China Employee Non-Competes: Do Not Try This at Home

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) 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 an example: if you own a small sushi restaurant in Peoria, Illinois, a well-crafted non-compete with your sushi chef might prohibit that person from working as a chef at another sushi restaurant within a 25 mile radius for a year. The poorly crafted non-compete provision might prohibit them from doing anything in the food business anywhere in the world for the next five years.

For obvious reasons, courts are loathe to enforce overly broad non-compete agreements because it is neither fair nor 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 their employees’s employment contracts, but these provisions are valid only if all of the following are true:

1. The employee is senior management or a senior technical person. China’s courts take this requirement very seriously and few employees qualify.

2. 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.

3. 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 this amount in the contract and to make it between 30 and 50% of the employee’s salary, depending mostly on the locale. But China’s Supreme Court issued some national level guidance on these payments and a terminated employee’s monthly compensation typically should be at least 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 they “might as well” put a non- compete clause in their employment contracts with their high level employees since they would be free to back out of any payment post-termination if they wished. However, since China’s Supreme Court has held that employers are free to terminate a non-compete clause but in doing so they must pay three months compensation, we now usually advise our clients to think longer and harder before just throwing in non-compete provisions.