China’s employment laws generally permit employee non-compete agreements that prevent an employee from competing with its former employer for up to two years after employment ends. But there are all sorts of restrictions on these agreements, as explained below.
Only some China employees can be bound by non-compete agreements. Employee non-compete agreements are generally limited to senior management, senior technicians, and other personnel who have confidentiality obligations. Senior management usually means a management level person who has access to company confidential information. Senior technician usually means someone who engages in technology research and development and who has access to company technology information. Whether an employee is deemed have a confidentiality obligation is determined on a case-by-case basis by considering all relevant facts, including the following:
- The employee’s compensation
- The employee’s job title
- The employee’s responsibilities
- The likelihood of the employee getting access to and using confidential information
- Whether the employee has signed a confidentiality agreement with its employer
The Duration of the Non-Compete. China’s employment laws generally limit employee non-compete periods to a maximum of two years from the date on which the employment contract ends or gets terminated.
China Requires You Compensate an Employee for Not Competing. Chinese law requires employers compensate their employees for agreeing not to compete during the entire post-employment non-compete period and failing to pay this required compensation will free up the employee to compete. Therefore it’s best to have a non-compete compensation provision that specifies how much you will pay or how the amount of the compensation will be calculated. If there is no written agreement regarding the amount of an employee’s compensation for not competing, the employer must pay the employee 30% of the employee’s average monthly salary in the twelve months before termination, or the local minimum wage, whichever is higher. However, as is true with just about everything involving Chinese employment law, there are local differences regarding the required amount for non-compete compensation. See China Employment Contracts: Localization is Key.
Our China employment lawyers have over the last few years been seeing a trend where the courts in China’s major business cities strictly enforce contractual non-competes even when the non-compete compensation in the employment contract is very low. However, we advise our clients to provide for non-compete compensation at least greater than the local minimum wage so as to minimize the likelihood of their having to defend their non-compete compensations before a Chinese court.
China Allows for Contractual Penalties Against Employees that Breach their Non-Compete Agreements. Employee non-compete agreements are one of the few instances where China employers are allowed to impose a penalty on their employees. This can be done with a contract damages provision requiring the employee pay a specific damage amount for failing to comply with the non-compete provision. But for non-compete contract damages to be effective, they must be reasonable. If a Chinese court or arbitral body determines your contract damages are too high it will reduce this amount or maybe even eliminate it entirely. For the difficulties inherent in coming up with an appropriate contract damages amount, see On the Importance of Contract Damages in China Contracts.
Permissible Geographic scope of China Employee Non-Competes. The geographic scope of your employee non-compete must also be “reasonable.” The Chinese courts and arbitral bodies consider all sorts of facts in determining whether the geographic scope of an employee non-compete is reasonable, including the employee’s position, the employer’s business scope and size and industry.
Chinese courts do not usually strike down non-compete provisions solely because its geographic scope is too great; they instead will usually simply reduce its geographic scope. Because it is nearly impossible to expand the scope of an employee non-compete in court we usually advise our clients to make their non-compete agreements geographically broad, but not so broad that the court will throw up its hands and strike the whole thing.
Employers May Not Terminate an Employee Non-Compete Agreement Early. China employers are not allowed to unilaterally terminate a non-compete agreement without being subjected to a penalty and employers that do so during the non-compete period must pay the employee three additional months of non-compete compensation for the early termination.
Employers Must Pay the Required Non-Compete Compensation. A China employee may unilaterally terminate a non-compete if its employer has failed to make its required non-compete compensation payments for three months or longer, so long as the employee performed his or her non-compete obligations. In other words, if you want your non-compete agreement to remain in force you must pay for it.