Enforeceability of Choice of Law, Choice of Forum, and Non-Compete Provisions in International (Ex-Pat) Employment and Consulting Agreements

It is a common tendency for employers dealing with foreign or ex-pat employees to insert a choice of law, choice of forum or restrictive provisions (e.g. non-solicitation and non-compete provisions) in the employee's contract that are governed by the law of a jurisdiction different from the place of employment. In a typical situation, the employer would choose to implicate the laws of its home jurisdiction - e.g. a California-headquartered company would choose California state law to govern any employment-related disputes and would choose California courts as the venue for any dispute resolution. This is done for practical reasons such as the employer's in-house counsel being most familiar with the labor rules in his home jurisdiction and choosing to apply them as a matter of convenience. In other situations, the laws of a jurisdiction known for being employer-friendly or litigation-friendly could be chosen. An easy example that comes to mind is New York law, New York being known as a business and employer-friendly venue with a very developed legal precedent and enforcement base. Likewise, the employment contract could contain an arbitration provision that contains choice of law and choice of venue elements and its own dispute-resolution procedure. The presence of such arbitration provision does not change the enforceability analysis below.

In all these situations, the question that arises is whether such choice of law, choice of forum and restrictive (non-compete) provisions are enforceable. In other words, is it possible, as a practical matter, for the employer to bypass the laws of the place of employment and choose some other law to apply to the employment relationship? The short answer is "No", meaning that in almost every situation the laws of the the country where the work is performed will apply on most subtantive matters related to the employment relationship. For reasons of public policy, most countries choose to make a lot of their labor rules "mandatory". Such rules would cover matters like minimum compensation, workplace safety, overtime, vacation, public holidays, discrimination protection, employee benefits and certain tax matters. In practically every jurisdiction that I have researched, such rules cannot be contracted around. That leaves only 'second tier' employment matters subject to the choice of law provisions of the contract, e.g. additional benefits, pension, equity and other long-term compensation. This is not to say that such 'second tier' matters are unimportant. On the contrary, many ex-pat employees are highly compensated professionals and it is hardly unusual for their employment contracts to contain a host of additional employment benefits and sophisticated compensation packages.

Since the choice of law provisions would be unenforceable on most substantive employment issues, then the question becomes whether there's any benefit to the employer for including such provisions in the contract at all? And the answer is "Yes". The first benefit is that such choice of law provision may end up applying to some of the second tier issues. Secondly, the employee may not be familiar with the host-country protective rules, and assume that the choice of law provision of his contract controls and thus convince him not to attempt to sue the employer in a local host-country court. Thirdly, in jurisdictions that are extra keen on upholding the freedom of contract doctrine, the employer would have a good argument regarding the intent of the parties at the time of entering into the agreement, which may afford the employer a more favorable interpretation on some contractual issues.

Here are some noteworthy recent judicial decisions that illustrate my points:

1. In two separate, well publicized UK decisions from 2007 (Duarte v. Black & Decker and Samengo-Turner v. Marsh & McLennan) the UK court refused to apply the US choice of law and non-compete clause of the employment contract. In one of the cases the law of choice was New York, in the other it was Maryland law. The facts in each case involved some peculiarities, but in the end both UK courts ruled that UK and not US-state public policy controls how the provisions of the employment contract are enforced on UK soil.

2. European Union countries have adopted a choice-of-law treaty which is usually referred to as the "Rome Convention". According to some interpretations, the Rome Convention allows an expat choice-of-law clause to overcome the application of host-country law. There have been articles making that argument by French and German practitioners. However, a careful look at the Rome Convention (article 6(1)) actually confirms the generally accepted view that "in a contract of employment, a choice-of-law ... shall not have the result of depriving the employee of the protection afforded to him by mandatory rules of law." Applying this, the French appeals courts in Grenoble and Paris have disregarded choice of law clauses calling for Texas and German law and invoked the Rome Convention to impose the French employment code on expats working locally.

3. Practically all countries from the former communist block in Eastern Europe have labor-friendly legislation that was originally styled after the Russian Federation's labor code. A lot of these rules survive to this day, even after many of these countries have become part of the European Union. Generally, US expats in the European Union and in Eastern Europe and Russia would find local law significantly more favorable to them than anything contained in their employment contracts. Hence the incentive to sue in local courts, which could invoke the Rome Convention or some other non-contractual choice of law rule.

Some practical considerations:

One possible approach in drafting contracts for foreign or ex-pat employees is to leave out the choice-of-law clause — but to confirm with local counsel the extent to which any restrictions imposed by the employment contract would be enforeceable under local law.

Another approach is to insert a choice of law provision and count on voluntary compliance by the employee. As a practical matter, many Western ex-pats are highly skeptical (often for good reason) of the laws and the justice system of the local jurisdiction and would not even consider filing suit locally even if the local laws would afford them greater protection than the employment agreement. Such preconceptions can be exploited by the employer in convincing the ex-pat to subject himself to personal jurisdiction in accordance with the contract's choice of law provision.

Overall, as a rule of thumb, I would always put in doubt the enforceability of the choice of law and choice of forum provisions and any restrictive covenants such as non-compete, where the law chosen is different from the law of the jurisdiction where the work is performed. If an employer is serious about enforcing such provisions, then such employer should seek the advice of local counsel. From the employee's standpoint, chances are that the employee would be better off implicating local law in any dispute with his employer, because such local law is very likely to offer better protection than the terms of the employment agreement.