This is the sixth article in a series about Central and East European employment law issues.

Since 1990, Poland has been steadily transitioning to a liberalized economy, and although progress has been rocky at times, Poland stands out as a bright spot among its fellow transitional economies.  Poland still struggles with rigid labor and employment laws, low-level corruption, and creaky infrastructure, but boasts an educated workforce, and according to the World Bank, ranks 62 out of 183 economies for ease of doing business (a slight decrease from 2011).  As of the post date of this entry, Poland is in the midst of co-hosting the Euro 2012 competition (for those of you who may be scratching your heads – the Euro 2012 is a showcase of the world’s most popular sport – the “beautiful game” known as football the world over, and soccer to most Americans), which to date has gone off fairly smoothly, and has served to introduce many to the beauty of Poland and its capability to host a major international event.   

Background

Poland is a democracy, with its current constitution in place since 1997.  The head of government is the president, who serves a 5-year term, and a prime minister.    There is a bicameral parliament, with a lower house, the Sejm, consisting of 460 members, and an upper house of 100 members, the Senat.  The Polish economy has continued to remain fairly strong during the global recession, and as of early 2012, had not entered recession.  Although many Polish citizens took advantage of their European citizenship to see work elsewhere, a number of highly-educated, English-speaking Poles have returned to Poland in the last couple of years as jobs in western Europe have dried up and those economies struggle with stagnant growth.  Tourism, banking, and energy are all important  industries in Poland, and Poland exports textiles, machines, and chemicals, among other products.  The zloty is the Polish unit of currency, and as of the date of this post, one Euro was roughly equal to 4.27 zloty and one dollar equal to approximately 3.40 zloty.    

The Labour Code

The Labour Code, along with secondary legislation and collective bargaining agreements, are the primary sources of labor and employment law.  The Labour Code was enacted in 1974, but has been amended numerous times.  Employers doing business in Poland are advised to review relevant Labour Code provisions on a regular basis.  Perhaps surprisingly, given Poland’s history with organized labor, only about 20% of all Polish employees are covered by some type of collective bargaining agreement.

The employment contract

As in most European countries, the employment contract establishes the essential terms of the employment relationship.  Under the Labour Code, the employment contract must be in writing and must include the following information, at a minimum:

• The names of the parties to the contract;
• The date employment commences and contract execution date;
• The type of contract (e.g., fixed term, unlimited term, or contacts for specific tasks);
• Type of work to be performed;
• Location where work will be performed;
• Salary amount, how often wages are paid;
• Working hours (on a daily and weekly basis);
• Entitlement to holidays;
• Required notice period.

Employers should note that these terms are required to be in writing at the outset of the employment relationship, and seven days after the commencement of employment for additional terms.  

Termination of employment

Employment contracts may only be terminated based on the grounds enumerated in the Labour Code.  For an individual dismissal without notice, the employee may only be dismissed for (1) gross violation of job duties; (2) employee committing a crime which makes it impossible for him or her to continue with his or her job duties; or (3) employee loss of necessary license/authorizations, etc.  Under certain circumstances enumerated under the Labour Code, employees may be entitled to severance, and terminations in violation of the Labour Code may be appealed to the Labour Court.  Remedies include reinstatement or payment of damages

Non-competition agreements valid

Under the Labour Code, employees may be subjected to post-employment restrictions on employment provided they are paid a minimum salary for the duration of the on-competition period.  Although the contract must specify the period of the restriction, the period is not limited by law, but cannot be unreasonable. 

Equal Treatment under the Labour Code

The Labour Code requires equal treatment of all employees, with respect to commencement and termination of employment, pay and work-related benefits, promotions, and training.  Employees are protected on the basis of gender, age, disability, race, religion or belief, nationality and ethnic origin, political views, trade union membership, sexual orientation, and employment contract status (i.e., whether unlimited, fixed term or specific task).  The burden to prove there was no discrimination rests with the employer, and sexual harassment can lead to criminal liability, including fines and/or imprisonment. 

Although this is only a brief overview, it is important to note that trade unions, collective bargaining, and employee work councils are also permitted under the Labour Code, and foreign employers doing business in Poland should take care to review all potential contracts and agreements pertaining to its operations before taking any actions that may affect employee rights, or the terms and conditions of employment.

This is the fifth article in a series about East European employment law issues.

Bordered by Germany, Austria, Poland, and Slovakia, the Czech Republic occupies an important position in Europe.  Following the Velvet Revolution of 1989, and its return to liberal democracy, the Czech Republic quickly became re-integrated into Europe and is a strong economic force in the region.  The Czech Republic ranks 64 out of 183 economies for “ease of doing business” and boasts a highly-educated and developed workforce.  For employers looking to do business from a strategic, centralized location, the Czech Republic offers many advantages. 

