cases, questions of jurisdiction and applicable law arise frequently; mandatory German rules on compensation may apply to employees habitually working in Germany even if the contract is governed by another law.

Employers should also remember that the restricted period does not extend the employment relationship itself, and that the tax and social security treatment of compensation payments should be checked with payroll before the first payment is due. Clear internal responsibility for tracking restricted periods, payments and waiver deadlines avoids paying compensation for restrictions the business no longer needs. For the treatment of non-competes on exit, see our insight on severance and settlement agreements, and for general employment matters our employment and pensions practice page.

How TRW & Co helps

We advise employers and companies on drafting, reviewing and enforcing post-contractual non-competes for employees and managing directors in Germany. We adapt international templates to German requirements, calculate compensation including variable pay and equity awards, advise on waivers and exit negotiations, and represent clients in injunction and compensation proceedings. We also advise on protecting trade secrets and customer relationships through alternative measures. This page is general information, not legal advice. To discuss a matter, please contact us.