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The global HR strategist, chapter four: business protection- the global use of restrictive covenants in employment

  • Global
  • Employment law

02-02-2022

One of the consequences of the pandemic has been to boost the prospect of using technology to work from anywhere in the world. Employers willing to entertain that possibility for their existing workforce or in order to widen their talent pool face a number of tax, immigration and other legal considerations. However, an issue that can often be overlooked where the location of work is more fluid and spans jurisdictions is ensuring the appropriate protection of a business’s client and supplier base and other legitimate interests, including through the use and enforcement of restrictive covenants.

Restrictive covenants are typically used to prohibit an employee or ex-employee from working for a competitor or performing competitive activities (non-compete provisions) or soliciting customers, suppliers or employees (non-solicitation and non-dealing provisions). The use of such restrictions across jurisdictions has the added complexity of different laws and practices dictating whether, where and how such clauses may be used and enforced.

Following on from the previous global briefings in this series of materials focusing on considerations for HR strategists on topical issues (Chapter one: Global workforce mental health protection, Chapter two: Global diversity data and Chapter three: Speaking up - the 2021 deadline for the EU Whistleblowing Directive), in this briefing we consider some of the key strategic considerations for multi-national employers when considering the use of restrictions across jurisdictions.

Restrictions – a new tide of government regulation?

With the pandemic propelling the need for governments to support economic bounce-back, many governments are exploring ways to encourage and remove perceived barriers to innovation and competition and to maximize opportunities for individuals in the labor market.

The use of restrictions in employment, particularly non-compete clauses in contracts of employment, has been one area of focus for some governments, including in the UK and the US. In particular, there has been a focus on how to achieve an appropriate balance between ensuring the labor market is as open as possible and competition is not stifled, while at the same time protecting businesses’ confidential information and proprietary interests in relationships that they have invested time and resources in developing.

In many jurisdictions, there are already legal constraints on the use of restrictive covenants, however the pandemic has spurred a renewed focus on that regulation. For example, in July 2021, President Biden signed an Executive Order on Promoting Competition in the American Economy, where it is proposed to introduce new rules banning or limiting non-compete agreements. In the UK, a government response is awaited following the public consultation that closed in February 2021 regarding potential curbs on the use of contractual post-termination non-compete clauses. In Finland, new legislation entered into force on 1 January 2022, ensuring that workers have an entitlement to compensation for all post-employment non-compete restrictions, with minimum levels of compensation and a maximum duration of restraint. In Washington state in the US, also with effect from 1 January 2022, salary/fee thresholds now apply for post-employment non-compete agreements to be enforceable against employees/contractors.

In addition, the protection of confidential information, particularly that amounting to trade secrets, has been a focus. In China, the Anti-Unfair Competition Law was amended in 2019 and saw additional guidance being issued during 2020. In particular, this elaborated on the definition of trade secrets, the scope of prohibited acts and the potential administrative, civil and criminal liabilities. Those changes have resulted in a shift in the risk profile for the protection of confidential information in China, broadening the scope of protection for businesses and clarifying the activities that are unlawful, which expressly include using trade secrets in breach of confidentiality obligations.

In Europe, member states transposed the EU Trade Secrets Directive into national legislation between 2017 and 2019, which has resulted in a more defined legal framework in this area than previously existed in some jurisdictions. In addition, it has established a more harmonized understanding of what constitutes a trade secret and the different forms that misappropriation of such information can take in order to gain legal protection.

Use and enforcement – can an effective global approach be achieved?

For multi-national employers, global approaches around people strategy can often seem attractive, having the advantages of consistency of treatment, ease of messaging for implementation and simplicity in terms of policies and procedures. However, there are a number of reasons why striving to find a universal approach to the use and enforcement of restrictive covenants globally that is both effective and lawful is unlikely to be successful.

Permissibility of use

The extent to which post-termination restrictive covenants are permitted varies by jurisdiction, with some countries also having variations by state or region. For example, in Russia post-termination restrictions, whether non-compete or non-solicitation, are generally not permitted, except to ensure the non-disclosure of confidential information. In India, post-termination non-compete restrictions are not enforceable as a matter of law, although reasonable non-solicitation covenants and confidentiality provisions can be agreed.

Scope of protection

Even where restrictive covenants are in principle permissible, the limitations around permitted scope vary by jurisdiction. Factors such as the type of interests that are capable of protection, the duration of the period to which the restriction applies, the geographic scope of the restraint and the type and seniority of employee, can all have an impact on enforceability. The use of such clauses to simply stop competition is rarely permitted and tailoring the restriction, taking account of any local limitations around permitted scope, will be particularly important if the enforceability of the restraint is to be maximized.

Compensation

In some jurisdictions, there will be requirements to provide compensation as a condition of the use of post-termination restrictive covenants. For example in Germany, where payment has to be made for the duration of any non-compete, non-dealing or non-solicitation restriction, in the amount of at least 50% of remuneration. Similarly in Belgium, a payment equal to at least 50% of the gross remuneration is generally required for the duration of a non-compete restriction. In China, monthly compensation is required to be paid during the period of any post-termination restriction, with the default position being that 30% of the average pre-termination monthly remuneration is payable.

For those countries that require compensation to be paid for the use of restrictive covenants, the calculation of that compensation can sometimes take account of elements beyond basic pay, such as bonuses and the value of other benefits, particularly where the right to such additional elements is incorporated into the terms and conditions of employment. Where applicable, this can significantly increase the amount payable in return for the benefit of restrictions and will therefore be an important consideration in their use.

