Non-Compete Clauses – A Waste of Time or Worth the Effort?
To protect their business interests and prevent employees from working for competitors, some companies place restrictive covenants – non-compete clauses — in employment agreements.
These can be particularly important to companies with global assignees, as non-compete clauses are considered one way of protecting human capital and intellectual property when an employee is in the host location and exposed to new opportunities.
However, non-competes have many drawbacks. Those who accept them and feel unfairly restricted may not be as engaged. Those who reject them typically don’t accept the employment offer. Non-competes are also difficult to enforce (at least outside of the U.S.), so repercussions are unlikely if an employee who has signed one goes to the competition.
Still, some companies believe they’re needed. In such instances, it’s important to consider the factors that can impact their validity. These include:
Time limitations: In most countries, non-competes must have some type of time limit, such as six months or a year from the date of termination.
Geographical restrictions: Most global non-competes would be unenforceable, as the terms would typically be restricted to the geographical region in which the employee is (or was) working.
Types of activity covered: Valid non-compete clauses will often be highly specific when it comes to the type of restricted activity.
“Legitimate” business interests: One of the tests used in many countries to assess the validity of a non-compete clause is whether it’s actually is needed to protect “legitimate business interests.” Often, courts will favor the employee.
In drafting the non-compete clause, and taking into consideration the factors noted above, companies should also be aware of common pitfalls. Examples include:
- Relying on home country standards
- Including terms that are too broad
- Assuming courts will favor the company (not as likely outside the U.S.)
- Failure to draft a new clause for a position change
- Valuing the non-compete more than the employee
Clearly, familiarity with a country’s laws around non-competes is critical when drafting one, or opting not to. Approaches can differ widely, but the following are a few considerations to keep in mind for some key foreign markets.
United States: Non-compete clauses are widely used and permitted, but enforcement varies by state.
Mexico: All types of non-competes are prohibited.
Chile: Permitted, but require narrow restrictions and compensation to the employee.
Brazil, China, Germany: Permitted, but the employer must compensate the employee for the duration of the restriction.
Spain, Argentina, UAE: Permitted, but courts will not block a worker from accepting the position
India: Permitted, but cannot be enforced post-termination, which makes the non-compete almost useless.
Canada: Permitted, but only rarely enforced by the courts except in “exceptional” circumstances.
United Kingdom: Permitted, but only if the duration is limited to 12 months.