China’s Supreme People’s Court recently made clear the required compensation for a non-compete agreement or provision to be valid and to remain in effect. If an employee agrees to a non-compete provision, but the labor contract or confidentiality agreement (signed by the employee) does not mention the compensation the employee must receive as consideration for not competing, and the employee has in fact not competed, the court can award the employee up to 30 percent of his or her average monthly salary. If a 30 percent award of the average monthly salary is less than the minimum salary standard in the city, the minimum salary must be paid instead.
The Court also made clear employees are entitled to such compensation no matter the reason why the employee did not compete. In other words, even if the employee’s not competing stems from the employee’s inability to find new employment, the employee is still entitled to compensation for not having competed.
The Court also clarified what it takes to terminate an employee non-compete:
- An employer may terminate a non-compete agreement and thereby cease having to pay for that non-compete if it pays the employee at least three additional months’ compensation for the non-compete. In other words, three months notice is essentially required to terminate the compensation requirement.
- An employee may terminate a non-compete if he or she has not been paid the required non-compete compensation for at three months by requesting termination of the non-compete agreement. Note that this failure to pay has to be the fault of the employer; the employee cannot deliberately avoid payment in an effort to cancel a non-compete.
Certain aspects of non-compete agreements in China have not changed and remain important, including the following:
- An employment agreement may include provisions intended to protect the employer’s trade secrets. A non-competition agreement may be included in support of such protections.
- The employer must pay reasonable compensation on a monthly basis to the employee during the term of the non-competition period.
- Non-competition agreements are limited to executives, technical personnel and other personnel with access to trade secrets. Cases have held that senior sales staff are included in this category. On the other hand, blanket agreements applicable to all employees are invalid.
- The terms of the non-compete restriction must be “reasonable” in length of restriction, business scope and geographic area. A term in excess of two years is prohibited. The scope requirement is strictly interpreted. It is not sufficient that the employee is working in the same general area as the former employer. Competition must be specific and direct.
- An employee that violates the terms of the non-compete agreement can be liable for damages to the employer and these damages can be determined by contract so long as the contract damages are reasonable.
Just as is true of any contract you will eventually seek enforce in China, your non-compete/trade secret/employee contract should be written under Chinese law and with Chinese as its official language.