How to calculate the compensation for a non-compete clause

The non-compete clause appears in many employment contracts of managers, sales staff and technicians who hold know-how. It prohibits the employee, after leaving, from carrying on a competing activity for a certain period and within a certain territory. In return, the employer must pay a sum of money: the financial consideration. The question that gives rise to the most disputes is precisely the amount of that compensation, because consideration that is badly calculated or held to be derisory may result in the outright nullity of the clause. This guide sets out the method for calculating non-compete compensation, the ranges commonly observed and the situations in which the amount exposes the employer and the employee alike to a legal risk.

Financial consideration: a condition of validity, not an option

Financial consideration is not a favour granted to the employee. It is a condition of validity of the clause itself. The Social Chamber of the Cour de cassation, in leading judgments of 10 July 2002, held that a non-compete clause is lawful only if it satisfies four cumulative conditions: it protects a legitimate interest of the business, it is limited in time, it is limited in space, and it provides for financial consideration in favour of the employee. Each of these conditions and the drafting of the clause are discussed in our article on the non-compete clause in the employment contract.

These requirements derive from freedom to work and from the principle laid down in Article L1121-1 of the French Labour Code, under which no one may impose on the rights of individuals and on individual freedoms restrictions that are not justified by the nature of the task to be performed or proportionate to the aim pursued. A clause that deprives an employee of the possibility of finding a job matching his or her training without any compensation runs directly counter to that principle.

The practical consequence is clear: if the financial consideration is missing, or is set at a derisory level, the clause is void. The employee is then free of any non-compete obligation, and may in addition claim damages if he or she shows that the unlawful clause caused loss, for example because he or she gave up a professional opportunity believing that he or she was bound.

What the law does not say: no statutory scale

No provision fixes the amount of non-compete compensation. The French Labour Code requires that consideration exist, but it determines neither the minimum, nor the percentage, nor the method of calculation. The amount therefore derives from two successive sources.

The first source is the collective bargaining agreement (convention collective) applicable to the business. Many sectors regulate the non-compete clause and set a minimum amount, often expressed as a fraction of remuneration. The collective agreement is mandatory: if it provides for consideration more favourable than the contract, the amount set by the collective agreement applies.

The second source is the employment contract itself. In the absence of a provision in a collective agreement, or where the agreement leaves some margin, the amount is the one negotiated between the employer and the employee and set out in the contract or in an amendment. This contractual freedom is not unlimited: the court retains the power to review whether the sum is derisory, and may recharacterise token consideration as an absence of consideration.

It is this framework that explains why a non-compete compensation simulator can give only an estimate. No online tool knows the exact collective agreement, the employee's variable remuneration structure or the particular clauses of the contract. A simulator is useful to work out a rough order of magnitude, never to settle a figure that can be relied on against the other party.

The calculation method, step by step

The calculation of compensation for a non-compete clause follows a three-stage logic: determine the applicable rate, define the remuneration base, then apply that rate over the duration of the prohibition.

Step 1: identify the source of the rate

The starting point is to read the collective bargaining agreement. One must look in it for the provisions relating to non-competition and note the percentage of remuneration required, together with any conditions on maximum duration or geographical scope. Some sectors express the consideration as a percentage of the monthly salary paid throughout the duration of the prohibition, others as a declining percentage, and others still as a lump sum.

In the absence of a provision in a collective agreement, one turns to the employment contract. If the contract sets a rate, that rate applies, subject to review by the court. If the contract creates a non-compete clause without quantifying the consideration, the clause is liable to be declared void, because indeterminate consideration is most often equivalent to no consideration.

Step 2: determine the remuneration base

The base is the reference remuneration to which the percentage applies. In practice, contracts and collective agreements frequently use the average monthly remuneration over the last twelve months of employment, which has the advantage of smoothing variations. That average includes in principle all items having the nature of salary: the fixed element, but also the variable element (commissions, target bonuses), benefits in kind and bonuses that operate as a salary supplement.

This point is decisive for sales staff whose variable remuneration represents a substantial part of the total. Excluding commissions from the base mechanically reduces the compensation and may push it into the derisory. The drafting of the clause must therefore state unambiguously what the reference remuneration covers.

Step 3: apply the rate over the duration

The compensation is then calculated by applying the rate to the base, over the period during which the employee is actually bound not to compete with his or her former employer. The consideration is most often paid monthly, after termination of the contract, throughout the period of the prohibition.