Background

The Czech Republic came into existence on January 1, 1993, following the Republic of Czechoslovakia’s peaceful split into two countries:  the Czech Republic and The Republic of Slovakia.  The Czech Republic is a parliamentary representative democracy, led by a Prime Minister.  The head of state is the President, who serves for a five-year term, and has limited powers.  Although the Czech Republic has made great strides in privatizing most of its industry, the country is still hampered by a relatively high rate of corruption, which can provide challenges to running a business in the country.  The Czech Republic is a relatively affluent country, with its per capita GDP approximately 80% of the European Union average.  Although a member of the European Union since 2004, the Czech Republic has not yet adopted the Euro, and there is no set timeframe in which it will do so.  Most observers believe that 2013 would be the earliest date that Czech citizens would vote to adopt the Euro.  The currency unit is the Czech koruna (CZK).  As of December 2007, the Czech Republic became a Schengen country, doing away with border controls with its neighboring countries.   

The Labour Code

In the Czech Republic, the Czech Labour Code, along with The Collective Bargaining Act, and the Employment Act, are the primary sources of labor and employment law.  Because the Labour Code has been updated at least ten times since 2007, employers are advised to review relevant Code provisions on a regular basis.

The latest revisions to the Labour Code took effect on January 1, 2012, and were generally welcomed by employers.  The Labour Code governs most aspects of the employment relationship, from minimum wage, severance pay (governed by length of service), overtime pay and maximum hours (limited to 416 hours annually for managers, 150 hours annually for non-management employees), outsourcing, terms and conditions of employment, to annual leave (a minimum of four weeks of paid leave - longer for certain professions/industries - with at least one block of leave taken in a two-week increment).  It is important to note that “employment-at-will” as permitted in the United States is not recognized under the Labour Code.  Employee terminations are limited to certain specific reasons, and the employer must be careful to follow required notice and severance requirements.  

The employment contract

The Labour Code requires that the terms of the employment relationship must be outlined in a written employment contract at the outset, and should address the following topics: 

• A description of the job, including duties required;
• The start date for the job, including the time;
• Location of the work.
• Additional information that is recommended, but not required, includes information regarding
• Holidays – length of leave;
• Any required notice periods;
• Weekly schedules/hours to be worked;
• Wage and salary information, including date for payment and method for calculation;
• Collective bargaining information; and
• Whether there is any trial period.  Under the Labour Code, trial periods can last up to three months for non-management employees and up to six months for managers.  Importantly, the trial period must be in writing and agreed to prior to the commencement of employment, or will be invalid. 

Non-competition agreements valid

Pursuant to the January 2012 revisions to the Labour Code, employees may agree to accept a non-competition agreement, provided the agreement does not exceed one year, and the employer is able to show there is a valid reason for such an agreement.  During the non-competition period,  the employee must be paid one-half of his or her average monthly wage.

Equal Treatment under the Labour Code

Under the Labour Code, equal treatment of all employees, with respect to pay and benefits, training and advancement opportunities, is guaranteed to all employees, with special protection guaranteed to pregnant women and new mothers.  Employees complaining of unfair treatment may bring a complaint to the local labour office or in a court of law.  Discrimination on the basis of race, color, gender, sexual orientation, creed, religion, language, political opinions, membership in political parties or movements, trade union membership, nationality or ethnic/social origin, property status, health status, family extraction, marital or family status or responsibilities is also prohibited, as is sexual harassment.  “Mobbing,” which is defined as “any behavior perceived by the employee as unwanted, unsuitable or offensive, and which could affect personal dignity or create a humiliating or unpleasant work environment” is also prohibited.
 
Although this is only a brief overview, it is important to note that trade unions, collective bargaining, and employee work councils are also permitted under the Labour Code, and foreign employers doing business in the Czech Republic should take care to review all potential contracts and agreements pertaining to its operations before taking any actions that may affect employee rights, or the terms and conditions of employment.

This is the second in our series on international non-compete and trade secrets law for U.S. corporate counsel.  Today, we examine the law in the world’s second largest economy, The Peoples Republic of China (PRC).  The heated competition for qualified talent in the PRC makes non-compete protections a crucial topic.  In a recent survey, members of the US-China Business Council reported that their #1 challenge doing business in China was “talent recruitment and retention”: 

Companies reported that it is becoming increasingly difficult to recruit and retain talented employees because the demand for such employees – by multinational corporations (MNCs) and, increasingly, Chinese employers – outstrips availability.  In particular, companies noted difficulties in recruiting qualified managerial and technical talent.

