non-compete agreements

Many American companies (at least outside California where employee non competes are generally considered invalid) love non competes and they use them as a matter of course with most (sometimes all) of their employees.  Generally a non-compete agreement or a non-compete provision in an employee contract provides that the employee cannot work for one of the employer’s competitors and/or engage in the same business as the employer.

The well crafted non compete provision is usually limited to a certain period of time following the employee’s termination and also usually limited geographically. Just by way of example: if you own a small sushi restaurant in Peoria, Illinois, a well-crafted non-compete with your sushi chef might prohibit him or her from working as a chef at another sushi restaurant within a 25 mile radius. The poorly crafted non-compete provision might prohibit him or her from doing anything in the food business anywhere in the world for the next five years.

For obvious reasons, courts are loathe to enforce over-broad non-compete agreements simply because they do not think it fair or right to preclude someone from making a living at their profession or craft, especially when doing so poses no real threat to anyone.  China’s laws on non-competes are not so different on this point, but they are quite different on others.

China’s Labor Contract Law specifically permits employers to include non-compete provisions in labor contracts or confidentiality agreements with their employees. But these sorts of provisions are valid only if all of the following are the case:

  •   The employee is senior management or a senior technical person. China’s courts take this requirement very seriously and few employees will qualify.
  •   The period of the non-compete and its geographic scope must be reasonable and the non-compete period must be for less than two years.
  •   The employer must pay the employee during the non-compete period or the non-compete provision ceases to be valid.

Note again that for the non-compete agreement to remain valid after the employee has left the company, the employee must continue receiving compensation from the company.  In other words, the employee must get paid for not competing.

How much must the employer pay the employee during the non-compete period?  We used to advise our clients to put in the contract this amount and to make it between 30 and 50% of the employee’s salary, depending mostly on the locale.  China’s Supreme Court recently issued some national level guidance on these payments and it appears that the terminated employee’s monthly compensation should be 30% of the employee’s average monthly salary over the previous year, or the local statutory minimum wage, whichever is higher.  This 30% should be deemed the minimum; employees may be able to negotiate a higher amount when signing their employee contracts.

We used to tell our clients that they “might as well” put in a non compete clause into their contracts with their high level employees since they would always be free to back out of any payment post termination if they wished.  I now have my doubts as to that advice going forward as the Supreme Court has said that though employers are free to terminate a non-compete clause at any time, they must pay three months compensation to do so. We will now be advising our clients to think a little longer and a little harder before just throwing in non-compete provisions.

What are you seeing out there with non-compete provisions in employee contracts?

A quasi-interesting discussion going on over at the Foreign Policy in Focus site regarding China’s proposed labor laws, entitled, “Debate on Labor in China.”  The discussion is between the US-China Business Council, which knows whereof it speaks, and Foreign Policy in Focus (which describes itself as “a think tank without walls”), which does not.

Foreign Policy in Focus (FPIF) started the fracas by falsely claiming AmCham opposes China’s proposed new labor laws. AmCham responded by pointing out that it opposes only certain of the proposed changes. FPIF responded to that by stating it stands by its story, proving it will not let facts get in the way.

FPIF then goes on to “analyze” the proposed changes to China’s labor laws and AmCham’s objections. I found FPIF’s reasoning so sophomoric and jejune (please note that this is the first time either of these words have been used on this blog, but they are warranted here) that after reading its views on just two of the issues, I simply could not continue.

Here are the two:

1.  “Non-compete Agreements and the Freedom to Change Jobs. Non-compete agreements are a regressive feature of U.S. and other western systems that have crept into the Chinese economy. They are especially common in high skilled jobs. They prevent workers from changing jobs easily if they have access to proprietary knowledge as determined by an employer. For a developing economy like China, knowledge transfer is essential.”

Let’s examine this first one, point by point.

  • Non competes impinge on the freedom to take a new job, they do not, as the title implies, prohibit taking on a new job.
  • “Non competes are a regressive feature of U.S. and other Western systems that have crept into the Chinese economy.”  Oh yeah, when it comes to labor rights, I always think of the U.S. and other Western systems as being so far behind non-Western countries like Bangladesh, Saudi Arabia, and Yemen. Western countries use non competes so as to encourage innovation and employment, both of which  appear to be anathema to FPIF.
  • “They prevent workers from changing jobs easily if they have access to proprietary knowledge as determined by an employer.”  I am not aware of any country that gives the employer full authority to unilaterally determine what constitutes proprietary knowledge. In the United States, courts generally will enforce non compete agreements only if they are reasonable in duration and geographic scope, and only if they are in fact necessary to protect the employer. Courts particularly disfavor them when they involve anyone other than higher level employees. For instance, I have never seen such an agreement with a factory worker, nor have I ever seen or heard of a case involving such an agreement.
  • “For a developing economy like China, knowledge transfer is essential.” So rival companies should just be free to steal it?

2.  Limited Probationary Periods. “Currently corporations can set probationary periods unilaterally, often for an entire year, keeping people in a highly precarious employment status. This is a major problem for workers since it leaves them with little or no protections. The new law sets standard probationary periods of from one to six months depending on the type of job. The USCBC argues against limiting the probationary period from one to six months because it “[will make] it more difficult for employees and employers to properly evaluate the work relationship.” Instead, it should therefore be left to the sole discretion of employers to set probationary periods for all employees — including the most unskilled — for up to six months.”

All AmCham is asking is for employers to be able to determine for themselves whether to have a probationary period of up to six months. I will note that probationary periods are of less import in the United States because it is typically so easy to fire someone here because employment is “at will.” Firing in China is already very difficult and is primed to become more so. If employers are limited to a one month probationary period for their employees, I am quite certain they will become more reluctant to hire.  As the Indian Economy Blog so succinctly puts it, “Hard to Fire is Hard to Hire.

In addition to being “a think tank without walls,” FPIF appears to be without brains as well.

What do you think?