At a glance
- Non-compete clauses must meet certain criteria to be enforceable.
- Courts have ruled on various cases, emphasising the importance of fair compensation and proper notification to employees.
- Non-compete agreements should only apply to senior managers, senior technicians, and employees with confidentiality obligations.
- Courts support claims for fair compensation, typically 30% of the employee's average monthly salary before departure.
- The maximum duration for non-compete obligations is two years, and courts may issue rulings to protect company interests within the non-compete period.
As the business environment becomes more challenging, companies are increasingly enforcing non-compete agreements to protect themselves from business losses and competitive pressures. For non-compete clauses to be valid in China, they must meet specific criteria:
- Non-competes should be imposed on senior managers, senior technicians, and employees with confidentiality obligations.
- Compensation must be provided to the former employee at least monthly during the restrictive period.
- The non-compete duration must not exceed two years after termination of employment.
Model Cases and Legal Interpretations
Employee Eligibility: Non-compete agreements should only apply to employees in specific roles. The Supreme People’s Court of China (SPC) emphasised that illegal non-compete clauses infringing on employees' right to employment should be rejected. For example, a masseur was not considered a senior manager or technician, and the court overruled the company's claim for damages.
Compensation Standards: If a non-compete agreement is silent on compensation, courts can support claims for 30% of the employee's average monthly salary for the 12 months before departure. In a Shanghai case, the court ruled that paying only the minimum wage was unfair and ordered the company to pay 30% of the normal monthly salary.
Notification Requirements: Employers must notify employees upon termination of employment. In a Guangdong case, a company was required to pay compensation until a waiver was issued. In a Beijing case, failure to deliver a non-compete compensation notice invalidated the non-compete obligation.
Understanding Non-Compete Territory: High-end talent should understand their non-compete obligations. In a Jiangsu case, a Chief Software Scientist disputed the global scope of his non-compete obligation, but the court ruled he should have understood his obligation.
Breach Determination: Employment nature determines breach. In a Tianjin case, a former employee's consulting services for a competitor constituted employment, breaching his non-compete obligation.
Spouse’s Involvement: In another SPC case, a manager's wife becoming the controlling shareholder of a competing enterprise breached his non-compete obligation, but the court adjusted the liquidated damages.
Enforcement Challenges: The maximum duration for non-compete obligations is two years. In a Suzhou case, the court issued an act preservation ruling to stop a former employee from working for a competitor during the non-compete period, protecting the company's interests during litigation.
The enforcement of non-compete agreements in China is becoming increasingly significant as companies seek to protect their business interests. These agreements must meet specific criteria, including the employee’s role, compensation, and duration. Model cases from 2024 provide valuable insights into how non-compete clauses are interpreted and enforced. These cases highlight the importance of drafting fair and legally enforceable non-compete agreements.
