Many Western companies are accustomed to using non-compete agreements for employment contracts with high-level employees. This is particularly the case for companies with valuable proprietary assets and know-how. A non-competition agreement prevents an employee from working for a direct competitor once the contract has ended.
The question for companies in China that wish to sign a non-compete agreement is whether a court will enforce the agreement. There are a number of factors that companies in China need to pay attention to when attempting to maximize the likelihood that a non-compete agreement will be upheld by a Chinese court.
The non-compete period, that is, the period of time that an employee can be prohibited from working for a direct competitor after the employee has left the company, may last for a maximum of two years. A court is unlikely to enforce an agreement with a non-compete period lasting longer than two years (even if it is signed by the employee).
An employer is required to pay the former employee some portion of his/her former salary during the non-compete period. During the non-compete period, the employee is entitled to at least 30% of his/her former salary. However, if this amount turns out to be lower than the average salary of the region, the company must pay the average local salary instead.
Compensation during the non-compete period and enforceability of the agreement are closely linked. Therefore, if the employer fails to compensate the employee in a timely fashion, the non-compete agreement will not be enforceable and the employee is essentially free to work for a competitor. Additionally, any non-compete agreement that does not provide for the employee to continue to receive a portion of his/her former salary will not be enforceable in court, even if it was signed and agreed upon by the employee.
Non-compete agreements may not be used for any employee the company wishes. They are limited to personnel with extensive access to and familiarity with confidential and proprietary information. Relevant positions include the following:
Other staff with access to confidential information may potentially have non-compete clauses in their contracts. The enforceability of such a clause, however, will depend on the relevant factors listed below.
Labor courts consider non-enforcement agreements on a case-by-case basis and do not usually conform to a rigid set of rules. A court will consider the following factors when determining the enforceability of a non-compete agreement:
As a non-compete agreement requires the employer to compensate the former employee after he/she has left the company, some employers may wish to end the non-compete agreement to avoid paying compensation. However, employers are not entitled to freely end the non-compete agreement without compensating the employee. For an employer to terminate the agreement during the non-compete period, the company will likely be required to pay the employee three months salary. There may be potential to terminate the agreement before the non-compete period has begun without offering so much compensation, however, this will depend on the region and be determined on a case-by-case basis. A non-compete agreement that gives the employer the right to unilaterally terminate the agreement at any time without offering compensation is very unlikely to be enforced by the authorities.
If a court orders an employee to pay damages for violating a non-compete agreement, the agreement can remain in effect, if the employer wishes. In other words, the payment of damages, whether paid by the former employee or his/her new employer, does not serve as a substitute for honoring the non-compete.
It is important to remember that what is signed and agreed-upon by both parties in the non-compete will not necessarily be enforced. The rules and legal uncertainties necessitate that companies thoroughly consider whether signing a non-compete is worthwhile. Failure to consider the long-term situation may result in very high costs, as non-compete agreements may not be freely cancelled without compensating the employee.