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Working for a competitor whilst on garden leave :

employee keeps double salary

In a recent case before Germany’s Federal Employment Appeals Tribunal an employee who worked for a competitor whilst on garden leave was not ordered to account to his employer for the extra money earned, despite breaching a non-competition clause.

Within the framework of a redundancy package an employee was granted paid garden leave at 6,000 euros per month until 31st January 2010. However, from 1st December 2009 the employee went to work for a competitor earning 6,000 euros gross.

The employer brought a claim salary earned whilst working for the competitor, or in the alternative, for that amount to be offset against the continued rights of the employee under the several package.

The claimant relied on §61 sub-paragraph 1 German Commerce Act (Handelsgesetzbuch, HGB). Under this paragraph, where an employee carries on a business in breach a non-competition clause, he must account to the employer for any income earned on behalf of a third party. Furthermore, any income received for the employee’s direct benefit is deemed to be earned for the benefit of the employer.

The defendant disputed the claim and applied for it to be struck out on the grounds that it had no real prospect of success.

In the lower courts the claim was unsuccessful. The Regional Employment Appeals Tribunal in Baden-Württemberg held that §60 sub-paragraph 1 HGB and following paragraphs were not applicable in the current case. The claimant lodged further appeals which did not succeed.

The Federal Employment Appeals Tribunal, although rejecting the claim, differed from the lower courts in its reasoning. The court affirmed that §60 sub-paragraph 1 HGB did apply in the current case. Under this paragraph an agent is not permitted to trade or encroach on the trading sphere of a principal, for his own or a third party’s benefit, without the principal’s authorisation.

Although the defendant in the current case was not strictly an agent within the definition of §59 HGB, it was held that non-competition clauses do apply to employees. In light of the level of earnings and the type of activity undertaken for the competitor, the court found that the non-competition clause in this case had been breached.

Despite this breach, the employee was not ordered to account to the employer for the earnings received whilst working for the competitor. The Federal Employment Appeals Tribunal argued that the employee had not “received remuneration whilst carrying on business for the benefit of a third party” as defined under §61 HGB. An employment contract does not represent the carrying on of a business with a speculative aim of making profit and as such, an individual who enters an employment contract with a competitor does not compete on open market with his employer.

Consequently the employee was not ordered to account to his employer for the additional earnings received after working for a competitor whilst on garden leave.

The claim to offset the earnings made in contravention of the non-competition clause against the continuing rights under the severance package also failed as no express provision had been made to this effect in the severance agreement.

A further claim under §242 German Civil Code was also rejected as the claimant failed to show that the defendant had acted in bad faith.

However, it remains unclear how the court would have decided, had the employer brought a claim for compensation under §61 sub-paragraph 1 half sentence 1 HGB. The claimant did not seek to rely on the argument that damage had been caused as a result of the breach of the non-competition clause.

The employer also failed to show a breach of any other obligations by the employee which would have amounted to damage in light of the payments made under the severance package