Extended Employment Contractual Notice Period Clauses

Monday, October 31, 2016 | Published by

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Background

Currently, there is a trend amongst corporations utilizing extended employment contractual notice period clauses as a strategy to retain key employees. Extended notice periods are gaining popularity in all parts of the globe including Switzerland, South Africa, India and Hong Kong.

Where talent is limited and the market is competitive, specifically executives and industry specialists, corporations are increasingly standardizing the use of extended notice periods as a tactic similar to non-compete provisions. Extended notice periods typically range from three to six month months, but can be up to one year.

Corporations hope that requiring extended notice periods of top employees will protect the corporation, providing it with greater oversight during the transitional and often chaotic period when an employee considers leaving. The extended period allows the corporation ample time to restructure departments, delegate work, and find a proper replacement for the position.

In addition, the extended leave period may be used to prevent competitors from poaching top employees. Or similarly, on the opposite end, used as a tactic to deter an employee from leaving the corporation. An extended leave period often impedes an employee’s job search process, as a potential employer may be unwilling to wait out the period. Moreover, the extended notice period allows the corporation time to offer the employee a promotion, or more competitive salary.

There can, however, be a downside for a corporation that tries to retain top talent for extended periods prior to an employee’s decision to leave. Typically, an unhappy employee has an adverse impact on corporate morale and culture and the longer they stay, the more detrimental their impact can be. One employee leaving can suddenly turn into several. To alleviate this potential issue, a garden leave clause must be in place providing the employer the option of paying the employee to stay home for the duration of the notice period.

Are Extended Notice Periods a Useful Strategy for U.S. Corporations?

U.S. employment law is distinct in many key aspects from most countries. Most non-U.S. jurisdictions provide broader employee rights and protections, and place greater value on the employee’s freedom to work. Unlike the “at-will” nature of most U.S. private sector employment relationships, most industrialized nations have legislative requirements of minimum notice periods for both employer and employee, written employment contracts, limitations on length and activity of non-compete restrictions, labor codes specifying employee duties, and restrictions on termination provisions and garden leave.

U.S. federal employment law places virtually none of these limitations on the employer. The “at will” nature of the employment relationship in the U.S. allows the employer flexibility in ways which are not present in other countries, thus making the need for added control over the termination process less of a concern.

The bottom line, however, is that in “employee friendly” countries, corporations are primarily using extended notice period clauses as loopholes around the legislation that places limitations on employers, particularly non-compete clause restrictions.

Although only three of the fifty U.S. states, mainly California, have a strong public policy against non-compete clauses, U.S. courts nationwide are becoming less willing to honor non-compete clauses. The standards for reasonableness and a legitimate business interest in the non-compete clause context have become increasingly tougher.

In IBM v. Visentin, 437 Fed Appx 53, (2d Cir 2011), for example, the Second Circuit Court affirmed the Southern District of New York’s decision to deny IBM’s preliminary injunction motion effectively permitting Visentin, the general manager of a $2.5 billion business within IBM, to join IBM competitor Hewlett-Packard, despite signing a 12-month non-compete agreement.

The need for extended notice period tactics may be direr in countries that are “employee friendly” and place broader restrictions on employers than in the U.S. Nonetheless, in the U.S. corporate climate, where non-compete provisions are increasingly difficult to rely on and competition over top executives and industry specialists is fierce, any tool that allows the corporation greater oversight of key transitional periods is one to consider.

Tips for Employers

To prevent the negative aspects that can come with extended employment contractual notice period clauses, any U.S. corporation considering the implementation of such a clause should have an exit plan strategy in place with the goal of tying up loose ends, protecting remaining employees, finding a replacement, and preparing for the future. Furthermore, the exit plan strategy must include a garden leave clause exercised in the case of a disgruntled employee or an employee with access to commercially confidential information.


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