Employers around the world have long relied on non-compete provisions in employment agreements to protect their investments in IP, talent, and customer relationships. These provisions typically prohibit employees from engaging in activities that would compete directly or indirectly with the business activities of the employer during and after their employment for a specified duration.
Local laws vary widely, however, making it critical for employers to take care when assessing and implementing non-competes for their global workforce. Israeli companies with a global presence should familiarize themselves with these considerations and requirements to remain compliant.
In our handbook, we identify key considerations for global employers, requirements in select jurisdictions around the world, and potential steps companies can take to ensure compliance with diverse constraints while protecting their business.
You can review the complete report with detailed information about country requirements, access country reports, and compare restrictive covenant laws across jurisdictions on our global employment site GENIE. If you are not yet a GENIE subscriber, please speak to your usual DLA Piper contact, email [email protected], or subscribe here.
Consider who should receive restrictive covenants and why
As a threshold issue, employers should consider the purpose of the non-compete and whether it is reasonably necessary to protect their legitimate business interests. Issues to consider include:
- Does the employee pose a risk to the legitimate business interests of the company?
- Does the employee access confidential information or trade secrets?
- Does the employee have contact with actual or prospective clients or customers?
- Is the employee unique or extraordinary in the specific services they perform?
- Could the employee take advantage of the company’s goodwill or reputation?
Some jurisdictions limit the use of non-competes to certain employees (eg, senior executives, employees above a certain salary). For example, in Belgium, non-competition clauses are only valid if the employee earns annual gross remuneration of (currently) at least EUR78,706 at the date of termination, with limited exceptions.
Similarly, several states and cities in the US (eg, Colorado, Illinois, Maryland, Massachusetts, New Hampshire, Nevada, Oregon, Rhode Island, Virginia, Washington, District of Columbia) have enacted laws establishing salary thresholds or banning non-competes for workers deemed not to pose a competitive threat, such as employees who are 18 years old or younger and employees paid on an hourly basis.
Even in the absence of legal requirements, courts often consider a variety of other factors like the employee’s position, seniority, and access to confidential information when determining the enforceability of a non-compete clause.
While there is no one-size-fits-all approach, focusing on the most important areas of protection can help employers draft covenants that function to protect the business.
Post-termination non-competes are generally enforceable if carefully drafted to comply with local laws. However, in some jurisdictions, such as Colombia, Malaysia, Mexico, India, the Ontario province in Canada, and several US states (eg, California, Minnesota, North Dakota, and Oklahoma), post-termination non-competes are largely prohibited (with limited exceptions, such as for the sale of a business). Criminal or other laws (eg, unfair competition, IP, principles of fiduciary duty) may provide protections in the event of employee theft or misuse of confidential business information or other deliberate actions detrimental to their employer.
Even where allowed, it may be difficult to enforce restrictive covenants in many countries. For example, while post-termination restraints are not prohibited in Chile, courts may be unwilling to enforce such restraints based on the Chilean Constitution, which protects an employee’s right to work. Similarly, while non-competes are, in theory, permissible in Indonesia based on freedom of contract principles codified in the country’s civil code, they are difficult – if not impossible – to enforce in practice.
The remedies available in the event an employee breaches their agreement can also differ. For example, in Spain, injunctions generally are not available in cases involving discrete employment agreements; rather, the company’s recovery is limited to the consideration paid to the employee and compensatory damages, if any.
A liquidated damages clause providing for a specific amount for which the employee will be liable if found in breach of post-termination restrictions may be an option depending on the jurisdiction. However, such provisions are subject to challenge and likely to be scrutinized for reasonableness. Additionally, in some jurisdictions, those provisions may adversely impact an employer’s ability to seek actual damages and/or injunctive relief.
Regardless of enforceability and depending on the jurisdiction, it may be common for companies to include restrictive covenants in employment agreements for their deterrent effect. However, in some jurisdictions like California, including an unenforceable clause in an agreement may lead to liability, even if the employer does not take any action to enforce it.
Draft non-competes based on local requirements
Most jurisdictions have enacted legislation regulating the use of restrictive covenants and establishing requirements for their enforceability.
For example, the Danish Act on Restrictive Covenants outlines specific requirements for a non-competition agreement, including the following:
- The employee must hold a special position of trust
- The clause must indicate the specific circumstances as to why such a clause is necessary, and
- Certain compensation must be paid during the restricted period.
In Colorado, the Restrictive Employments Agreement Act addresses various obligations, including employee compensation thresholds, notice requirements, and choice-of-law and venue provisions. An employer’s failure to comply with requirements may void the restrictive covenant agreement and lead to statutory penalties.
