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China Non-Competes. The Basics Have Become Clearer.

Posted in Basics of China Business Law, Legal News

Earlier this year, China’s Supreme People’s Court of China promulgated various interpretations of various employment law issues.  These interpretations were intended to clarify and for the most part, they did.  In particular, what was once unclear about non-competes signed by China employees has now become much clearer.  I am not going to compare the old rules on China non-competes with the new rules, in large part because many of the old “rules” were less than clear.  This post is instead intended to set out what the new rules are so that you as a China employer can act accordingly.

Perhaps most importantly, the Supreme People’s Court has made clear the required compensation for a non-compete to be valid and to remain in effect.  If an employee agrees to a non-compete provision, but the labor contract or confidentiality agreement (signed by the employee) does not mention the compensation the employee must receive as consideration for not competing, and the employee has in fact not competed, the court can award the employee up to 30 percent of his or her average monthly salary. If a 30 percent award of the average monthly salary is less than the minimum salary standard in the city, the minimum salary must be paid instead. The Court also made clear that the employee is entitled to such compensation no matter what the reason is for the employee having not competed.  In other words, even if the employee’s not competing arises from the employee’s inability to find new employment, the employee is still entitled to compensation for not having competed.

The Court also clarified what it takes to terminate (or not) an employee non-compete:

  • An employer may terminate a non-compete agreement and thereby cease having to pay for that non-compete, so long as it pays the employee at least three additional months’ compensation for the non-compete.  In other words, three months notice is essentially required to terminate the compensation requirement
  • An employee may terminate a non-compete if he or she has not been paid for three the required non-compete compensation for at three months by requesting termination of the non-compete agreement. Note though that this non-payment has to be the fault of the employer; the employee cannot deliberately avoid payment in an effort to cancel a non-compete.

Certain aspects of non-compete agreements in China have not changed and remain important, including the following:

  • An employment agreement may include provisions intended to protect the trade secrets of the employer. A non-competition agreement may be included in support of such protections.
  • The employer must pay reasonable compensation on a monthly basis to the employee during the term of the non-competition period.
  • Non-competition agreements are limited to executives, technical personnel and other personnel who have access to trade secrets. Cases have held that senior sales staff are included in this category. On the other hand, blanket agreements that apply to all employees are invalid.
  • The terms of the non-compete restriction must be “reasonable” in length of restriction, business scope and geographic area. A term in excess of two years is prohibited. The scope requirement is strictly interpreted. It is not sufficient that the employee is working in the same general area as the former employer. Competition must be specific and direct.
  • If the employee violates the terms of the non-compete agreement, the employee can be held liable for a payment of contract damages to the employer. The amount of contract damages must be reasonable. Excessive damages that are clearly punitive will be rejected.

Just as is true of any contract that you will eventually seek to/need to enforce in China, your non-compete/trade secret/employee contract should be written in Chinese as the official language.

  • Leila

    Thanks for this post Dan, very helpful. My question is in terms of protection for employees, if a contract was signed prior to 2013 and the non compete compensation was below 30% of the monthly income and unreasonable (i.e. 2% of monthly salary for Shanghai), would the non compete still be enforceable? What should employees do to better protect themselves on contracts signed prior to these new interpretations?