After more than a year since the implementation of the PRC Employment Contract Law1 (the "Law"), the law governing non-competition agreements remains unsettled. Employers should work closely with counsel to ensure that their non-competition agreements are up to date and enforceable in China. The general rule is that the employee must receive reasonable compensation for the non-competition agreement to be enforceable. Underneath this general rule, however, two traps wait silently for the unwary.
To Specify or Not to Specify Compensation?
The first trap for the employer is whether the non-competition
agreement must specify the amount of compensation. The statutory
language would lead one to conclude that the amount of compensation
does not have to be specified when the employee signs the
non-competition agreement. Article 23 of the Law states that an
employer may specify the monthly compensation payable to the
employee. The word "may" suggests discretion on the part
of the employer, which means that a non-competition agreement is
enforceable even if the agreement does not specify compensation
The employer would be right if the non-competition agreement were to be enforced in Shanghai. According to the local judicial guidance, a court in Shanghai has the authority to determine the amount of reasonable compensation at the time when an employer seeks to enforce the non-competition agreement2. But, a local jurisdiction could act in contrary to the plain language of the Law. A recent case demonstrates the risk to employers. In that case, the non-competition agreement failed to specify amount of compensation for the employee. After the employee was terminated, the employer and the employee could not agree on compensation, and the case went before a municipal court in Beijing. The court could have imposed reasonable compensation and upheld the non-competition agreement. Instead, it ruled that the non-competition agreement was void partly because the agreement did not specify compensation payable.
How Much Compensation is Reasonable?
The second trap relates to the amount of compensation. How much
compensation is reasonable in the eyes of a court and enough for it
to enforce the agreement? The Law offers no guidance because the
statutory language is silent regarding this issue. In practice, the
amount of compensation that would be deemed
reasonable—which greatly increases the likelihood that
the agreement is enforceable—varies from jurisdiction to
jurisdiction and may even vary within the same jurisdiction from
time to time. Because the rate of increase in the cost of living
varies from region to region, the local jurisdictions are better
positioned to judge what is considered reasonable compensation. For
example, the Shanghai Municipal Higher People's Court issued
guidance on reasonable compensation in March 2009. The Shanghai
authority said that the amount of compensation could be between 20
to 50 percent of the employee's income if the employer and the
employee cannot agree on the amount of
Nonetheless, what is considered reasonable compensation may change over time. Employers should not assume that the range of 20 to 50 percent of income would remain constant over time. The best practice in navigating safely through this unsettled area of law is to contact the relevant local authority at or near the time when entering into an employment agreement that contains a non-competition agreement.
When contemplating the use of a non-competition agreement under
PRC law, an employer should follow these steps:
(a) prepare a well-drafted agreement and have the employee sign the agreement;
(b) clearly define competition (or the specific competitors), geographic coverage, the scope of competitive activities, and the non-competition time period (the maximum period is two years)4;
(c) specify the amount for liquidated damages or a formula for calculating liquidated damages;
(d) clearly define compensation for the non-competition agreement and use language to indicate the employee's acknowledgement for the adequacy of such compensation;
(e) during the enforcement of non-competition, obtain the employee's acknowledgment for the receipt of compensation; and
(f) with the assistance of counsel, understand and comply with any additional local employment regulations where the employee will work. Conclusion PRC law governing non-competition agreements remains unsettled. The general rule is simple but traps remain for the unwary. Employers should work closely with counsel to ensure that their non-competition agreements comply with both the Law and guidance from local jurisdictions.
1. The PRC Employment Contract Law was promulgated on
August 5, 2007 and became effective on January 1, 2008. The
Implementing Regulations for the PRC Employment Contract Law became
effective on September 18, 2008.
2. The authority for a court in Shanghai to determine the amount of compensation is found in Article 13 of The Guidance Opinions on Some Issues Concerning the Application of the PRC Employment Contract Law, which was issued on March 3, 2009 by the Shanghai Municipal Higher People's Court.
3. Please see Article 13 of The Guidance Opinions on Some Issues Concerning the Application of the PRC Employment Contract Law, which was issued on March 3, 2009 by the Shanghai Municipal Higher People's Court.
4. Article 24 of the PRC Employment Law limits the maximum period of non-competition to two years.