USCBC 2011 China Business Environment Survey Results at p. 8.  In another study, the MRI China Group surveyed more than 3,000 mid- to senior-level managers in China and Hong Kong, and found with respect to Mainland China respondents that:

• 64% had received offers in the prior 18 months, and 24% had received three or more offers
• 46% had moved to a new job with a compensation increase of 30% or more (another 46% received increases of 11 – 30%)
• 42% are not satisfied with their current compensation
• 24% had already determined to make a job change sometime in 2011

See MRI China 2011 Greater China Talent Environment Index at pp. 5-6. 

All of this adds up to a very competitive and unstable market for key management and technical talent in an enormous and fast-growing economy.  There is not much to do about the increasing spiral of salary levels in China, but at least companies are not left empty-handed when it comes to protecting competitive assets such as confidential business information and client relationships.  It may come as a surprise to some that, with the advent in 2008 of the Labor Contract Law of the People’s Republic of China (also known as the Employment Contract Law or ECL), the rules for employee contracts have been simplified and China’s environment has emerged as more friendly to companies seeking to protect their interests than some US states. 

Counsel who have been handling US domestic non-compete issues on a multi-state basis may note that, in some ways, the basic outline of non-compete law in PRC looks a bit like Colorado in that it permits covenants, but only for specified types of employees:

o Senior management
o Senior technicians
o Employees with access to trade secrets

See ECL Articles 23 & 24 (Cornell University Unofficial English translation).  Compare Colo. Rev. Stat. 8-2-113(2)(d) (permitting non-competes only for “executive and management personnel” or “officers and employees who constitute professional staff to executive and management personnel”).  The terms of any post-employment restrictive covenant must be contained in a written employment agreement.  Indeed, all employment in the PRC must be by written agreement signed within one month of commencement of employment (ECL Art. 10).  See generally To Write or Not to Write? International Laws on Employment Agreements (discussion by my colleague of written employment agreements internationally, including in PRC, on this blog).

Under the ECL, non-compete, non-solicitation and confidentiality agreements can be enforceable in the PRC if they meet the following requirements:

o Against one of the listed class of employees (ECL Arts. 23 & 24)
o Duration of  no more than 2 years (ECL Art. 24)
o Reasonable geographic scope
o Compensation must be paid to employee monthly during the restriction term (ECL Art. 23); the amount varies by province (by way of example, it may range as high as 60% of prior compensation in Beijing)

The ECL specifically provides for an award of damages for violation of an otherwise enforceable non-compete agreement, and a specific liquidated damages clause may be advisable.  See Art. 23 (“If the laborer breaches the non-competition provisions, he shall pay damages to the Unit as stipulated.”).   

Interestingly, the ECL statutorily provides for severability of unenforceable terms, employing a structure akin to US “blue pencil” states.  The law stipulates that “if certain provisions of a labor contract are invalid and such invalidity does not affect the validity of the remaining provisions, then the remaining provisions shall still remain valid.”  ECL Art. 27. 

In addition to the ability to impose contractual non-compete restrictions on the listed types of employees, the ECL also imposes a mandatory 30-day notice period for any employee who wishes to leave a job by dissolving his or her employment agreement (ECL Art. 37).  This requirement gives the company a built-in de facto 30-day non-competition period against any employee who resigns.  The only exception is if the employee seeks to dissolve the employment agreement for what in US law would be referred to as “good cause,” the requirements for which are laid out in Article 38 and if satisfied would allow an employee to dissolve his or her agreement immediately and disregard the normal 30-day notice requirement. 

In addition to the protections and requirements outlined in the ECL, it is worth noting that other sources of law in the PRC may offer protection for employers:

• The Company Law statutorily mandates a duty of loyalty (including a duty of non-competition and non-appropriation of corporate opportunities) during employment term for directors, supervisors and senior managers (Company Law § 6, Art. 148 & 149)

• Trade secrets are protected under the Ant-Unfair Competition Law (UCL), Article 10

o Requirements are substantially similar to Uniform Trade Secrets Act standards

o 2007 judicial interpretation makes clear that “client lists” can be trade secrets, although it suggests no violation if the employee can prove customers approached him or her on their own

Despite the potential protections of the UCL and the Company Law, the better approach for protecting confidential business information and ensuring non-competition during the term of employment is to have written covenants in employment agreements rather than relying solely on statutory provisions. 

Next week, we will visit another fast-growing Asian economy, India, where the law on post-employment restrictive covenants looks quite different than it does in China.