Non-competes may be drafted in different ways to cover (or leave uncovered) various activities that may constitute “competition.” Employers should consider how to define the “business” of the company, the forbidden competitors or relevant industry, and the specific activities to be prohibited. Covenants with a broad and vaguely defined scope, including those covering activities competitive with affiliated entities or other business lines with which the employee was not involved, are more likely to be deemed unreasonable.
For example, a Delaware Chancery Court recently ruled that a 30-month non-compete in a sale of a business agreement was unenforceable where the definition of “business” encompassed all of the purchaser’s business lines and geographic areas rather than just the one in which the seller worked. According to the court, the purchaser’s legitimate economic interest could support restraining the seller’s employment only in the goodwill and competitive space of the purchased asset and the market it serves, and not that of the purchaser’s subsidiaries.
The maximum duration of post-termination non-competes can vary considerably, with 6 to 12 months considered standard (but not always enforceable) in many countries where non-competes are allowed. While non-competes for two or more years post-termination may be legal in some countries depending on the circumstances (eg, Argentina, Brazil, Chile, Italy, and Portugal), it may be difficult for a company to prove a restraint of this duration is necessary and reasonable.
When it comes to geography, the general rule is that clauses should be (1) reasonable, (2) limited to places where the employee represents actual competition to the employer, and (3) not unduly restrict an employee’s ability to earn an income. For example, in New Zealand, non-compete restraints generally should not have a broader geographical scope than the city where the employee is based or should bear direct relevance to the employee’s duties/trade.
To maximize the chances of enforcement, companies are encouraged to tailor the agreement based on the applicable legal and judicial standards and risk posed by individual employee to their legitimate business interests.
Plan for consideration and compensation requirements
In some jurisdictions, new or continued employment may be adequate to support a restraint. In others, additional consideration and/or compensation during the period of the restraint may be required to ensure it is legally binding.
Many countries (eg, China, Belgium, Denmark, Finland, France, Germany, Poland, Portugal, Spain, Sweden) require employers to pay extra compensation during a post-termination non-compete in order for it to be valid and enforceable. For example, in Germany, the employee must be paid at least 50 percent of the employee’s total earnings in the year before termination (including base salary, bonus, other benefits in kind), during the entire period covered by the restraint. In Denmark, compensation for a non-competition clause must amount to either 40 or 60 percent of the employee’s monthly salary (depending on the duration of the restriction) at the effective date of termination of employment.
In those without a statutory amount, compensation generally should be proportionate to the duration, territorial extent, and scope of the non-competition obligation and consider the employee’s title, salary, and local customs. Even where extra compensation is not required, some courts may consider compensation when determining enforceability.
Notably, once a non-compete is agreed, the employer may not be able to waive the non-compete clause in order to avoid paying related compensation upon termination. In Germany, for instance, the employer is obligated to pay compensation for a period of one year following the waiver. Similarly, in Spain, the employer generally cannot unilaterally waive the benefit of the restraint. Where permissible, the possibility for employers to unilaterally waive the non-compete should be included in the agreement.
Understand the jurisdiction’s approach to severance and modification
A court’s power and willingness to sever or modify an otherwise invalid covenant can vary by jurisdiction. In some jurisdictions, the so-called “blue pencil doctrine” may allow courts to strike unreasonable clauses from a non-compete agreement, leaving the rest of the agreement intact.
Courts in other jurisdictions may “read down” a restrictive covenant to rewrite an unenforceable provision. In Australia, for example, it is common for a restraint to be drafted in the form of a “cascading clause” which has multiple temporal and geographical limitations (eg, 12 months, 6 months, or 3 months; Australia, New South Wales, or Sydney) to allow a court to strike out any part of the restraint it regards as exceeding what is reasonably necessary to protect the business’s legitimate interests, but still enforce a more limited restraint. If the court is presented with no options, it may simply strike out an entire clause it regards as excessive, leaving no restraint at all.
Courts may be unwilling to correct a facially overbroad covenant. For example, in several decisions this year, the Delaware Chancery Court in the US declined to blue-pencil or otherwise modify an overbroad covenant (even when the agreement expressly authorized the court to do so), noting that the practice can create a “no-lose” incentive.
Companies are encouraged to consider the likely judicial approach to non-compete agreements during the drafting process to minimize the risk of losing all non-compete protections. In addition, where permissible, companies should consider including a severability clause, as well as language allowing the court to reform an agreement.
Be mindful of mobility issues
When an employee performs services abroad – depending on the period of the stay – local employment laws may be deemed to apply and override the contract the employee has with the “home” employer with respect to various terms and conditions of employment. Whether or not local laws apply is a fact specific analysis that can depend on a variety of factors, such as the duration of time spent in the country, the employing entity, where payroll is paid, and what work permits are held.
