News rules relating to non-competition provisions and
termination of employment contracts
On 30 November 2016, the Supreme People's Court of the PRC
published Minutes of the 8th National Court Trial Work
Conference on Civil and Commercial Matters – Part of Civil
Matters (The Minutes). The Minutes came into force on the same
day of publication.
The Minutes offers effective guidance for courts at all levels
and is aimed at protecting the legitimate rights and interests of
various civil subjects and promoting the sustainable and sound
economic and social development.
In this update we focus on two specific provisions in the
Minutes which relate to employment law matters, specifically, the
payment of damages for breach of a non-compete obligation and
unilateral termination of an employment contract by an
The significance of the Minutes for employers
The penalty for breaching the non-competition obligation
In China it is reasonably common practice for employers to
include a non-compete provision in any employment contract
prohibiting an employee from working for a competitor for a
specified period of time after the employment contract has been
terminated for any reason. In such cases, the parties
can agree on the damages that should be paid by the employee in the
event he or she breaches the non-compete provision. In some
cases, however, the damages fixed under the contract might not be
proportionate to the actual loss suffered by the employer.
They may either be too little to cover the employer's actual
losses (in which case, the employer may lose out) or, perhaps more
commonly, be significantly in excess of the employer's actual
losses, if any (in which case it is the employee will be
Article 28 of the Minutes provides that "where a party
applies for adjustment of the sum of penalty for breaching the
non-competition obligation agreed in the employment contract on the
basis that it is significantly higher or lower than the actual
losses, the People's Court shall make a ruling according to
Article 29 of the Interpretation II of the Supreme People's
Court of Several Issues concerning the Application of the Contract
Law of the People's Republic of China. "
Article 29 of the said Judicial Interpretation accordingly gives
the Court a discretion to adjust the contractual damages up or down
to match the employer's actual losses. Pursuant to rules laid
out in guiding cases issued by the PRC Courts, if the damages
agreed on by the parties exceed the employer's actual losses by
30% or more, they shall be deemed as "significantly higher
than the losses incurred" and should be adjusted down.
Employers wishing to include such clauses in their employment
contracts accordingly need to ensure that they are a genuine
estimate of the losses that are likely to be sustained by the
employer in the event of a breach of a non-compete provision (so
far as that is possible) rather than simply a penalty imposed on
the employee as punishment for breach.
Termination of employment contract
Under the PRC Labour Law, an employer cannot unilaterally
terminate an employee without cause. An employer may
unilaterally terminate an employee if he or she is incompetent and
cannot fulfill the performance criteria for that position, but this
right is subject to certain restrictions. First, the employer
must give the employee training so that he or she has an
opportunity to improve and fulfill the relevant criteria.
Secondly, the employer must be able to produce evidence that the
relevant criteria have not been fulfilled, even after training has
been given, and that the employee remains incompetent.
If the employer fails to satisfy either of these requirements, the
employee will have a right to bring a claim against the employer
for unjustified dismissal.
Article 29 of the Minutes provides "Where the employer
unilaterally terminates the contract within the contractual period
on the basis of the lowest rating or failure to certain criteria,
the employee can claim for either the continuous performance of the
contract or the payment of compensation on the basis of termination
in violation of law."
Accordingly, Article 29 clarifies that in an unjustified
dismissal scenario the employee has a choice of either
reinstatement or monetary compensation (which under the PRC Labour
Law amounts to two times the employee's average monthly salary
for each year of the employee's employment). As neither
of these outcomes is particularly satisfactory, employers need to
take care when dismissing employees on the grounds of incompetence
that they have provided the requisite degree of training and have
solid evidence to justify the dismissal.
This case demonstrates that there is still some legal uncertainty around liability under workers' compensation policies.
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