Christopher P. Stief is the chair of Fisher & Phillips' Employee Defection & Trade Secrets Practice Group and a member of the firm's International Employment Practice Group.  To receive notice of future blog posts either follow Christopher P. Stief on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

On paper, the restrictive covenant law in Mexico looks a bit like California, but on closer examination it may be easier for a company to achieve certain goals in Mexico.  For U.S. practitioners, Mexico offers an interesting example of just how different employment laws in general – and restrictive covenant law in particular – can be in a different legal system.  In Mexico, the first principles from which all restrictive covenant law derives are found in the Mexican Constitution.  The Constitution of the United Mexican States contains prohibitions and guarantees intended to protect all Mexican citizens and the Mexican economy. 

Article 5 of the Mexican Constitution expressly prohibits enforcement of any contract by which a person renounces his or her right to exercise a given profession or industrial or commercial pursuit:

 . . . The State cannot permit the execution of any contract, covenant, or agreement having for its object the restriction, loss or irrevocable sacrifice of the liberty of man, whether for work, education, or religious vows. . . .  Likewise no person can legally agree to his own proscription or exile, or to the temporary or permanent renunciation of the exercise of a given profession or industrial or commercial pursuit.  A labor contract shall be binding only to render the services agreed on for the time set by law and may never exceed one year to the detriment of the worker, and in no case may it embrace the waiver, loss, or restriction of any civil or political right.  Non-compliance with such contract by the worker shall only render him civilly liable for damages, but in no case shall it imply coercion against his person.

Article 123(aa) of the Constitution guarantees employment rights:

The following conditions shall be considered null and void and not binding on the contracting parties, even if expressed in the contract: . . . .

h. stipulations that imply waiver of any right designed to favor the worker in the laws of protection and assistance for workmen. . . .

In a more general way, Article 28 preserves business competition in Mexico.  See Constitution of Mexico (Text translated from Constitución Política de los Estados Unidos Mexicanos, Trigésima Quinta Edición, 1967, Editorial Porrua, S. A., México, D. F. Originally published by the Pan American Union, General Secretariat, Organization of American States, Washington, D.C., 1968).

In light of these constitutional pronouncements, the baseline rule in Mexico is that covenants not to compete are unenforceable.  In addition, the courts have consistently held unenforceable even the lesser restraint of a covenant not to solicit customers.  On the other hand, confidentiality and non-disclosure covenants that are designed to protect a company’s confidential business information are enforceable.  In addition, trade secrets are protected under Mexico’s Industrial Property Law, which is similar in concept and structure to the Uniform Trade Secrets Act adopted by so many jurisdictions in the United States.  In all of these ways, the law in Mexico resembles the regime that exists in California.

There is, however, an approach that some companies have taken in Mexico that allows them to create financial incentives for a former employee to abide by bargained-for post-employment restrictions.  Some employers have included post-termination covenants in employment agreements, and then assigned a specific and separately enumerated payment of lump sum consideration in exchange for the employee’s agreement to the restrictive covenant.  This money must be paid ahead of time, and may not be deferred until termination or the post-employment restrictive period.  If a departing employee competes or declares his intent to compete, the employer may be able to sue the former employee to seek return of the consideration previously provided for the restrictive covenant.  Essentially, the employer goes to the court and seeks invalidation of the illegal covenant, which entails the former employee returning to the employer the money the company had previously paid for the covenant.  Many employees will not wish to risk the possibility that a judge will order them to repay money previously received, and instead will react to these economic incentives and elect to comply with the post-termination covenant, even though it is a covenant that could not be enforced in court.   This approach, of course, can be seen as a bit of an “end run” around the Mexican proscriptions against non-compete agreements, and although it may have worked at times in the past, there is no guarantee that courts in the future will not at some point reject the argument that the “illegal” covenant should be stricken down and the parties returned to the status quo ante.

Next up….China. 

Christopher P. Stief is the chair of Fisher & Phillips' Employee Defection & Trade Secrets Practice Group and a member of the firm's International Employment Practice Group.  To receive notice of future blog posts either follow Christopher P. Stief on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

Back in July 2011, we wrote in our sister blog, "Noncompete News," about the challenges posed for in-house attorneys who are tasked with drafting and enforcing restrictive covenants when a company does business in many different states throughout the country.  See Non-Competes in a Multi-State Environment.  In recent years, however, we are hearing from more and more companies facing an analogous challenge that is even more daunting:  managing non-compete and trade secret issues on a multi-national basis.  This isn’t just a problem for Fortune 500 companies.  A recent study by Deloitte Consulting found that 52% of U.S.-based middle market companies surveyed derive some of their revenues from abroad and that 48% already have employees outside the U.S.  Looking into the future, Deloitte’s survey also found that within three years  65% of middle market companies anticipate they will be operating abroad; 10% expect overseas revenues to outstrip domestic revenues within three years; and nearly 30% report they will have at least a quarter of their employees based abroad.  See Mid-Market Perspectives:  2011 Report on America’s Economic Engine.  More and more middle market companies are grappling with the need to manage a global workforce, and those that aren’t grappling with it yet likely will need to do so in the near future.  

