Jurisdiction clauses in employment contracts

A new EU regulation on jurisdiction and enforcement of judgements came into effect in January this year. In addition there have been a number of cases which have exposed misunderstandings about how disputes with an international element should be allocated between courts of competing jurisdictions.

That has prompted employers and their advisors to think about how they should approach jurisdiction clauses in the future. The idea behind them is to agree in advance which court or courts will determine any disputes which arise out of the employment relationship. However, as we will see, employers do not have a completely free hand when making this choice.

The international legal framework

Both parties in EU
Where both parties to an employment contract are based inside the EU, the court which will have jurisdiction to hear any dispute will be determined by a European instrument known as the Recast Brussels Regulation. Under these rules an employer can only sue in the courts of the member state in which the employee is domiciled. Employees have a wider choice. As well as suing in the member state where the employer is based, they can sue in the courts of the country where they habitually carry out their work. The Regulation stipulates which member state’s laws should be used to determine where a party is domiciled.

While this note refers to the EU, the Regulation also applies at present to Iceland, Norway and Switzerland.

Employer in EU, employee outside
If the employer is based in the EU but the employee is neither domiciled nor working in the EU, the Brussels Regulation will still apply to claims against the employer. If the employer wishes to take proceedings against the employee, the local conflict of law rules will apply. These will normally require some degree of connection between the employment and the chosen jurisdiction, but the precise requirements will vary. There is currently no international treaty setting out the rules to be applied in this situation.

Employer outside EU, employee inside
Even if the employer has no presence in the EU, the Regulation provides that the employee can still sue the employer in courts of the EU member state where the work is habitually carried out.

The Regulation obliges the employer to sue the employee in the member state where he or she is domiciled. The employer may face an application for an anti-suit injunction from an EU court if it commences proceedings in a prohibited jurisdiction. However this is a complex area where it is particularly important to obtain specialist advice.

Effect of jurisdiction clauses
In all cases the rules of the Regulation allocating jurisdiction will over-ride any express jurisdiction clause in the contract of employment, though it is permissible to give the employee a wider choice of jurisdiction than is provided for in the Regulation. It is also permissible to reach an agreement on jurisdiction after the dispute has arisen, even if departs from the principles set out in the Regulation.

Effect of governing law
It is a common misconception that a choice of law clause will also determine choice of jurisdiction. These are in fact two different issues. For example if English law is chosen to govern an employment contract, that does not mean that an English court will have jurisdiction to determine any disputes. Conversely, the choice of a foreign law will not necessarily preclude an English court having jurisdiction.

Factors to consider when deciding on jurisdiction clauses

Non-exclusive clauses: pros and cons
Particularly where senior and internationally mobile employees are concerned, employers may wish to retain the flexibility to sue in any competent court. However the employee will normally ask for the same flexibility. Also as we have seen, such a clause will not be recognised where the employee is domiciled in the EU.

Exclusive causes: pros and cons
Sometimes the certainty of an exclusive jurisdiction clause can be preferable, though it will be important to ensure that the chosen jurisdiction reflects the Brussels Regulation where this applies. Indeed in some cases either or both parties will have a positive incentive to avoid the courts of a particular jurisdiction that may otherwise apply. For example, justice in that country might unacceptably slow, the range of remedies limited or the independence of its judiciary questionable. It will also be important to consider whether a judgment obtained in the chosen jurisdiction can be readily enforced in the jurisdiction where the defendant may have assets.

How many jurisdictions are in play?
In all cases, before making a decision about a jurisdiction clause employers should think about what could happen if the relationship breaks down and what jurisdictions are likely to be involved. Among other things, they should consider what confidential information, customer lists or trade secrets the employee has. Thought should also be given to what post-termination restrictions might need to be enforced and where the parties’ assets are located if a money judgment might be required.

The permutations can be particularly complicated where the employer is a member of multinational group and the employee’s work is spread across a number of different countries. Particularly in these circumstances, advice from lawyers familiar with the relevant jurisdictions can be valuable.

Service of proceedings
When including a jurisdiction clause, the parties should consider whether a clause covering service of proceedings should also be included. In some cases the inclusion of such a clause will avoid the need to apply to the court for permission to serve proceedings outside the jurisdiction.