How to structure non-compete clauses
October 18, 2012 | BY
clpstaff &clp articles &Despite China's Employment Contract Law offering uniform rules over non-compete clauses, employers are still unsure of the best way to structure these agreements and how to deal with rules that vary from province to province
The PRC Employment Contract Law (中华人民共和国劳动合同法) was released in 2007 and became effective in 2008. For the first time, the Law offered employers in China the chance to use non-compete agreements with their employees.
The Law has strict requirements, however, and employers are often reluctant to take notice of these requirements or ensure their agreements fully comply. For example, non-compete agreements can only be negotiated with certain employees like senior management or technicians.
Employers also have to provide compensation and the non-compete period after termination of employment can be no longer than two years. Companies can require employees to pay damages for breaching the non-compete agreement.
“Sometimes employers do not take the necessary measures to protect information,” said May Lu, a lawyer at MWE China Law Offices. “Employers have to take certain measures to ensure enforceability and they are not always aware of what is required,” added the Shanghai-based lawyer.
|Upholding agreements
The first issue is that employers need to consider when and if a non-compete agreement is necessary with an employee. Using a standard contract from lower-level through to senior-level employees is a common practice and a dangerous one.
As the Law clearly states, only certain employees are eligible for non-compete agreements and it is essential to comply with that requirement. Employers must also make sure their workers are aware of such non-compete agreements, clearly detailing what is expected and required of them. Courts will look more favourably upon a company that is transparent with it employees.
“According to the practice in China, reasonable compensation is important when it comes to non-compete agreements. Specifically listing compensation and which competitors employees can or cannot work for and in which capacity as well as reasonable compensation is what judges will consider,” said Lu.
Specifically detailing compensation is also essential as different provinces have different minimum non-compete requirements. For example, in Beijing this minimum ranges from 20% to 60%, while in Jiangsu it is one third of the employee's previous monthly salary.
“A safe line when it comes to detailing minimum non-compete standards is about 50%, except for those places that have a higher minimum requirement according to specific local rules” noted Lu. This minimum payment is particularly important for companies with offices across China and employees who signed their contract at one location, but work somewhere else.
|Internal procedures
Relying on non-compete agreements is not the only thing companies can do to ensure their information is protected. Building internal procedures can help mitigate any risk of sensitive information leaving the company. Systematic internal rules as well as different procedures over who has access to certain information are an effective way to ensure protection.
“Chinese courts want to see that specific protection measures have been taken by the employer and to prove certain information is confidential, not in the public domain. Generally, information that relates to the business interests of a company, such as financial and technical information may be easier to be considered as confidential information.” said Lu.
SPC's 100% compensation
In August this year, the Supreme People's Court (SPC) released a draft judicial Interpretation requiring employers to make non-compete payments of 100% of the previous month's salary. The draft Interpretation has caused much controversy because, if issued, employers would face unreasonable amounts of compensation and a lot of non-compete cases will come to the courts.
“The SPC has tried several times to issue a judicial interpretation over the Employment Contract Law. This is the fourth interpretation and the previous three have all covered substantial issues in their draft form, but become procedural in substance once they are issued,” said Lu.
The Employment Contract Law is under review, but draft amendments show no signs of clarifying or changing the Law on non-compete agreements. The draft specifically deals with labour dispatch, a problem which affects a far greater proportion of the population than non-compete agreements.
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