This is the third article in a three-part series addressing employment matters in Central and Eastern Europe.

As employers increasingly look to expand their global reach, the countries of Central and Eastern Europe continue to provide attractive opportunities for entrepreneurs.  Effectively closed to foreign investment and travel for decades, the Republic of Albania has undergone many changes  in recent years.  Strategically located in central Europe, only 45 miles from Italy and bordered by the Ionian and Adriatic seas, Albania occupies a geographically and culturally important location within Europe.  Albania became a member of the North Atlantic Treaty Organization, and formally applied for entry into the European Union in 2009.  Albania has become an increasingly popular tourist draw, creating jobs in its fledgling tourism sector, and attracting foreign investment.  Although personal services and tourism account for the majority of cash revenue in the economy, Albania has also been opening its energy and transportation sectors to foreign investment, creating additional jobs for its citizens and opportunities for foreign investors.  

Background

Although foreign investment in Albania remains relatively low, the country has been taking steps to make it easier for foreign investors to set up operations in Albania.  In a 2007-2008 World Bank report, Albania was considered to be one of the  top global reformers, taking steps to make it easier to establish credit, start and run businesses, and create jobs.   There are no sectors of the Albanian economy that are closed to foreign investment, including the subsidized leasing of state-owned facilities, and its National Center for Registration of Businesses is set up to handle all facets of business registration in one operation.  Albania’s most promising business sectors are thought to be those in insurance, telecommunications, tourism, banking and energy and transportation services.  The EU is Albania’s largest trading partner, and its citizens enjoy a 99% literacy rate.
 
The Employment Relationship

In Albania, the employment relationship is largely governed by the Labor Code, which covers most Albanian workers.  Additionally, in February 2010, a new law was passed mandating certain minimum requirements for employee security and safety.  Although there are other laws governing employment, the Labor Code is the primary source of employment law and will be the focus of this article.
 
Among other things, the Labor Code generally requires that employment terms be set out in a written agreement, to be signed by both the employer and employee.  Failure to timely reduce the employment terms to writing could result in a fine of up to 30 times the minimum salary.  Although the employment agreement can designate a foreign choice of law, the terms of the agreement cannot be less generous than those set out by the Labor Code.  Collective bargaining is permitted, but the terms of the contract cannot be less favorable than the benefits and protections set out under the Labor Code.   

In general, the employment contract should address these terms:

• Party names
• Date of the contact and duration (if applicable)
• Salary details and pay periods
• Working hours and days
• Location work will be performed
• A general description of the job duties required
• Notice period required for termination

Failure to address any of these terms at the outset of the employment relationship leaves the employer vulnerable to post-employment legal claims. 

Once the employee has agreed to a contract, the employer must register the employee with the local taxing authorities at least 24 hours prior to the employee starting work.  Further, employers are required to make all tax withholdings, and must designate an “administrator” to oversee payroll matters.

Similar to other European countries, Albanian law also provides for a minimum wage and maximum number of overtime hours that an employee may work per week (10 hours), and paid annual and maternity leave (up to 365 days for one child).  Finally, Albanian law provides for a three-month probationary period for all new employees, although this period can be changed by agreement of the parties. 
 
Restrictive Covenants

Post-employment restrictive covenants are generally permitted where the employer can demonstrate that the employee has access to the employer’s confidential information, and that a breach of that confidence could cause “significant” damage to the employer.  To be enforceable, the agreement must be set out in writing at the beginning of the employment relationship, and may be no longer than one year in duration.  In exchange for agreeing to the restrictive covenant, the employee is entitled to 75 percent of his or her regular salary for the restricted post-employment period.  A lawsuit to enforce  the restrictive covenant must be brought in the court where the defendant resides, or in the country where the employee is working.  

Employee Discharge

Under the Labor Code, employers must provide notice prior to discharging an employee.  If the written employment agreement does not specify the notice period, the Labor Code mandates notice periods based on length of service, ranging from three days’ to three months’ notice.  When employees are discharged for cause, employers are obliged to pay the employee for the notice period, as well as certain other payments depending on seniority.  If an employee was discharged without cause, the employer may be responsible for notice and bonus payments as well as up to 12 months’ of damages compensation.  Employees are considered dismissed without cause where the employee is discharged for voicing  complaints about the employment relationship, the employee was dismissed for a discriminatory reason, for giving legally required testimony, participating in a labor organization, or exercising his or her constitutional rights.  Employees who believe they were fired without cause may sue their former employer within 180 days of the notice deadline.    
 
There are special notice procedures for employers to follow when dismissing ten or more employees at the same time.  Including providing notice to affected employees, employers are also responsible for notifying the employees’ trade union and taking part in a consultation process with the union regarding the proposed layoffs.   

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.