China Employee Non-Compete Agreements

China employee non-compete agreements make a lot of sense, once you recognize that they differ a fair amount from such agreements in most other countries. The overall handling of employee non-compete agreements in China is not all that different from most other places.

During your new employee on-boarding process in China, you should confirm there are no encumbrances or restrictions on any new hires coming to work for your company. In particular, you should make sure there are no in-force non-compete agreements. Let me explain why this is so important.

Though employee non-compete agreements are generally disliked by China’s administrative and judicial authorities, many employers like to have non-compete agreements in place with every employee they hire, even part-time workers. Moreover, many employers prefer to have an elective agreement where the employer has the right to decide whether or not to enforce the non-compete agreement upon termination of the employment contract. In other words, the employer gets to decide whether it will pay the employee for not competing for a certain period of time after the employee’s departure, or whether the employee can “go free” without any restraints. The legality of such an elective arrangement depends on where you are located in China, but for purposes of this discussion let’s assume such terms are in fact legal and enforceable.

It makes complete sense for the employer to want to wait until the end of the employment term to see if the employee possesses proprietary information worth protecting, since things may change during the course of employment. This especially makes sense because in China the employer must pay its departing employee not to compete.

What happens though if an employer does nothing when the employment relationship ends. Usually,“no action” on the part of the employer means the non-compete agreement does not come into force. If this is the employer’s intention it’s probably okay. But if the employee is both expecting and wanting a non-compete payment from you as the employer and you have not clarified the non-compete issue at the time of termination, the employee will probably demand payment from you or sue you to enforce the non-compete.

To avoid this battle and headache, if you decide you do not want to enforce the non-compete provision or contract, your best course is to make this clear to your departing employee before their departure. Doing this will virtually always stop a terminated employee from suing you for non-payment on a non-compete.

But what if you as the employer want to enforce your non-compete provision or agreement? In this case, you will need to inform the employee that you are electing to enforce the non-compete and you should be sure to comply with all of the terms of the non-compete, including paying all non-compete compensation due to your departing employee. You should put your employee(s) on notice of your intent to enforce the non-compete via a clear writing to the employee. And by this I mean a hard copy document with clear language (in Chinese) setting out your intention to enforce the non-compete.

In most Chinese jurisdictions, an employer that does not affirmatively confirm its desire to enforce a non-compete will be deemed to have waived its right to enforce the non-compete after three or so months. The exact number of months an employer can go without being deemed to have relinquished its rights to enforce a non-compete depends on the locale — as is true for just about everything else relating to China’s employment laws. See China Employment Law: Local and Not So Simple.

Back when China employee non-compete agreements were less complicated, our China employment lawyers pretty much always counseled our clients to put non-compete provisions in their China employment contracts. Nowadays though, we suggest they balance their need for a non-compete against the risks that such a provision or contract could eventually cause them problems.

For example, what happens if you use a non-compete that automatically takes effect upon the employee’s termination and you have no intention of enforcing it when the employee leaves but you forget to terminate the non-compete when processing the employee’s departure? Though this depends on your locale, in many of China’s cities, this will mean you will need to reach agreement to pay your employee for a mutual termination of the non-compete or if you do not pay any non-compete compensation you run the risk of a Chinese arbitrator or judge “sticking” you with the non-compete because you knowingly signed a binding agreement that included one.

Bottom Line:
Be careful with your China employee non-compete agreements. Do not just insert a non-compete provision into your China employment contracts without first thinking through the repercussions of doing so. You also need to be careful to act on any non-competes before any impending employee termination.