What Your International Business Should Know About Restrictive Employee Covenants
In most U.S. states employers are free to bind employees with restrictive covenants—which commonly take the form of post-employment restrictions on soliciting clients or employees—as a condition of employment. The wide acceptance of such restrictions in the U.S. does not necessarily translate to other countries, however, and although restrictive covenants may be permitted in some form, they are generally much more limited in scope outside the U.S.
INTERNATIONAL BUSINESSES: EMPLOYEE CONTRACTS ARE NOT ONE SIZE FITS ALL
In general, U.S. employers feel that post-employment restrictive covenants help them to retain global talent, guard against the theft of trade secrets and confidential information, protect against unfair competition, and provide employers time to reinforce key client relationships following the loss of a critical employee. In many U.S. states, employees must accept a post-employment restrictive covenant as a condition of employment, and employers are not required to provide additional consideration to ensure the restriction is enforceable.
Outside of the U.S., however, post-employment restrictions may not be permitted at all. For example, in Mexico, non-competition and post-employment non-solicitation agreements are deemed to be a violation of the principle of “freedom of work.”
While many European countries permit post-employment restrictive covenants, it is common for employers to pay employees at least a portion of their former salary for the duration of the non-competition period. In Germany, for example, post-employment restrictions are enforceable only if they are in writing, do not exceed two years in duration, and provide the employee compensation of at least 50 percent of his or her salary for the duration of the restricted period, inclusive of bonuses and commissions.
In addition to providing adequate compensation for post-employment restrictions, many countries that permit post-employment restrictions will only enforce such restrictions provided the employer narrowly tailors the agreement to address its legitimate business interests, not theoretical risks. In many European countries, for example, it is not uncommon for post-employment restrictions to be enforced only for the highest-level employees.
TIPS FOR GLOBAL BUSINESSES CONCERNED WITH CROSS-BORDER POST-EMPLOYMENT RESTRICTIONS
As part of an employer’s global strategy regarding restrictive covenants, employers should thoughtfully consider the following:
- Whether legitimate business needs warrant restrictive covenants outside the U.S.
- Make sure you understand the law in each country in which you plan to use such agreements—each country is different.
- How much consideration is required and when must it be paid?
- How are such agreements typically enforced and what is the burden of proof? In many jurisdictions, the burden of proof is on the employer and requires the employer to demonstrate actual unfair competition, trade secret theft, or damages. Most jurisdictions have not yet recognized the doctrine of inevitable disclosure.
- Tailor the agreements as narrowly as possible. If you are worried primarily about theft of trade secrets or confidentiality, tailor your agreements accordingly. A non-competition agreement may not be necessary. While many U.S. states employ “blue penciling” to overbroad agreements, many foreign jurisdictions do not recognize blue-penciling, and overbroad provisions could result in the entire agreement being struck.
Danielle S. Urban is a partner in the Denver office of Fisher & Phillips LLP, representing employers nationally in labor, employment, civil rights, employee benefits and immigration matters. Contact her at firstname.lastname@example.org or 303.218.3650
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