Take an illustrative and anonymous example. A sales manager leaves the business. His or her collective agreement provides for consideration equal to a fraction of the average monthly remuneration, paid each month for the duration of the prohibition, set at one year. His or her average monthly remuneration over the last twelve months, variable element included, serves as the base. The amount of the monthly compensation is that base multiplied by the rate set by the collective agreement, and the total compensation is that monthly amount multiplied by the number of months of prohibition. Changing the duration or the base changes the result proportionately, which illustrates why the calculation must always start again from the exact provisions.

Ranges observed in practice

In the absence of a statutory scale, practitioners reason from ranges derived from collective agreements and from negotiation. One frequently observes consideration of between one third and two thirds of remuneration, paid for the duration of the prohibition. These fractions are not rules of law: they reflect sector practice and negotiating custom.

Several parameters justify placing the amount at the upper or lower end of the range:

• the geographical extent of the prohibition, a national perimeter weighing more heavily on the freedom to work than a prohibition limited to one département
• the duration of the prohibition, a two-year clause being more restrictive than a six-month clause
• the employee's specialisation, a highly specialised profile having more difficulty finding other work outside the competing sector
• the level of remuneration and the variable element, which determine the base

The underlying logic is that of proportionality: the more the clause restricts the employee's professional freedom, the more substantial the consideration must be for the clause to remain valid. A broad and lengthy prohibition coupled with low compensation presents an imbalance that attracts the court's attention.

Derisory compensation: the main risk of nullity

This is the heart of the disputes. Financial consideration of a derisory amount is treated by the courts as an absence of consideration, which results in the nullity of the non-compete clause. The trial court assesses the derisory nature of the amount in its sole discretion, having regard to all the constraints imposed on the employee.

That assessment is concrete rather than abstract. Compensation representing a very low percentage of salary, or a token lump sum unrelated to the duration and extent of the prohibition, will be characterised as derisory. Conversely, modest consideration may be upheld if the prohibition is itself limited in time and space. What matters is the relationship between the constraint suffered and the compensation received.

Two configurations frequently recur in practice.

The first is that of a clause that makes the compensation vary according to the manner of termination, reducing it for example in the event of resignation or dismissal for misconduct. Case law considers such a reduction unlawful: the amount of the consideration cannot depend on the circumstances of the termination, because the interference with the freedom to work is the same whatever the cause of the departure. The reduction clause is deemed unwritten, and the employee retains the right to full consideration.

The second configuration is that of an artificially reduced base. Consideration calculated on the fixed salary alone, where the employee received a substantial variable element, may result in a derisory real amount even if the stated percentage appears reasonable. The dispute then concerns the calculation base rather than the rate.

For the employer, the stakes are serious: if the clause falls, the employee is released from any non-compete obligation, which may deprive the intended protection of its meaning, in particular where the former employee joins a direct competitor. For the employee, challenging the derisory nature of the compensation is a lever to recover professional freedom and, where appropriate, to obtain redress.

Payment and the social security treatment of the compensation

Financial consideration has the nature of salary. It is therefore subject to social security contributions and income tax, and it appears on the payslip or an equivalent document. This characterisation has several practical consequences.

Payment is made in principle after termination, during the period of the prohibition, at the intervals provided for by the clause. Payment in a single instalment is possible if so stipulated, but monthly payment remains the most frequent because it coincides with the actual duration of the prohibition.

An employer who wishes to be released from the obligation to pay may, if it reserved that option in the contract, waive the non-compete clause. The waiver must be made in accordance with the conditions and time limits laid down by the collective agreement or the contract. A late or irregular waiver does not relieve the employer of payment. Legal certainty therefore requires checking, when the employee leaves, whether a waiver option exists, and its form and time limit.

The non-compete clause in business contracts

The logic differs where the non-compete clause concerns not an employee but commercial partners. In a sale of a business (cession de fonds de commerce) or a sale of shares, the seller's non-compete undertaking is as a general rule regarded as the counterpart of the price paid by the buyer: it does not require separate compensation, because it protects the value of what is sold. Its validity rests on its being limited in time, in space and as to the activity concerned, and on its proportionality to the legitimate interests of the acquirer. The validity, scope and sanctions of the seller's undertaking are dealt with separately in our article on the non-compete clause in the sale of a business.