Waiver

Although having restrictions in place may seem appropriate at the time they are entered into, that view may change at a later date, particularly where compensation is payable for their use. The ability to simply waive the right to rely on the restriction may however be limited in some countries. In Germany, waiver is possible pre-termination, but this will not automatically cancel the payment obligation, which for most categories of employees continues for 12 months after the waiver being declared. Waiver is also possible in France, but it is often the case that an applicable collective bargaining agreement will specify the required timings of such waiver.

Duration and geographical scope

The permitted duration and/or geographical scope of restrictions can also vary by jurisdiction. For example, in Argentina, a non-compete restriction of up to two years is permitted. In contrast, in Poland, the maximum duration of non-compete restrictions tends to be significantly less, in the region of three to nine months. The position held by the employee can also have an impact. In Italy a maximum duration of three years for non-compete restrictions can apply, but for executives this is extended to up to five years. In Spain, a restriction may last for up to two years for certain specialist or highly-qualified workers, but is limited to six months for other workers.

Garden leave as an alternative to post-termination restrictions?

Notice periods can often span many months. Particularly when coupled with a requirement to pay compensation for the use of a restrictive covenant at the end of the notice period, this can result in an ongoing financial commitment for a significant period that may outlast the benefit of the restriction. To avoid this, while at the same time ensuring a period where the employee is kept out of the market and therefore unable to compete, many companies consider the use of garden leave (i.e. a period where an employee remains on normal salary and bound by their contract of employment, but can be prohibited from attending the workplace or having contact with customers). In some countries, for example Brazil, the use of garden leave is not allowed, but where permitted under the employment contract and local law, garden leave can be an effective alternative to the use of restrictive covenants or can reduce the required duration of such restrictions.

See our at-a-glance comparison of some sample jurisdictions.

Cross-border enforcement of restrictions

For multinational employers considering the use and enforcement of restrictive covenants across borders, it will be critical to understand the applicable law that that will govern any restriction and where the restriction may need to be enforced. That understanding will inform not only the way in which any restriction should be drafted to maximize its enforceability but also the appropriate enforcement strategy.

The starting point is that, as long as the choice is expressed or demonstrated with reasonable certainty in the contract, the parties have freedom to choose the applicable law. However, this freedom is usually limited by legislation, with many jurisdictions having conflict of law rules that require the application of local employment law in certain circumstances where they are more favorable to the employee.

In all EU member states (other than Denmark), for contracts made on or after 17 December 2009 and where the governing law of the employment contract has not been chosen, under the so called Rome I Regulation the particular circumstances will determine the governing law. Consideration is given to where the work is habitually carried out, the place of business and/or the closeness of connection with a particular country. This includes consideration of the place from which the worker carries out tasks and receives instructions, where the employer and/or worker are based, the location of any tools or equipment, the place to where the worker returns after completing the tasks, how the worker is paid, how the worker is managed and the locations from which disciplinary decisions emanate.

It is also important to bear in mind that the fact that a country’s law is the governing law of a contract does not mean that claims under that contract can be automatically brought in that country’s courts. Whether a national court has jurisdiction to hear a claim with an international angle will be determined by applicable local legislation (or EU legislation, where applicable).

Giving early consideration to these factors will be an essential element of an effective business protection strategy.

Summary - the global use of restrictive covenants for business protection

In the wake of the pandemic, it is expected that movement in the employment market will continue to grow, with a consequent rising importance of having a strategy in place to safeguard business relationships and confidential information. Although the ability to restrict certain activities varies significantly around the world, having in place up to date enforceable protections can maximize the options available should an individual depart and seek to operate in a manner that has the potential to damage the business.

Practical checklist for employers considering the use and enforcement of restrictions in employment.

Global enquiry and analysis- understand the legal position in relation to the use and enforcement of restrictive covenants in employment in all jurisdictions of operation.

Strategic planning – determine the approach to be taken that best fits the organization’s culture and attitude to risk and business protection.

Tailored restrictions – where a strategy is adopted that seeks to maximize the enforceability of restrictions, ensure that the restrictions are carefully drafted to take account of the legal position in the jurisdiction of operation. This may mean tailoring the restriction based on the type of interests that are capable of protection, the duration of the period to which the restriction applies, the geographic scope of the restraint and/or the type/seniority of the employee.

Choice of law – ensure the appropriate use of choice of law clauses, including taking account of enforceability and/or remedy.

Reviewing and updating – ensure that a process is in place to ensure that restrictions are regularly reviewed and do not go out of date, for example as a result of promotions, transfers, changes in location or changes in client portfolio.

Leaver process – determine the approach to be taken when a key employee announces that they are leaving, to secure key information and relationships.

Monitor developments – reforms on the legislative landscape in relation to the use of restrictive covenants reflects a trend in recent public policy that employers should monitor and be mindful of when considering the use and enforcement of restrictions.

Our extensive global footprint means that we are well placed to help employers, wherever they have a presence. Our teams across the world have significant experience of supporting employers to steer through the legal and practical implications associated with the use and enforcement of restrictive covenants in employment.

See other materials on this topic:

UK: Emerging from COVID and beyond – A guide to protecting your business relationships and confidential information

Global: Global Employment and Pensions app, and the Cross-border reorganization guide for employers