Where a dispute arises – such as over termination of the employee while abroad – the employee is likely to pursue the “best of both worlds,” meaning the employee will try to claim benefits from the better of the laws of their home and host countries. Accordingly, restrictive covenants with mobile executives, for example, should be implemented with a high degree of care to enable employers to use them to maximum advantage. Key issues to consider include:
- Do you need to enter into a new employment contract with the expatriate?
- Do you need to include new restrictive covenants to take account of the employee’s role and host country’s laws?
- What happens if the expatriate needs to be terminated during their assignment?
- Where is the employee likely to end up after their secondment or employment ends? The home country, the host country, or somewhere else?
While the scope of post-termination non-compete restrictions may best be addressed as part of negotiations over the employee’s exit, it is still advisable to consider these issues when structuring the assignment.
Relatedly, when an employee permanently relocates abroad, employers should generally enter into a new employment relationship in the new jurisdiction, including executing a locally compliant employment agreement, which can contain a non-compete provision if appropriate. Of course, the employment laws of the employee’s new country of residence and work will apply, so it will be critical to ensure compliance with all applicable laws and to draft the non-compete in light of that country’s rules.
Carefully choose governing law and venue
Employers should consider including choice-of-law and jurisdiction provisions, as courts may initially look to the parties’ agreement in the event of a dispute. Jurisdictions may limit the ability of employers to designate another jurisdiction’s laws as controlling. For example, in the US, a growing number of states, like California, have passed or introduced laws limiting an employer’s ability to select either the forum or law (or both) to be applied in the context of restrictive covenants. Likewise, the courts of most countries will apply local law when reviewing the enforceability of an employee’s non-compete provision, notwithstanding any choice-of-law provision to the contrary.
Keep up to date on jurisdictional developments and trends
In recent years, lawmakers and/or regulators in some countries have moved to limit the ability of employers to enter into noncompetition agreements with employees. For example, in the US, President Joe Biden’s administration has sought to broaden employee rights. From the Federal Trade Commission’s proposed rule to ban non-competes and the Department of Justice’s antitrust enforcement initiatives to the National Labor Relations Board General Counsel’s memorandum asserting that certain non-compete provisions in employment-related agreements violate federal labor law, US federal agencies are targeting restrictive covenants that limit employee mobility.
In the US, state limits on non-competes are also spreading. Common reforms include:
- Banning almost all non-competes (eg, Minnesota, California)
- Banning non-competes for workers not deemed to pose a competitive threat, such as employees who are 18 years old or younger, non-exempt employees, and/or wage earners below a certain threshold (eg, Colorado; Illinois; Maine; Maryland; Massachusetts; New Hampshire; Nevada; Oregon; Rhode Island; Virginia; Washington; Washington, DC)
- Prohibiting enforcement if the termination of employment is involuntary (eg, Massachusetts, Washington)
- Imposing consideration requirements such as a minimum period of employment after the agreement is signed, garden leave, or other express consideration (eg, Illinois, Maine, Massachusetts)
- Imposing notice and/or consideration period requirements (eg, Illinois; Colorado; Maine; Massachusetts; Virginia; Washington, DC)
- Limiting the duration of post-employment restrictions (eg, Louisiana, Oregon, Washington), and
- Mandating that agreements be governed by the laws of, and enforced in, the jurisdiction in which the employee resides (eg, Colorado, Illinois, Massachusetts, and Washington).
Other countries have also enacted reforms in recent years (eg, the Ontario province in Canada and Finland) or are considering changes (eg, the UK, the Netherlands, and Uganda). In addition, in some jurisdictions, like the US and Canada, non-compete agreements are the focus of antitrust and competition laws and enforcement actions.
In light of this, employers are encouraged to review their non-competes from time to time to account for changes in the law, their business, and employee roles and responsibilities.
While non-competes are a useful tool to retain valuable employees and protect confidential information, they are not the only option. Other types of restrictive covenants (eg, employee and/or client non-solicitation, IP, and confidentiality agreements) can provide additional protections. Like non-competes, these may be prohibited or restricted by statute and/or common law (and, in some countries, such as in South Korea, the enforceability analysis for non-solicitation clauses is very similar to that for non-competes).
Other methods of business protection may also be considered. For instance, garden leave is commonly used by employers in many jurisdictions around the world (eg, China, Hong Kong, the UK, New Zealand, Singapore, Saudi Arabia, the UAE, and Uganda) and becoming more common in others (eg, Canada) to keep senior employees and/or those with access to particular confidential information and/or customer connections out of the business during the notice period. However, salary typically must be paid in full during garden leave. An express contractual garden leave provision is often advisable.
Employers are also encouraged to focus on protection of trade secrets with confidentiality agreements and clear policies around the use of confidential information, as well as review post-employment checklists and exit procedures.