By Duncan Macintosh, GEO Solutions Director of Shield GEO
What is a Restrictive Covenant and Why Is It Important for International Assignments?
Restrictive covenants are contractual terms usually contained in an employment agreement or letter or assignment, which could also be a part of a broader written employment policy. Restrictive covenants are essentially constraints on employee actions that can affect business value, property and market competition.
These clauses are typically enforced post termination, but this can be problematic for international assignments depending on the country where work is performed by the employee. There are several basic areas that restrictive covenants cover that deal primarily with protecting a company’s business interests:
- Non-competition covenants that restrict an employee from accepting a similar position with a competitor of the original employer.
- Non-solicitation covenants that prohibit the employee from contacting and/or soliciting the business of employer clients and customers.
- Covenants that limit the ability of a former employee to solicit their previous co-workers.
- Protection of confidentiality and non-disclosure of trade secrets, business information and intellectual property
Naturally, all of these covenants would also apply while the employee is still working, but most of the time any conflict will arise after the employee has left their position.
In Which Industries Are Restrictive Covenants Most Relevant?
Restrictive covenants play an important role for any business that gives employees access to sensitive information or valuable intellectual property. Industries such as high tech software and hardware developers, legal and accounting firms, manufacturers, financial firms, banks and publishers may all require employees to have some form of confidentiality restrictive covenants in their contracts.
In addition, any international business that relies on skilled workers or experienced executives will want to have both non-compete and non-solicitation clauses included in their employment agreements. The real issue for international assignments is whether the host country will recognize the restrictive covenant and enforce its terms.
The main legal issues that control these types of contract terms are ‘duration’ (how long is the former employee restrained from working) and ‘geographical scope’ (which country or region does the covenant cover). Global or open-ended restrictive covenants would be unenforceable in almost every country, with possible exceptions for senior executives of multinational corporations.
In Which Countries Are Restrictive Covenants Most Effective?
In general, restrictive covenants can be placed in any employment agreement, but the question is whether the country with jurisdiction will enforce the terms after the employee leaves. The core test is ‘reasonableness’ of the covenant depending on the duration, geography, type of industry and potential for inhibiting business interests of the former employer.
Countries such as the US with a very pro-business climate may allow former employers to bring a legal claim based on any type of covenant violations, while other countries that have pro-labor policies may be reluctant to enforce broad based restrictions.
For example, Mexico and Chile prohibit any type of non-compete clause, while others like China, Brazil and Germany will allow them as long as there is some type of compensation for the duration of the non-compete time period. Compensation amounts range from 25% to 50% of the former employee’s wage, not an insignificant cost for some businesses.
The legal remedies in some countries may be limited for the employer. Unlike the US, countries like Spain and Argentina will not force an employee refrain from working for a competitor. In that case, the only relief for the employer may be through money damages as specified in the covenant itself, assuming the jurisdiction will allow it.
How Can Restrictive Covenants Be Useful for Global Companies and Are They Effective in Avoiding Post Termination Contractual Disputes?
The presence of restrictive covenants in an employment agreement can have the effect of dissuading former employees from acting counter to non-compete or confidentiality policies. If a termination is voluntary or amicable, then most of the time employees will follow the terms of the covenants, or at least seek some form of permission from their former employer. For this reason alone, including restrictive covenants can help to avoid unnecessary conflicts, and also preserve the employee’s potential need for references and recommendations from their former superiors.
However, in the case of involuntary terminations or if an employee feels they have the right to use their skills and experience to find a better job, they may act against the interests of their former employer and the covenants. At that point, the employer will need to make a choice about whether it is worth the time and expense of seeking a legal remedy, and also whether the country of jurisdiction will support the employee’s covenant-breaching actions.
When Should Global Employers Consider Incorporating Restrictive Covenants in Employment Contracts?
Many companies that send employees on international assignments will have the employment agreement drafted in the home country based on domestic laws. However, many countries will require another employment contract that complies with local labor and employment laws, and that will often be the agreement that controls the legal enforceability of restrictive covenants. Despite this fact, even if a restrictive covenant is invalid in the country of assignment it could still have a deterrent effect, and at a minimum will establish the company’s serious attitude to protecting its business interests.
The best approach for companies with global mobility programs is to draft restrictive covenants that are potentially enforceable in the host country, adhering to limits on duration and geographical approach. This could be helpful in preventing a local court from dismissing it altogether, and eliminating any type of remedy.
What Role Do International GEOs Have in Ensuring the Protection of Restrictive Covenants?
A GEO solution for international employment offers a wide range of services to companies sending staff on assignment. Among those is assisting with the employment contract that complies with host country laws. Using local partners and experts, Shield GEO can make sure that the restrictive covenants in your agreements meet legal standards and can be enforced in the event of a breach.
More importantly, Shield GEO is also involved in any premature termination of the assignment, including statutory notice periods and severance pay that may be required in the foreign market. Being involved from the start to finish of an international assignment allows Shield to ease employment transitions, assist with repatriation and minimize post termination conflict.