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Top 10 Pitfalls in Managing International Employment Contracts as You Go Global

By June 18, 2014January 18th, 2018No Comments
[Note, this blog post was guest-written by Ute Krudewagen, Partner, Global Labor & Employment Law, DLA Piper LLP]
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?”  While surprising for U.S. executives, employment lawyers or HR representatives (who are used to one or two page U.S. style at-will offer letters), use of detailed employment agreements is not only customary and best practices, but also required in many jurisdictions around the world. In fact, as foreign companies are expanding into the U.S., we see the reverse phenomenon – foreign companies rolling out foreign-style employment agreements to U.S. based regular employees, thus failing to maintain the benefits of the unique concept of at-will employment in the U.S.  Against this background, below are ten of the most important pitfalls to be aware of you are developing your global employment documentation and while managing international employment contracts:

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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 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 6 months probationary period, China 6 months for open-term contracts, but only 1 month for fixed-term contracts of less than 1 year, and 2 months for contracts longer than 1 year). If you include a probationary period, make sure to make any termination decisions before the expiration of the probationary period. In various jurisdictions, termination provisions are crucial as we all. 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. 

Just because you might need a contract, it doesn’t mean that one size fits 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 (e.g., commission plan or bonus languages – keeping in mind that internationally, once granted, variable compensation is hard to take away or amend, so careful drafting is crucial, references to specific global policies, etc.) to include in any agreement globally, while otherwise working off local templates.

Just because you might need a contract, it doesn’t mean that one size fits 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 (e.g., commission plan or bonus languages – keeping in mind that internationally, once granted, variable compensation is hard to take away or amend, so careful drafting is crucial, references to specific global policies, etc.) 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.  

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 an 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, e.g., 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. 

What 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 recognizes the principle of choice of applicable law, this is usually overridden by considerations of public policy, and employees are almost always deemed protected (see, e.g., Art. 8 of the Rome Convention). 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 will 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 the level of the employee.

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 that employees who used to be fluent in English during their entire employment relationship seem to have lost their ability to communicate in a foreign language when it comes to bringing a termination lawsuit. Regardless, many jurisdictions (e.g., 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. 

If you thought state-to-state rules were confusing, it gets much more interesting abroad. Rules on post-termination restrictive covenants vary significantly from jurisdictions to jurisdictions, with many following a general reasonableness approach (e.g., Australia, the UAE or the United Kingdom), 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% post-termination non-compete compensation even if it has no desire in enforcing the provision.

9. You don’t issue your contract on time.

While often some delay is not a big deal, there are jurisdictions (most commonly in the common law context) that require not only offer & acceptance but also the consideration for a valid contract. For example, if an employee in Canada receives his/her employment agreement after having commenced employment, 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

10. You let your contracts become stale. 

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