A key question for a global employer is: “can we enforce our restrictive covenants in all our locations and if not, what else can we do to protect our vital business interests?”
In most jurisdictions, employees are bound by a duty of trust and honesty to the employer during their employment. They must not act in a way that is detrimental to the employer’s business. However, such duties do not generally continue once a former employee has left the company. Employers therefore use post-employment restrictive covenants in the employment contract to protect their interests, particularly for senior employees, whose access to valuable proprietary information and strong client and colleague relationships makes the employer vulnerable.
Meanwhile, on the employee side, virtually every jurisdiction protects its citizens’ basic right to earn a living. Restrictive covenants that overly encroach on that right will not be enforced.
Most countries strive to achieve a balance between the reasonable and genuine business interests of the former employer and the employee’s right to earn a living. But countries do this in a range of different ways.
Some countries disallow restrictive covenants altogether. Others allow such encroachments on the employee’s ability to earn a living as long as they are financially compensated in return. Compensation ranges from 20-100% of the employee’s leaving salary. Still other countries allow covenants without compensation provided they are justified and reasonable on commercial grounds. The table below illustrates the point.
|Country||Are covenants enforceable?||If so, is compensation payable?|
|Australia||Yes||No, but it is best to include some compensation to ensure enforceability|
|China||Yes||Yes, depending on the municipality, compensation can vary between 20% – 60% of salary|
|France||Yes||Yes. The compensation can vary from 30% to 50% of salary or be set by collective agreements|
|Germany||Yes||Yes. The compensation must be at least 50% of salary|
|Indonesia||Yes||No, but it is best to include some compensation to ensure enforceability|
|Ireland||Yes||No, but the Courts tend to look favourably upon clauses that do offer some compensation|
|Netherlands||Yes||Yes, if they are prevented from taking up other employment|
|Romania||Yes||Yes. The compensation must be at least 50% of salary|
|Spain||Yes||Yes. The compensation can vary from 40% to 100% of salary depending on the circumstances|
|USA (Florida)||Yes||No, but recommended in certain cases to ensure enforceability|
|USA (California)||Only non-poaching||No|
Depending on jurisdiction, there are strategies that employers can adopt at the outset of the employment and on its termination to manage the liabilities and costs of covenants and to obtain the best available business protection.
Where restrictive covenants are enforceable, clearly close compliance with local enforcement rules is essential. Local Courts will usually give the benefit of any doubt on enforceability to the employee.
Where restrictive covenants are not enforceable (and indeed perhaps any way), the focus should be on tightening the employment contract to catch any potential breaches during the employment. Most employees contemplate moving to a competitor while still employed and will sometimes take illegal steps in anticipation of the move. For instance, downloading customer data, initial steps to set up a new competitive business or indirect approaches to customers and staff. Contracts should be clear that any such actions during the employment amount to enforceable breaches. At the time of termination, checks by the employer to ensure there have been no such breaches would be sensible.
Multi-national employers should also bear in mind that while the law regarding restrictive covenants is entrenched in statue in many countries, legislators in others have not specifically addressed the issue. This leaves a practical grey area which can be difficult to navigate. Indian Labour Courts, for example, will generally throw out a non-compete clause, but can be more lenient towards a non-solicitation clause.
It may also be prudent to include post-termination restrictive covenants in employment contracts even where they won’t ultimately be enforced by the local Courts. Regardless of enforceability, a well-worded restrictive covenant can act as an effective moral deterrent against former employees who do not wish to invite the possibility of litigation or damage their future employability.
Covenant Types – Aide Memoire
There are various types of restrictive covenant available to employers, including:
- Non-competition – to refrain from setting up a competing business or otherwise working for a competitor;
- Non-solicitation – to refrain from poaching clients, customers and/or suppliers of the business;
- Non-dealing – to refrain from dealing with clients, customers and/or suppliers of the business regardless who approached who;
- Non-poaching – to refrain from poaching former colleagues.