Non-compete employment restraints globally

Employers expanding globally will often be faced with the issue as to whether a restraint of trade is enforceable when hiring a candidate, contracting with a new employee or exiting an existing employee in a foreign country.

There are basic principles which are virtually universal:-

• There is a public interest in maintaining competition and the freedom of the employee to move freely within the workforce
• There must be a legitimate proprietary interest of the employer to be protected
• The temporal and geographic restraints must not be too broad
• The restraint must be, on balance, reasonable having regard to the interest to be protected and the effect of the restraint upon the future employment prospects of the employee after termination of the employment.

Notwithstanding the universality of these basic principles, there are variations in the application of the principles between jurisdictions at country level and sometimes at state level.

United States

In the United States courts evaluate the enforceability of restraints based upon the “rule of reason” to establish that the restraints are reasonable in geographic area and duration.

Whist some states (such as New Jersey and Virginia) tend to liberally interpret restraints, others (such as California) are more restrictive and deem the restraints invalid unless they are entered into by a vendor in connection with the sale of a business.

Some states have prescriptive technical requirements deeming the lack of specificity as to the scope or the description of the business fatal to the enforceability of the restraint.

Courts in the United States have been known to modify restraints to the extent necessary to render them reasonable (“blue pencilling”).  This is similar to the ability of the Supreme Court in NSW (see below) which differs from all other states in Australia.

Canada

Unlike the United States, Canadian Courts are unlikely to amend or modify a restraint deemed to be unreasonable. Canadian courts can also imply a restraint against a departing employee if the employee held a very high position of trust within the organisation.

France and Germany

French and German law requires that the former employee is paid compensation during the restraint period. Employers must therefore include a provision in there restraint that the employer can waive the restraint and thereby avoid payment of the compensation.

Australia, New Zealand and England

The Australian and New Zealand jurisdictions are very similar and are based upon the development of the common law in England.

Restraints can be drawn more liberally in NSW where legislation enables the Supreme Court to “blue pencil” amendments.  This can make it very problematic when considering employing a candidate burdened by a relevant restraint.

Conclusion

Whilst the general principles may be universal, the application of those principles varies from country to country and state to state. This article has only touched on some of the differences in various jurisdictions. Even within a jurisdiction judges will differ on the application of the reasonableness test.

It will always be advisable to ensure that restraints include non-solicitation provisions as they are universally more readily enforced than mere geographic non-compete restraints.

It is important to seek local advice when considering the potential enforceability of a restraint of trade.  Mason Sier Turnbull is a member of The Law Firm Network, with members in 35 countries, and can provide clients with appropriate referrals worldwide.

For further information please contact one of our Workplace Relations lawyers.

Author: Charles Cody