Does Your Non-compete Agreement Comply with the PRC Laws?
As an advance precaution for enterprises to protect their trade secrets, non-compete agreements have become more and more common in recent years. There is no separate legislation on non-competes in China so far. The non-compete regulations are mainly contained in Article 23, Article 24 and Article 90 of the Labour Contract Law of the PRC. Furthermore, the Interpretation (IV) of the Supreme People’s Court of Several Issues on the Application of Law in Trial of the Labour Dispute Cases (hereinafter referred to as the “Interpretations (IV)? has clarified some issues related to non-compete. It is crucial to make sure your non-compete agreement comply with the PRC laws. Kaizen hereby summarizes the relevant laws and regulations as follows for your reference.
- Who can legally be subject to non-compete obligations?
In China, non-compete restrictions shall not be applied to all employees. An employer shall not require all its employees to sign a non-compete agreement.
According to Article 24 of the Labour Contract Law of the PRC, employees who can legally be subject to non-compete restrictions are limited to the senior management, senior technicians and other personnel with a confidentiality obligation. The non-compete agreement signed between the employer and personnel not mentioned above shall be deemed as invalid and shall not be binding to the employee.
- What kind of competitive actions can be prohibited?
According to Article 24 of the Labour Contract Law of the PRC, the competitive actions that can be prohibited include: working for any other employer producing or trading in products of the same category or engaging in business of the same category, or establishing his/her own business to produce or trade in products of the same category or engage in business of the same category.
- Non-compete Period
According to Article 24 of the Labour Contract Law of the PRC, the non-compete period shall not exceed 2 years upon termination or expiration of a labour contract. If the non-compete period set forth in the non-compete agreement exceeds 2 years, then the exceeding part shall be deemed as invalid.
According to Article 9 of the Interpretations (IV), an employer may terminate the non-compete agreement during the non-compete period as set forth in the non-compete agreement. But the employee is entitled to ask for payment of an extra three-month non-compete compensation upon the termination of non-compete agreement.
- Non-compete Compensation
According to Article 23 of the Labour Contract Law of the PRC, the employer shall pay economic compensation to the employee on a monthly basis during the non-compete period as set forth in the non-compete agreement.
The Labour Contract Law of the PRC does not specify the payment standard or amount of compensation to be paid. But according to Article 6 of the Interpretations (IV), even if the non-compete agreement does not specify that economic compensation shall be given to the employee upon termination or expiration of the labour contract, the employee is entitled to ask for monthly payment of non-compete compensation by the employer in an amount equal to 30% of his/her average salary over the twelve-month period preceding the termination or expiration of the labour contract provided he/she has fulfilled the obligations under the non-compete agreement. If the amount of 30% of the average monthly salary as prescribed above is lower than the minimum salary standard applicable in the place where the labour contract is performed, the said minimum salary standard shall prevail.
- Could non-compete compensation be included in the paid salaries?
Article 23 of the Labour Contract Law of the PRC has clearly provided that the non-compete compensation shall be paid to the employee on a monthly basis during the non-compete period after termination or expiration of the labour contract. It shall be deemed as invalid if the non-compete agreement provides that non-compete compensation has been included in the salaries paid to the employee since it violates the compulsory provisions of the law.
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