Employee Non-Competition Agreement – China’s Labor Contract Law

In China, employers, going through the process of hiring, should pay attention while deciding to put in place Non-Competition Agreements.

Under PRC Labor Contract Law, the Non-Competition Agreement consists in the obligation of the employee “not to compete” with his/her previous employer after the termination of the Labor Contract. Concretely, this means that the employee who has signed this kind of agreements is not allowed to work for companies engaged in similar businesses, producing similar products or services.

Which are the most relevant information?

The Non-Competition Agreement may apply to any employee of a company who has confidential obligations for instance according to responsibilities or duties; but usually it concerns the top managers and senior technical employees or workers who have been in contact with the company’s sensitive information such as business secrets and trade secrets.

The Non-Competition Agreement enters into force upon the termination or dissolution of the Labor Contract and usually has a duration up of two years after the employment term.

It requires the employer to pay a Non-Competition Compensation to the employee. If the employer fails to pay it, the employee can stop abiding by the non-compete provisions. In case the compensation amount is not specified, it’s the Court that determines the level of compensation.

From employee’s perspective, a non-compete agreement is one of the cases based on which the employer is legally authorized to apply a penalty to an employee.

At last, still in terms of reasonableness, the geographic scope shall also not be underestimated as aspect to be covered in a non-compete.

How do normally employers act?

Many employers adopt an elective non-competition agreement in order to be able to decide, at the moment of termination, whether to enforce the provision or not. This happens because companies prefer to retain the option of deciding if the employee holds any information that needs to be protected or not.  The key aspect is the clarification whether the leaving employee will be required not to compete or not in a written copy of confirmation/waiver in the original language and at the appropriate time, depending on the local China’s employment laws.

Not to be misunderstood with Confidentiality Agreement

The Confidentiality Agreement is focused on “disclose commercial secrets” therefore the duty of confidentiality remains valid a certain information is secret. While, Non-Competition is focused on “work for competitors” and can last 2 years maximum. Normally the confidentiality is a duty, no matter agreed in advance or not; while non-competition is a special agreement.

The Confidentiality Agreement does not require a compensation while, as it is mentioned above, non-competition agreement require it.

To conclude, clarity needs to be done regarding the non-competition agreement in order to avoid any claim or lawsuit by the leaving employee.

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