According to the PRC law, employers may prohibit employees, who have access to and are obliged to keep confidential the employers’ business secrets, from working for competitors or running competing business within no more than 2 years after the termination of their employment relationship, by entering into a non-compete agreement with such employees; in consideration for the employees’ fulfilling such obligations, the employers should pay the employees non-compete compensation on a monthly basis. Such obligations of the employees are known as the “non-compete obligations” under the PRC law.
In dealing with non-compete disputes, we found the following common misunderstandings among employers about how to enforce and cancel employees’ non-compete obligations.
1. An employer may put a clause in the non-compete agreement, stipulating that the employee shall fulfil non-compete obligations after the termination of employment, and that if the employer doesn’t pay the employee non-compete compensation, the employee’s non-compete obligations should end automatically with no compensation.
Usually, some employers use such clause to increase flexibility in whether to impose non-compete obligations on employees and to save the cost of non-compete compensation, because as mentioned above, such compensation should be paid on a monthly basis throughout the non-compete period. If they know some former employees joined competitors, they sue the employees for breach of non-compete obligations; if they are certain that the former employees didn’t join any competitor, they will cease paying non-compete compensation (or some even refuse to pay any non-compete compensation from the very beginning of the non-compete period). They mistakenly believe that the former employees’ non-compete obligations should end immediately when their payment of non-compete compensation ceases.
However, such clause is not legally binding under the PRC law.
Non-compete obligations arise from employment relationship and are therefore governed by labor-related legislation. Under the labor-related legislation, autonomy of will is not always allowed.
According to Article 37 and Article 39 of the Interpretation (I) of the Supreme People’s Court of China on the Application of Law in the Trial of Labor Disputes, the former employees who have fulfilled the agreed non-compete obligations may request non-compete compensation from their former employers, and to terminate non-compete agreements, employers shall notify former employees and pay them 3 months’ additional non-compete compensation.
That is to say, despite the above-mentioned clause, employers’ cessation of paying non-compete compensation won’t affect the effectiveness of non-compete agreements. As long as the former employees keep fulfilling their non-compete obligations, the employers should continue paying the non-compete compensation. To terminate a non-compete agreement, what employers should do is to notify the former employees of the termination and pay them 3 months’ additional non-compete compensation.
2. The non-compete agreement may stipulate that if the employee joins a competitor after the termination of employment, the employer has the right to enforce the non-compete agreement by notifying the employee to fulfil his/her non-compete obligations.
Usually, by the termination of employment, employers don’t know whether employees will join a competitor thereafter. Some employers don’t want former employees to work for competitors, but they also need to lower down the expenses for non-compete compensation. Therefore, in the non-compete agreements, they don’t impose definite non-compete obligations on the employees, instead, they use the above-mentioned clause and expect it to grant them the right to arbitrarily request employees of the fulfilment of non-compete obligations at any time after the termination of employment. They will keep an eye on the new employment status of the former employees. If the former employees didn’t join a competitor, the employers will not require the fulfilment of non-compete obligations, thus with no need to pay non-compete compensation; if they did join a competitor, then the employers will require the fulfillment thereof and start paying non-compete compensation.
Unfortunately, such clause is not enforceable under the PRC law.
In judicial practice of China, the use of conditional non-compete obligations is allowed, and employers and employees may agree on the conditions, upon the satisfication of which the employees’ non-compete obligations become effective. Such conditions usually include the employers’ notice on the fulfilment of non-compete obligations and the employers’ commencement of paying non-compete compensation. However, courts in China tend to hold that if the effectiveness of non-compete obligations is conditional, the employers should let the employees know explicitly whether the employees need to fulfil non-compete obligations NO LATER THAN the termination of employment, regardless whether the conditions agreed are met after the termination of employment, because allowing the uncertainty of non-compete obligations to survive the termination of employment will limit the employees’ right of employment.
Back to the above-mentioned clause. If an employer uses such clause and fails to notify an employee to fulfil his/her non-compete obligations on or before the termination of the employee’s employment contract, then the non-compete obligations will not become effective and the employee owes no non-compete obligations to the employer.
3. It’s ok not to sign a non-compete agreement. An employer may require an employee to make a commitment that he/she will not join any competitor after the termination of employment, otherwise, he/she should pay liquidated damages and/or compensate for the employer’s loss.
Although such commitment (or the like) is not in the form of a non-compete agreement, it does impose non-compete obligations on the employee. Some employers make such arrangement, usually because they need employees to not join any competitor, but they also don’t want to pay any non-compete compensation to such employees.
As mentioned above, autonomy of will is limited under the labor-related legislation. In consideration for employees’ fulfilling non-compete obligations, employers should pay the employees non-compete compensation on a monthly basis, and where employers fail to pay 3 months’ non-compete compensation accumulatively, the employees may terminate the non-compete agreement or the non-compete obligations agreed in any other form.
Therefore, such commitment gives the option to the employee on whether to fulfil the non-compete obligations. If the employee chooses to proceed with fulfillment of non-compete obligaitons, he/she may request the employer to pay non-compete compensation on a monthly basis, despite there is agreement on the amount of the compensation. The employee may request monthly non-compete compensation equal to 30% of the employee’s average income before the termination of employment. If the employee chooses to join a competitor in violation of the commitment, then after the employer’s failure to pay 3 months’ non-compete compensation, the employee may terminate the non-compete obligations.