In relations between businesses, an overly broad non-compete clause may moreover be analysed from the standpoint of significant imbalance. Article L442-1 of the French Commercial Code penalises subjecting a commercial partner to obligations creating a significant imbalance in the rights and obligations of the parties. A clause imposed without real consideration, in a relationship where one of the parties is in a position of dependence, may be challenged on that basis. The boundary between the legitimate protection of know-how and abusive restriction of competition is once again a matter of proportionality and of the existence of real compensation. On the distinction between a non-compete prohibition and a non-solicitation prohibition between businesses, see our analysis of the non-solicitation clause in a B2B commercial contract.

What to check before signing or challenging

The strength of a non-compete clause lies in its drafting. Several checks are called for, whether one is on the side of the employer who drafts or of the employee who is wondering about the scope for challenge:

• the actual existence of quantified financial consideration, failing which the clause is void
• consistency between the rate, the remuneration base and the duration of the prohibition
• the absence of a clause making the compensation vary according to the manner of termination
• compliance of the amount with the minimum set by the collective agreement, which prevails if it is more favourable
• the precise limitation in time, in space and as to the prohibited activities
• the terms and time limit for waiver, for an employer wishing to be released from payment

An audit of these points, carried out before the contract is signed or when the employee leaves, avoids unpleasant surprises. For the employer, it secures the protection sought. For the employee, it identifies the levers for challenge.

Conclusion

There is no single statutory formula for calculating non-compete compensation, but there is a clear requirement: the consideration must be real and proportionate to the constraint imposed. The calculation rests on three concrete elements: the rate set by the collective agreement or the contract, the remuneration base including the variable element, and the duration of the prohibition. Prudence requires adopting a broad base and an amount that reflects the geographical and temporal extent of the clause, because a derisory amount brings down the entire arrangement.

The central message is a deliberate position: generous consideration and a sound clause are better than minimal compensation that weakens the protection. A void clause protects no one. Before signing or relying on a non-compete clause, have a professional check that the amount complies with the applicable collective agreement and that there is no provision liable to cause it to be recharacterised as derisory consideration.

Frequently asked questions

Is there a statutory minimum amount for non-compete compensation? No. No statute sets a floor. The amount derives from the applicable collective bargaining agreement and, failing that, from the employment contract. The court retains the power to penalise consideration that it regards as derisory by declaring the clause void. In practice, collective agreements often set the consideration at between one third and two thirds of remuneration.

Is a non-compete compensation simulator reliable? A simulator gives an order of magnitude, not a figure that can be relied on against the other party. It does not know the exact collective agreement, the precise structure of the variable remuneration or the particular provisions of the contract. It is useful for working out a rough estimate, but the final calculation must always start again from the text of the collective agreement and the signed contract.

Do the variable element and commissions count in the calculation? Yes, in principle. The reference remuneration includes all items having the nature of salary, including commissions and target bonuses. Excluding the variable element from the base may result in genuinely derisory compensation for a sales employee, which would expose the clause to nullity. The drafting must state expressly what the base comprises.

What happens if the compensation is held to be derisory? Derisory consideration is treated as an absence of consideration. The non-compete clause is then void, and the employee is released from any non-compete obligation. He or she may also claim damages if he or she shows loss linked to that unlawful clause. The derisory nature is assessed in their sole discretion by the trial courts, having regard to all the constraints imposed.

Can the employer reduce the compensation in the event of resignation or dismissal for misconduct? No. Case law considers that the amount of the consideration cannot depend on the manner of termination, because the interference with the freedom to work is identical whatever the cause of the departure. A clause that varies the compensation according to the circumstances of the termination is deemed unwritten, and the employee retains the right to full consideration.

Is non-compete compensation subject to contributions and tax? Yes. Financial consideration has the nature of salary. It is therefore subject to social security contributions and income tax, and it must appear on a payslip or an equivalent document. It is generally paid monthly after termination, for the duration of the prohibition.

Can the employer avoid paying the compensation? Only if it reserved a waiver option in the contract or the collective agreement provides for one, and provided that it is exercised in the form and within the time limits set. A late or irregular waiver does not relieve the employer of payment. It is therefore necessary to check, when the employee leaves, the existence, form and time limit of that waiver option.