Top 10 Pitfalls in Managing Employment Contracts as You Go Global

by DLA Piper
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The CEO of an emerging growth company called me a while ago, a bit shocked after having seen the employment contracts that had just been issued to a couple of new hires in Hong Kong.  “How could they be longer than mine!?  Are you sure that is the approach we should take as we expand our operations?”

This CEO, like many US executives, employment lawyers and HR representatives, is accustomed to one- or two-page US-style at-will offer letters. But in many jurisdictions around the world,. detailed employment agreements are not only customary and best practices, but are simply required.  In fact, as foreign companies expand into the US, we see the reverse phenomenon – foreign companies rolling out foreign-style employment agreements to US-based regular employees, thus losing the benefits of the unique concept of at-will employment in the US. 

Against this background, here are ten important pitfalls to be aware of as you develop your global employment documentation:

1.  You don’t use a contract.  Outside the United States, your employees will expect a contract – and might sue if they don’t get one! Written employment agreements are best practices and they can incorporate crucial terms such as probationary periods, termination grounds, or working time provisions.  In fact, many jurisdictions require written employment agreements.  In China, for instance, a company that fails to issue a written employment agreement within one month of the commencement date will be subject to double wage claims.  In the European Union, under Directive 91/533/EEC[1], an employer is required to inform its employees of all relevant terms of the employment relationship within two months of commencement of employment; commonly, this information is provided in the employment agreement.  Several EU member states have more stringent requirements.

2. You fail to protect your company by including probationary periods and proper termination provisions.  Given the lack of at-will employment, probationary periods are crucial outside the United States.  Each country has different rules on the maximum duration of a probationary period, whether renewals are permissible, etc. (e.g., Germany permits a six-month probationary period, China six months for open-term contracts, but only one month for fixed-term contracts of less than one year, and two months for contracts longer than one year).  If you include a probationary period, make sure to make any termination decisions before expiration of the probationary period.  In various jurisdictions, termination provisions are crucial as well.  While they may not always give a company full protection (since ultimately, it is statutory restrictions that determine in which instances terminations are permissible), they often give a company at least a good starting point to enforce a termination (e.g., in case of violation of company policies such as a code of conduct).

3. You don’t think strategically when it comes to employment contracts.  One size does not fit all. Before you embark on drafting employment agreements for your international operations, think through the strategy you want to use.  The most common approach is to prepare a local-law-compliant employment agreement in line with best practices and the standard approach of the specific jurisdiction where you hire.  Some companies feel strongly about global consistency, though, and would rather create a “global” template that would only be localized as necessary under local laws.  One hybrid approach is to agree on company-specific clauses (such as references to specific global policies and commission plan or bonus language – keeping in mind that internationally, once granted, variable compensation is hard to take away or amend) to include in any agreement globally, while otherwise working off local templates. 

Also consider the interrelationship between your contract and policies.  In some jurisdictions, it is advisable to incorporate relevant handbook policies in the contract (e.g., in the UK you need to mention disciplinary and grievance procedures). Having policies incorporated (e.g., data protection) can also often protect the company if claims are brought to show the employee was aware of procedures.  Finally, do not forget data privacy considerations.  Consider, for instance, whether you need consent to the transfer of personal data in the employment agreement, or a standalone data privacy notice.

4.  You don’t properly address assignment of intellectual property.[2]  Keeping your intellectual property safe starts from day one. Have you considered how to address IP assignment?  If there is a standard proprietary information and inventions assignment agreement (PIIA) you want to use, this must be localized under local laws.  Sometimes, specific policies and procedures are required.  In China, for instance, absent company rules on payments made for employee-created patents, a company will end up paying an amount determined under statutory rules.  In Russia, trade secrets must be specifically outlined in a company trade secrets regime or those trade secrets will not enjoy protection.

5. You use the wrong employing entity.  Make sure your employees (and the government and courts) know who’s the boss. A common mistake is to print the employment agreement on the parent company’s letterhead, or to include the parent company as employer of record in the contract.  This is only accurate where that company in fact acts as the employing entity (which is not feasible in some jurisdictions, like Brazil, Mexico or Russia).  Where you have set up an international structure of local subsidiaries, these should be expressly indicated to be the employing entity, or you risk joint employer liability and permanent establishment exposure of the employing entity, thus obliterating all the tax planning the company has done.  One exception to this rule: if stock option grants are made in a parent company, that company should be issuing the stock award documentation.

6.  You use the wrong template.  Which template to use is not determined by the employing entity, but by the jurisdiction in which the employee performs his or her services.  While most jurisdiction recognize the principle of choice of applicable law, this is usually overridden by considerations of public policy, and employees are almost always deemed protected (for example, see Article 8 of the Rome Convention[3]).  Accordingly, an employee in France should receive a French law-governed employment agreement, even if the employee works for a UK employing entity.  Otherwise, the employee could enjoy the best of both worlds (in this example, UK contractual rules, plus French statutory rules).

Also, templates for specific individuals or situations should be used where appropriate, such as fixed-term employment agreements (where permissible), managing director or entrustment agreements (e.g., in Germany or Japan for certain individuals in corporate roles), or agreements with specific working time provisions depending upon level of the employee.[4]

7.  You fail to translate your contract.  No surprise, but employees should be able to understand their agreement or it will not be enforced against them.  It is always fascinating when employees who used to be fluent in English during their entire employment relationship seem to have lost their ability to communicate in that language when it comes to bringing a termination lawsuit.  Indeed, many jurisdictions (such as Belgium, France or Poland) require employment agreements to be in the local language, even for an employee fluent in a foreign language.  Absent that, the agreement will not be enforceable (at least not against the employee).

8.  You insert unenforceable non-compete provisions.  You may think US state-to-state rules are confusing, but it gets much more interesting abroad. Rules on post-termination restrictive covenants vary significantly from jurisdiction to jurisdiction, with many following a general reasonableness approach (as in Australia, the United Arab Emirates or the UK), others prohibiting them outright (e.g., India, Mexico and Russia) and yet another set of jurisdictions requiring specific payouts for post-termination non-competes (e.g., China, France and Germany).  If you include such provisions in your employment agreement or PIIA, ensure that you understand the legal requirements.  For instance, in Germany, once included, a post-termination non-compete can only be terminated with a one-year advance waiver, or the company will end up paying the mandatory 50 percent post-termination non-compete compensation even if it has no desire in enforcing the provision.

9.  You don’t issue your contract on time.  Often, some delay is not a big deal, but there are jurisdictions (most often in the common law context) in which a valid contract is predicated not only on offer and acceptance, but also payment of a consideration, and these actions must happen within the proper timeframe. For example, if an employee in Canada receives his or her employment agreement after having commenced employment, then that employee will not be technically bound by the agreement, since no additional consideration was provided for the contractual restrictions set out in the contract.  Ongoing employment is not sufficient.

10.  You let your contracts become stale.  Last but not least, keep in mind that laws change, as do your company’s practices.  Implement a process to regularly review your template agreements and make sure they still provide you the best protection possible.


[1] See it here.

[2] See this post on the blog International Employment Lawyer.

[4] See this post on International Employment Lawyer.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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