Restrictive covenants imposed on employees in the People’s Republic of China (PRC) are normally in the form of non-compete and non-solicitation obligations. PRC law sets out some general principles on non-compete obligations but is silent on non-solicitation obligations which are therefore generally subject to the mutual agreement of the parties concerned.

As a general principle of PRC law, employers and employees may agree on the employees’ non-compete obligations during and after the term of the employment although the general law does impose some parameters. Under PRC law, the non-compete period must not extend beyond two years after the termination of the employment and the employer must pay monetary compensation to the employee during this restricted period – usually on a monthly basis although a lump sum payment or payment in-kind may also be recognised as valid forms of payment by the PRC courts. Such obligations may be set out in the employment contract or in a separate non-compete agreement which should also set out the amount of the compensation.

Reflecting the increasing use of non-compete provisions and a lack of clarity over certain aspects of their enforceability, the Supreme People’s Court of the PRC has recently promulgated The Interpretation on Various Questions Regarding the Application of Laws on Labour Dispute (IV) (最高法院关于审理劳动争议案件适用法律若干问题的解释(四)). This judicial interpretation clarifies various practical issues relating to PRC employment law including non-compete restrictions as follows:

  • It provides that where the employment contract or the separate non-compete agreement does not stipulate the non-compete compensation, such compensation should be the higher of (a) 30% of the employee’s average monthly salary over the previous 12 months, and (b) the applicable local minimum monthly salary, for each month of the employee’s performance of the non-compete obligations.
  • It clarifies that unless otherwise agreed by the parties, the agreed non-compete compensation should be payable if either (a) the employer requires the employee to perform the non-compete obligations upon termination of the employment contract, or (b) the employee demands the compensation after performing the non-compete obligations.
  • It allows an employee to terminate the non-compete restrictions early if the employer fails to pay the agreed non-compete compensation for three months (presumably in addition to demanding compensation for the period of the employee’s performance of the non-compete obligations).
  • The employer is also entitled to terminate the non-compete restrictions early but shall, if so demanded by the employee, pay an additional three-months’ non-compete compensation to the employee at the time of the early termination of the non-compete restrictions.
  • If an employee breaches the non-compete obligations, the employer is entitled to require the employee to continue performing the non-compete obligations even after the employee has paid liquidated damages for the breach to the employer.

Please refer to  the full text (in Chinese) of this judicial interpretation.

This judicial interpretation provides much-needed clarity on the enforceability of non-compete obligations – in particular where the agreement between the parties does not clearly specify the details of the performance of the non-compete obligations and/or the liability for a failure to perform the obligations.

 

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