Our China employment lawyers recently received the following email evidencing confusion about China employee confidentiality and noncompete agreements (modified to remove any possible identifiers):
I wanted to pass some information to you, which you might want to use on your blog, but please keep my name and my company name out of it.
Essentially one of our staff has taken us to the local Labor Bureau for unfair dismissal. We are now trying to pay her off and get her to sign a contract/settlement agreement making clear that she has no further claims against us. One clause we wanted in the contract was to basically get her to keep confidential about our business and especially the business of our clients. The Labor Bureau has advised us that for this to have any legal effect, we need to pay her for the period we wish her to maintain confidentiality.
My reading of this is that all of our confidentiality agreements with our employees are now meaningless because we can no longer ensure our ex-staff maintain confidentiality. This must impact all consultancy firms.
We need your help with the settlement agreement because we do not want her to come back later and sue us.
We helped this company by drafting a settlement agreement with its employee that the employee did eventually sign. But the payment this company had to pay was likely higher than it could/should have been, largely because of the mess caused by its poorly crafted employment agreement.
For companies facing – and that may face in future – similar problems, below is an explanation of the relationship between confidentiality and non-compete agreements.
A trade secrecy and confidentiality agreement should be included in every employment agreement. This typically works better as a standalone agreement, separate from the employment agreement itself. Such an agreement only works well if the company has a clearly documented secrecy/confidentiality policy that is enforced by the company. A mere agreement is of only minimal benefit.
It is a mistake to combine a secrecy/confidentiality agreement with a non-compete agreement. Under China’s Labor Contract Law, non-compete agreements are disfavored. Only management level employees and employees with special status can be subject to a non-compete agreement. The non-compete agreement can extend for only a limited period and it must be limited in scope, both in terms of geographic area and in terms of the activities it restricts. Finally, the employee must be paid something during the entire period the non-competition agreement is in effect. Failure in any of these areas will cause the Labor Bureau and the courts to reject the agreement as void. We typically advise our clients to restrict their use of non-competes to truly high-level employees with significant management responsibilities.
In the case mentioned above, issues likely stem from the following:
- The company combined the confidentiality provision with a non-compete provision. The Labor Bureau is almost certainly not making the company pay for the confidentiality provision; it is making them pay for the non-compete provision. Because the company made these two things pretty much inseparable, the Labor Bureau is grouping them.
- If the confidentiality agreement had been an entirely separate agreement, the Labor Bureau would not be correct. In that case, the solution would be to take the matter to court. That is, if an employee does violate her confidentiality agreement and has made improper use of trade secrets, the employer should consider suing the employee in the appropriate court.
Our employment lawyers’ approach has been to use non-compete agreements only when they are truly necessary and likely to be enforced. On the other hand, we work with clients all the time to carefully document and enforce confidentiality and trade secrecy agreements with all appropriate employees.
In the case of the email above, combining the confidentiality agreement with a non-compete agreement rendered the confidentiality provisions of little benefit. On the other hand, if you have separate and properly drafted confidentiality agreements, they are still valid, but they are only useful to the extent that your company has a formal secrecy program that you have carefully implemented, monitored and enforced.