Only certain employees should be subjected to non-competition agreements
The non-competition system is a legal precautionary measure for employers to protect their business interests, and its purpose is to protect the employer’s trade secrets from infringement and exclude horizontal competition.
However, the system inevitably places restrictions on the employment rights of laborers, and disputes and controversies over non-competition agreements are therefore extremely common. It is worth discussing how employers can legally and reasonably agree with laborers on non-competition clauses to protect their own rights and interests while protecting laborers’ freedom of choice of employment.
The purpose of this article is to analyze the determination of the validity of non-competition agreements.
Eligible subjects of non-competition
Article 24 of the Labor Contract Law of the People’s Republic of China stipulates that the persons who should be subject to non-competition shall be limited to the senior managers, senior technicians, and the other employees who have the obligation of confidentiality of employers. In practice, with respect to the review of the persons to whom the non-competition applies, the Shanghai No. 1 Intermediate People’s Court issued on April 22, 2019, the Hearing Ideas and Judgment Points for Cases over Non-competition Disputes, in which it was mentioned that if the laborer does not raise a defense in the lawsuit about the suitability of the subject of the non-competition, the court will not review the matter.
If the laborer claims that he or she is not an eligible subject, the court will need to review the matter: for the identification of senior managers, reference can be made to the relevant provisions of the Company Law; for the identification of senior technicians, reference can be made to the laborer’s title, the position he or she holds in the employer and the content of the work for a comprehensive determination; for the identification of other employees who have the obligation of confidentiality, reference can be made to the rules for hearing cases over trade secrets infringement disputes.
If the laborer’s position belongs to sensitive positions such as technology research and development, sales, finance, etc., it is presumed that he or she has access to the employer’s technical secrets or business secrets; if the laborer’s position does not involve sensitive positions, the employer is required to prove two aspects: one is that the employer has certain technical or business secrets; the second is the possibility of the laborer’s access to such trade secrets.
Employers are kindly reminded not to arbitrarily enter into non-competition agreements with ordinary employees who are not in conformity with the provisions of the Labor Contract Law. Moreover, employers should take care to maintain confidentiality of certain technical or business secrets, and to retain evidence of access to and receipt of trade secrets by employees who are not involved in sensitive positions.
Period of non-competition
Article 24 of the Labor Contract Law provides that the maximum period of non-competition shall not exceed two years. In Guiding Case (2018) Jing 01 Min Zhong No. 5826, the appellant Beijing Sohu New Power Information Technology Co. Ltd. and the appellee Ma Xiaonan signed a non-competition agreement, of which Article 3.3 stipulated that “the period of non-competition…shall not exceed 12 months…the above period of non-competition shall exclude the duration of arbitration and litigation proceedings.”
With regard to the validity of the agreement, the court finally held that, as the original purpose of the non-competition system is not only to protect the employer’s trade secrets from infringement but also to protect the laborer’s right to free choice of employment and the right to live from excessive restrictions, the period of non-competition stipulated in Article 24(2) of the Labor Contract Law adopts the way of mandatory regulation, which is an effectiveness regulation in nature and shall be binding upon both the laborer and the employer, with a view to setting the period of non-competition within a reasonable period. Therefore, in this case, when the employer and the laborer agree on the period of non-competition, they shall agree on a clear and specific one so that the laborer has reasonable expectation and clear knowledge of his or her obligations, and shall not set an indefinite period of time.
Thus, employers are reminded that when agreeing with a laborer on the period of non-competition, no conditions may be attached to extend the legal period, and that if the period exceeds two years, the excess portion will be deemed invalid.
Economic compensation for non-competition
With respect to the economic compensation for non-competition, Article 23 of the Labor Contract Law stipulates that, for a laborer who has the obligation of keeping information confidential, the employer and the laborer may stipulate non-competition clauses in the labor contract or in the confidentiality agreement and come to an agreement that, when the labor contract is dissolved or terminated, the laborer shall be given an economic compensation within the non-competition period. In practice, the court generally determines the economic compensation in accordance with the agreement between the employer and the laborer.
If the economic compensation is not agreed upon, the court will follow the provisions of Article 36 of the Interpretation (I) of the Supreme People’s Court of Issues Concerning the Application of Law in the Trial of Labor Dispute Cases, which stipulates that the economic compensation shall be the lower of 30 per cent of the average monthly salary of the laborer in the 12 months before leaving the employer and the local minimum wage for the same period. When determining the average salary of the previous 12 months, the laborer’s income such as the bonus and the fixed allowance granted during the above-mentioned period shall be taken into account.
Under Article 36 of the Interpretation, where the parties have agreed in the labor contract or confidentiality agreement on non-competition but have not agreed to give the laborer economic compensation after the dissolution or termination of the labor contract, and the laborer has fulfilled the obligation of non-competition and requests the employer to pay monthly economic compensation at 30 per cent of the laborer’s average wage for the 12 months prior to the dissolution or termination of the labor contract, the People’s Court shall support the request.
Where the 30 per cent of the average monthly wage stipulated in the preceding paragraph is lower than the minimum wage standard in the place where the labor contract is performed, the economic compensation shall be paid in accordance with the minimum wage standard.
Though the failure of the employer and the laborer to agree on economic compensation when entering into a non-competition agreement does not directly affect the validity of the agreement, in order to avoid disputes on this issue, we recommend that if the employer determines to require the laborer to fulfill the non-competition obligation at the time of the termination of the labor contract at the latest, the amount of economic compensation and the timing of its payment should be clearly agreed.
Teresa Huang is a partner at Lee, Tsai and Partners Attorneys-at-Law in Taipai. Joyce Wen is a senior associate at Lee, Tsai and Partners in Shanghai.