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Cross Border Restrictive Covenants: A Country Specific Case Study

Employing workers on foreign assignment carries many challenges for multinationals, and one of those is structuring the employment contract to suit the position and assignment location.  Part of drafting a locally-compliant contract for assignees is the proper use of cross border restrictive covenants, to protect against use of trade secrets or employee defection to a competitor.

As reviewed in this recent article, not every restrictive covenant is enforceable in all locations, so a country-specific approach needs to be used.  The term ‘cross border restrictive covenant’ reflects the very real need to enforce these clauses in multiple countries.  But this is far from a simple task, since choice of laws and place of legal employment will determine the applicable rules to restrictive covenants.

Enforcing Non-Competition Agreements in the Global Economy: Legality of Post-Termination Restrictions

It is important to understand the employment law of the host country of assignment, since in most cases that will control the outcome of any contractual disputes.  Foreign businesses are subject to the same rules as domestic companies, and cannot expect favorable treatment or special exceptions.

The most common restrictive covenant for international assignments is the non-compete clause, which is one of the only ways for a company to preserve its investment in employees and prevent use of business information with a competitor.  This priority becomes more pronounced when a skilled employee or senior executive on assignment is exposed to opportunities and offers from other businesses, and may be tempted to make a career move while abroad.

China has taken the middle ground on the issue, and will enforce reasonable non-competes, but has now imposed a mandatory payment (30% of wages) to the employee for the non-compete period.

Some countries view non-compete clauses as an illegal restraint on trade, and will refuse to enforce them against the employee.  The United Kingdom does recognize non-competes as valid, but only if they comply with current legal standards.  Any excessive terms such as duration longer than 12 months, may mean the entire clause is ruled invalid.  In other words, the court wont ‘rewrite’ the clause.

The US is at the other end of the spectrum and tends to favor the business that may suffer losses due to employee defection or misuse of confidential information.  Courts will often issue injunctions and even money damages against former employees who disregard the terms of their non-compete agreement.

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Legality of Post-Termination Restrictions in the Middle East, Asia and North America

Regional differences of how restrictive covenants are viewed stem from cultural or legal standards that may either favor the employee (pro-labor) or the business.  Enforceability is further complicated with international assignments, since both the employee and employer may be from another country.

Middle East

The UAE takes a unique approach to restrictive covenants, and if a court rules it is valid they still will not issue injunctions to enforce the terms.  The sole remedy for companies is to file a claim for money damages.

In Saudi Arabia, the maximum time period for post-termination restrictions is two years, and the law does state that both non-Saudi and Saudi nationals are subject to enforcement.

Asia

Companies in Japan are used to using non-competes and covenants that protect trade secrets and intellectual property.  The typical guidelines or ‘reasonableness’ are used, but one unique element is that employees have a constitutional right to choose their occupation, which may conflict with some non-competition clauses.

India takes a different approach and enforces non-competes and trade secrets clauses during employment, but will not enforce them post-termination.  This could be a concern for companies sending executives or skilled personnel to India, since Indian law would control any employment contract dispute.

North America

Mexico does enforce restrictive covenants, but only if the employer makes payments to the former employee for the entire period of restraint.  If no payments are made, the covenants are invalid.

Canada takes an equally strict approach, and will only enforce non-compete clauses in “exceptional circumstances”.  The company would then have to rely on the lesser protection of non-solicitation clauses to prevent contact with customers, and those clauses are enforced.

Benefits of Using a GEO Employer of Record: Knowledge of Local Employment Laws

When a company plans an international assignment, one available option is the use of a GEO local employer of record.  Essentially, the GEO is the legal employer and handles all aspects of immigration, payroll and employment.  Instead of setting up a full local corporation, the company contracts with the GEO to act as legal entity on their behalf.

This service will often include a local employment contract which may be required in the host country.  Because the GEO has a network of local experts and partners, it can ensure that the employment agreements contain restrictive covenants that are enforceable.  The GEO solution is ideal for small or midsize companies that may lack the resources to structure a foreign assignment and protect their business interests.

Get in touch to find out more about how an Employer of Record Solution can help your company

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