China Employee Confidentiality and Noncompete Agreements

I received the following email (modified slightly to protect anonymity):

Steve,

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.

We have been dealing with a staff issue under China’s new employment laws. Essentially one of our staff has taken us to the local Labor Bureau for unfair dismissal. We have now been 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. I thought you might find it worthwhile investigating/blogging on this.

Here is the basic situation. A trade secrecy and confidentiality agreement should be included in every employment agreement. It should be a stand alone agreement, separate from the employment agreement itself. Such agreements only work, however, where 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 the new Labor Contract Law, non-compete agreements are disfavored. Only management level employees and employees with special status can be subject to a non-competition agreement. The non-compete agreement can extend for only two years and 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 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, your issues stem from the following:

  • You combined the confidentiality provision with a non-compete provision. The Labor Bureau interpretation is thus probably correct. They are almost certainly not making you pay for the confidentiality provision; they are making you pay for the non-compete provision. Because you made these two things pretty much inseparable the Labor Bureau too is grouping them.
  • If the confidentiality agreement had been an entirely separate agreement, the Labor Bureau official is not correct. In that case, the solution would be to take the matter to court. That is, if the employee did violate her confidentiality agreement and has made improper use of trade secrets, then we 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 our clients all the time to carefully document and enforce confidentiality and trade secrecy agreements with all appropriate employees.

So in the case of the email above, if the confidentiality agreement is combined with a non-compete agreement, the confidentiality provisions are of little benefit to you. On the other hand, if you have separate and properly drafted confidentiality agreements, they are still fully valid. However, they are only useful to the extent that your company has a formal secrecy program that you have carefully implemented, monitored and enforced.

At this point, the best thing to do would be to settle with this employee and get her to sign a settlement agreement that does not contain non-compete provisions but does contain confidentiality and trade secret provisions. If we can get her to do this, you should be fine.

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