There are many issues and many myths related to China employee non-competes, in large part because this is a complicated and very localized aspect of China employment laws. In this post, I set out the following six common myths I and the other China lawyers at my firm often hear from our clients regarding China non-compete agreements:
Myth 1: A China employer can have a non-compete with anyone. Non-compete agreements are permissible with only senior management, senior technicians and other personnel who have a confidentiality obligation. The last catchall category is not to be confused with “any employee.” If you enter into a non-compete with an employee that did not have access to your confidential information (note that such information must be information the employee gained from working for you), your non-compete will likely be deemed unenforceable. Also, note there is no legal requirement that you enter into a non-compete agreement with all of your employees.
Myth 2: A China employer can set the non-compete period for as long as it wishes. Wrong. The maximum period for an employer to prevent an employee from competing is generally two years after an employee’s departure.
Myth 3: A China employer can terminate a non-compete anytime it wants, because it is releasing the employee from non-competition restrictions. Wrong. Once signed, a non-compete becomes a legally binding agreement on both parties. You cannot walk away from a non-compete without having to pay a penalty to the employee. Note also that some locales in China also require that you pay any promised employee non-compete compensation through the end date of your non-compete agreement, no matter what.
Myth 4: A China employer can walk away from a non-compete that is silent on the payment amount for non-competition during the non-compete period because such an agreement is void. Not sure why, but our China attorneys have been hearing this one a lot lately. Even though China’s national employment laws do not explicitly address this issue, generally speaking, if an employee can show he or she performed on the non-compete obligations, the court will deem it unfair to declare the non-compete agreement invalid. We are seeing local differences on this issue. Some places (such as Shanghai and most parts of Beijing) believe that the lack of non-compete compensation is a “flaw” that can be fixed by the parties and therefore does not automatically render the entire agreement void, while others hold the opposite position. For those places that do not believe such a non-compete agreement is automatically void, 30% of the employee’s average monthly salary in the 12 months before termination (or the local minimum wage) will generally be applied.
Myth 5: The contract damages amount will be enforced because a contract is a contract. It usually makes sense for a China employer to set a contract damages amount in its non-compete agreements to both deter its employees from breaching the agreement in the first place and to provide a concrete monetary amount when it comes to enforcement. However, for either of these things to be true, you need to set this amount carefully; it should be neither too high nor too low. If a court views your contract damages amount as significantly disproportionate to the non-compete compensation you have been paying your former employee, it will likely ignore your set amount entirely.
Myth 6: If your China employee breaches its non-compete agreement during the term of his or her employment, you as the employer have free reign to penalize this employee. Wrong. Generally speaking, regardless of the circumstances of an employee’s departure, you as the employer must (among other things) provide your soon to be ex-employee with a Proof of Termination of Employment Relationship document. This is a right afforded to every employee by China’s labor laws. You should think long and hard before you hold off on performing any of the myriad legal obligations you owe to your employee just because you believe that employee has breached a contractual obligation he or she owes you.
Bottom line: 1. Choose with whom you will be entering into a non-compete wisely. 2. Craft your non-compete agreements wisely. 3. Enforce your non-compete agreements wisely. 4. Ignore the myths.