China: How to recognize the validity of non-compete clause when economic compensation standard is not clearly agreed?

Labour Law Newsletter
Last Updated: 18 February 2015

by Maggie Kong, Shane Lou, Susan Shan, Kent Xu, Grace Yang, Anderson Zhang and John Zhou

In practice, employers and employees often have terms regarding non-compete obligation agreed in the employment contract or in the confidentiality agreement. Well, employers and employees sometimes do not agree upon the economic compensation standard of the non-compete obligation. Under this circumstance, the validity of the non-compete clause will directly impact the vital interests of employers and employees. Hence, the Employment Law and Human Resource Committee of Dacheng Law Offices summarize and discuss the latest judicial interpretations and relevant regulations of Beijing, Shanghai, Guangdong and Jiangsu regarding this issue for your reference.

1. The latest judicial interpretation in principle recognizes the validity of non-compete clause when economic compensation standard is not clearly agreed.

Article 6 of the Supreme People's Court's Interpretation on Several Issues Concerning the Application of the Law in Labor Dispute Trials (IV) regulates: 'where an employer and an employee have agreed upon a non-compete clause in the employment contract or confidentiality agreement, but have not agreed upon the payment of economic compensation to the employee in the event of the rescission or termination of the employment contract, the relevant people's court shall uphold the employee's request for monthly payment of economic compensation by the employer according to 30% of the employee's average salary over the twelve-month period preceding the rescission or termination of the employment contract if the employee has fulfilled the obligations under the non-compete clause. If the amount of 30% of the average monthly salary as prescribed in the preceding paragraph is lower than the minimum wage standard applicable in the place where the employment contract is performed, the said minimum wage standard shall prevail.'

Pursuant to this Article, if the employee has fulfilled the obligations under the non-compete clause when an employer and an employee have not agreed upon the payment of economic compensation to the employee, the court shall recognize the validity of non-compete clause. The employer should pay the economic compensation according to 30% of the employee's average salary over the twelve-month period preceding the rescission or termination of the employment contract, and the payment of economic compensation should not be lower than the minimum wage standard applicable in the place where the employment contract is performed.

2. In Beijing and Shanghai, the non-compete clause is valid even when the economic compensation standard is not clearly agreed. Employers and employee could negotiate the specific amount.

Article 39 of the Minutes of the Seminar Held by Beijing High People's Court and Beijing Labor Dispute Arbitration Commission Concerning the Application of Law to Cases of Labor Disputes regulates: 'where an employer and its employee have agreed upon a non-compete clause in the employment contract or confidentiality agreement but have failed to agree upon the detailed payment or the standard of compensation payment, the non-compete clause shall not be held invalid. The parties may negotiate the specific amount. If the negotiation fails, 20% to 60% of the annual salary of the employee during the last year preceding the rescission or termination of the employment relationship shall be paid as the amount of the compensation.

Article 13 of Shanghai Higher People's Court's Opinions on Several Issues Concerning the Application of the Employment Contract Law regulates: 'where an employer and its employee have agreed upon a non-compete clause but have failed to agree upon the payment of economic compensation, or have agreed upon the payment of economic compensation but failed to agree upon the standard of economic compensation, the non-compete clause is still binding upon the parties on the grounds of expressed agreement on the non-compete clause by both parties. Where the standard of economic compensation is not clear, the parties could continue to negotiate the standard; where the negotiation fails, 20% to 50% of the employee's normal salary shall be paid by the employer.'

In accordance with these aforementioned regulations, in Beijing and Shanghai, where the compensation standard is not clearly agreed in the non-compete clause, the non-compete clause is still valid and binding upon both parties to the employment contract. The amount of the compensation payment can be determined through negotiation. Where the negotiation fails, the range of the payment standard has been stipulated.

3. In Guangdong, under certain circumstances, the non-compete clause is invalid when the economic compensation standard is not clearly agreed.

Article 26 of the Opinions of Guangdong Higher People's Court and Guangdong Labor Dispute Arbitration Commission on Several Issues Concerning the Application of the Labor Dispute Mediation and Arbitration Law and the Employment Contract Law regulates: 'Where an employer and its employee have agreed upon a non-compete clause, the employer shall pay economic compensation to the employee during the non-compete period as the law requires. If the employer fails to pay the economic compensation as agreed, the employee may require the employer to fulfill the non-compete agreement. If the employer fails to make any commitment to pay the employee economic compensation upon the completion of the work handover, the non-compete clause is not binding upon the employee.'

Per this regulation, in Guangdong, when the standard of economic compensation is not clearly agreed in the non-compete clause, the employee has the right to require the employer to fulfill the non-compete agreement and make a commitment. When the work handover is completed and the employer still has not made a commitment to pay the economic compensation to the employee, the non-compete clause shall not be binding upon the employee.

4. In Jiangsu, the non-compete clause is invalid when the economic compensation standard is not clearly agreed.

Article 13 of the Guiding Opinions of Jiangsu Higher People's Court and Jiangsu Labor Dispute Arbitration Commission on Labor Dispute Trials regulates: 'The employer and the employee agree upon the non-compete clause, but fail to agree upon the economic compensation, or agree upon the economic compensation payment but the employer fails to pay the agreed economic compensation, the non-compete clause shall not be binding upon the employee.'

Per this rule, in Jiangsu, when the standard of economic compensation is not clearly agreed, the non-compete clause is invalid, and the clause shall not be binding upon the employee who bears the non-compete obligation.

Case Study: Can Court Rule Non-compete Clause Invalid when Economic Compensation Is Not Clearly Agreed?

In May 2009, Wang was hired by a technology company in Jiangsu, serving as the chief technology officer. Because of the particularity of the position, Wang and the company signed a confidentiality and non-compete agreement. In May 2012, Wang left the company and was hired by an internet company in Jiangsu which had a competitive relationship with the technology company. Hence, the technology company brought a lawsuit against Wang for Wang's violation of the non-compete obligation, requiring Wang to bear the liability for the breach of the contract.

After hearing the case, the court found that the standard of economic compensation was not clearly agreed in the confidentiality and non-compete agreement. The technology company paid Wang three months' basic salary as the economic compensation for non-compete when Wang left the company. Therefore, the court held that the employer and the employee should not only agree upon the non-compete clause, but should agree upon the payment of economic compensation for non-compete after the termination or expiration of the employment contract as well. The non-compete clause was invalid if the economic compensation of non-compete was not agreed or the compensation amount itself was too low to meet the requirement of the law. In this case, Wang and the technology company failed to agree upon the payment or the standard of the economic compensation in the confidentiality and non-compete agreement and the technology company only paid Wang three months' basic salary as the economic compensation for non-compete, which was still lower than the standard stipulated in the Regulations on Employment Contract of Jiangsu Province.

As a result, the non-compete clause in the confidentiality and non-compete agreement shall not be binding upon Wang. Even though Wang's behavior that Wang worked at the internet company after leaving the technology company violated the non-compete obligation, Wang shall not bear the liability of the breach of the contract. The claim of requiring Wang to pay liquidated damages, namely two times of the actual economic compensation Wang received from the technology company was not upheld by the court. Both sides did not appeal at a higher court and the judgment went into effect.

We are in the opinion the unity of opposites exist in rights and obligations. When the employers and employees sign a non-compete agreement, they should agree upon the standard of economic compensation for non-compete under fair and reasonable conditions and safeguard their legitimate rights and interests in compliance with the law.

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.

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