As a result, we thought it might interest our readers to offer a series of blog posts on the emerging challenge of managing non-compete and trade secrets issues when operating in a multi-national environment.  In general, managing these issues on a multi-national basis requires the same skills and discipline that allow a company to effectively create and implement a program of protecting competitive assets domestically.  Key first steps in drafting any restrictive covenants include:

• Carefully identifying the business risks the company faces when employees jump ship
• Cataloguing the types of employees who pose these risks
• Considering what types of post-employment protections could be used to minimize the risks
• Tailoring contractual restrictions to match the risks as closely as possible, so that the company seeks no more restraint than necessary to protect against specific risks
 
With this information in hand, a basic template agreement can be created.  This template functions as a “default setting” of what the company ideally would like to have in place.  The next step is to catalogue the countries in which the company has employees whose functions place them in one of the categories against which the company would like protection.  Once that list is in place, the process of determining what protections are possible in the various locations can commence.  In-house attorneys undertaking this process will find that many of the legal structures internationally are not all that different from what we already manage every day in the 50+ jurisdictions within the United States.  Just as there are dramatic differences betweenCalifornia, Delaware and Louisiana, so too are there important differences in the restrictive covenant laws in India, Mexico and China. 

With this in mind, we offer our series of blog posts offering a primer for in-house counsel on the non-compete and trade secrets law in key nations around the world in which U.S. companies increasingly find themselves (or expect to soon find themselves) employing people and facing the attendant risks of employee departures.

Tune in soon.  We’ll start first with Mexico. . . .

Christopher P. Stief is the chair of Fisher & Phillips' Employee Defection & Trade Secrets Practice Group and a member of the firm's International Employment Practice Group.  To receive notice of future blog posts either follow Christopher P. Stief on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

A recent decision from the Court of Appeals of New South Wales, Australia, illustrates the potential value of using a series of independent but “cascading” covenants to create options for enforceability of restrictive clauses depending on what a reviewing court may find to be reasonable.  In Hanna v. OAMPS Insurance Brokers Ltd., NSWCA 267 (Oct. 19, 2010), the Court of Appeals upheld a trial judge’s decision enforcing a 12-month restriction prohibiting a former insurance brokerage executive from soliciting or dealing with clients anywhere in Australia with whom he had contact during the final two years of his employment.  Notably, the covenant said that he could not “during the Restraint Period” and “within the Restraint Area” directly or indirectly “canvass, solicit or deal with” the described clients, with the following definitions:

"2.  Restraint Period means, from the date of termination of your employment:   

(a) 15 months;
(b) 13 months;
(c) 12 months.

Restraint Area means:

(a) Australia;
(b) The State or Territory in which you are employed at the date of termination of your employment;
(c) The metropolitan area of the capital city in which you are employed at the date of termination of your employment."

The contract also specified that “each restraint contained in this Deed (resulting from any combination of the wording in clauses 1 and 2 constitutes a separate and independent provision, severable from the other restraints.”

The defense argued that the covenant left the employee unable to determine where and for how long he was entitled to compete.  The court rejected this argument, relying largely on the language specifying that the covenants were independent, and noting that a series of “repetitive and overlapping restraints of ever widening reach and subject matter” were a reasonable commercial response to the perils of the common law “blue pencil” rule.  The court accepted the legitimacy of the employer trying to obtain for itself “some post-contractual restraint … within the temporal and geographic ranges identified.” 

The lesson for companies with employees in New South Wales and those other British and American common law jurisdictions that continue to use a traditional “blue pencil” approach to the enforcement (or non-enforcement) of assertedly overbroad covenants?  Consider whether a cascading set of interlocking but severable covenants might provide an avenue to obtain some level of post-employment protection when a contract is challenged by a former employee.

A copy of the court's opinion is available in pdf format below.

Christopher P. Stief is the Chair of the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either by Mr. Stief or other members of the Practice Group, you may subscribe to this blog's RSS feed or follow Mr. Stief on Twitter at @CStiefLaborLaw.  As always, please feel free to share your thoughts or pose your questions in the comment field below. 

Hanna v OAMPS decision.pdf (1.42 mb)