Non-competition agreement remuneration. How the nullity cases work (Guida al Lavoro de Il Sole 24 Ore, 19 March 2021 – Vittorio De Luca, Antonella Iacobellis)

Non-competition agreement – Agreement nullity – Remuneration – agreement onerousness – Remuneration Determination/Determinability

Court of Cassation, 1 March 2021, no.  5540

“Concerning the non-competition agreement entered into with an employee, the mere provision that the agreement is onerous excludes the extreme sanction of the agreement’s nullity may be applied if there is a financial imbalance of the services, unless there is an agreement of symbolic compensation or manifestly unfair or disproportionate to the employee’s sacrifice and loss of earning potential.”

Facts of the case

The Court of Appeal of Milan, reforming the ruling of first instance,

• declared the nullity of the non-competition agreement signed between the company and an employee,
• ordered the company to repay the amount paid under the ruling of first instance.

It argued as follows: “the agreement in question is null and void because there is no determination or determinability of the remuneration paid to the employee considering the professional limitations imposed by the employer and because it is consequently impossible for the employee and the judge to ascertain its fairness with the professional sacrifice required.”

The local Court held that it was clear from a reading of the agreement clauses that no provision had been made for a minimum duration of the agreement or for the employee’s payment of a guaranteed minimum amount to be established in advance if there was an employment relationship termination.

The agreement was structured so that if there was an employment relationship early termination, the employee was not entitled to full compensation, i.e. €18,000 gross (€6,000 gross multiplied three years), but only the amount accrued during the year or part of it.

The remuneration amount was not established and could not even be determined based on objective parameters. Instead, it depended on a variable linked to the relationship duration, which led to an imbalance between the parties and an unbalanced contractual structure in the employer’s favour. This made the established remuneration incongruous and the agreement null.

The company appealed to the Court of Cassation against that ruling, claiming a strong contrast between opposing statements and objectively incomprehensible reasoning. The employee responded with a counter-appeal.

The Supreme Court of Cassation’s ruling

The Supreme Court found the employer’s complaint to be well-founded and, in support of its decision, made the following points.

The non-competition agreement is an autonomous form of negotiation (Court of Cassation, ruling no. 16489/2009) and nothing more than a contract for pecuniary interest and remuneration in return for which:

• the employer undertakes to pay a sum of money or other benefits to the employee so that for
• the time following the employment relationship termination, the latter undertakes not to engage in activities in competition with those of the employer (Court of Cassation, ruling no. 2221/1988).

As an entirely autonomous agreement from the employment contract, the remuneration agreed upon must meet the general requirements of determination or determinability imposed by Art. 1346 of the Italian Civil Code for the service subject, under penalty of agreement nullity.

What are the interests underlying the agreement?

The purpose of the non-competition clause is to safeguard the entrepreneur from any “transfer to competing undertakings” of the company’s intangible assets and protect the employee. This prevents the clause from excessively restricting possibilities to direct work towards other more convenient occupations (most recently, Court of Cassation, ruling no. 9790/2020).

Continue reading the full version published in Guida al Lavoro of Il Sole 24 Ore.