China: Non-compete Clauses in China: New Rules

Last Updated: 4 March 2013
Article by Maarten Roos and Chen Yun

Recent interpretations by the PRC Supreme People's Court clarify a number of issues on implementation of Chinese labor laws. Arguably the most important clarifications are related to the compensation for and termination of non-competition clauses. Companies are strongly advised to review whether they have taken all necessary measures to ensure compliance and protection under the law.

The Judicial Interpretation IV of the Supreme People's Court on Several Issues Concerning the Application of Law in Hearing Labour Dispute Cases ("Interpretation IV") are effective as of 1 February 2013.

Under the Chinese Labor Contract Law, employers can sign non-compete clauses with key employees (legally limited to the employer's senior management, senior technicians and other personnel with a confidentiality obligation). In such a clause, for a maximum period of 2 years as of termination of the employment relationship (for whatever reason), the former employee cannot work for a competitor. In return for this commitment and during its performance (i.e. during the period of non-competition), the former employer must pay compensation to its former employee, even if this is not specifically agreed in the employment contract.

  1. Determining Compensation for Non-competition

The Chinese Labor Contract Law does not determine the amount of compensation to be paid, and until now this has been left to rules and interpretations adopted at local levels. In Shanghai for example, the parties are free to determine the level of compensation; but if no such compensation was agreed upon, a bandwidth has been set at between 20% and 50% of the average monthly salary over the 12 months before termination.

Many employment contracts fail to mention the compensation or the compensation amount. Under the new judicial interpretations, if no agreement is reached on the amount of compensation, then it is determined that the employer shall pay compensation at 30% of the employee's average salary for the 12 months before termination, or the applicable minimum wage (whichever is higher).

This provides useful guidance to companies who have signed non-competition agreements with some employees, but could not reach an agreement on the amount of compensation. Moreover, this level of compensation may well become the norm in the future.

  1. Termination of Non-competition Clauses

As payment for compensation is a pre-condition to the obligation to not compete, it follows that if a company fails to pay its former employee due compensation, then the employee can either claim for such compensation, or terminate the obligation and start working for a competitor.

The new judicial interpretations for the first time set a clear timeframe for the right to terminate the obligation of non-competition: if the former employer has failed to pay compensation for three months as of termination of the employment for reasons due to the employer.

In addition, the employer's right to terminate an agreement for non-competition is held to new standards. A company can still unilaterally terminate such an agreement to avoid having to further pay compensation. However, this will subject the former employer to a penalty of 3 months' compensation, payable to the former employee. This in fact is a major diversion from current practice. In Shanghai for example, unilateral termination has so far not been subject to penalties, and only one month advance notice was to be observed.

A related point that the judicial interpretation does not clarify, however, is whether a company's unilateral termination of the obligation of non-competition during the employment is subject to a penalty or notice. At the very least, the above rule makes it more likely that arbitration tribunals and courts will take the side of the employee in such a situation. In response, companies could draft their non-competition clauses in a very deliberate way to minimize the impact.

  1. Conclusions

The new interpretations that relate to non-competition clauses are a welcome clarification to current laws, and may help to establish more standardized practices. They do put seemingly new obligations on employers, which makes it even more important for companies to ensure that their non-compete clauses are written in a way that fully protects the interests of the company.

On the other hand, many questions related to this important issue remain unanswered or vague. For example, can an employer waive the non-compete obligation at termination of the employment, and would it help if this was agreed in the employment contract? What levels of liquidated damages can be demanded from former employees that breach their obligations of non-competition? And how to deal with the burden of evidence to prove a situation of non-competition?

On these and many other issues, clear and smart drafting of non-competition clauses or, preferably, independent confidentiality and non-competition agreements, will continue to be the best protection that a company can have.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Maarten Roos
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions