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PRC Labour Law - Bitesize

16 October 2013
Mayer Brown Newsletter

Non-competition Covenant

What types of restraint can I impose on an employee after termination of employment?

The most common forms of restraint are as follows:

  • Non-competition, where you seek to restrain an employee from engaging in activities that compete with you; and
  • Non-solicitation, where you seek to restrain an employee from soliciting your current employees and clients.

While non-competition restraints are dealt with under the PRC Labour Contract Law, there are no provisions under the PRC law in relation to non-solicitation restraints. There are, therefore, uncertainties as to how a court would deal with non-solicitation obligations in the PRC.

What are the legal requirements for an enforceable non-competition covenant?

  • Typically such a non-competition covenant is agreed between you and the relevant employee at the time you enter into the labour contract.
  • Applicable positions: Not all employees may be subject to a non-competition restraint. The PRC law allows you to impose a non-competition restraint on the following three types of employee: senior management staff; senior technical staff; and any other staff subject to the obligation of confidentiality.
  • Restrictive activities: The non-competition restraint must set out the restricted activities. You can restrain certain employees from being employed by any of your competitors which manufacture or sell the same type of products or engage in the same type of business as you. You can also restrain the employee from engaging in, on his or her own behalf, the manufacture or selling of the same type of products, or engaging in the same type of business as you.
  • Period of restraint: The period of restraint for non-competition can also be agreed between you and the employee. However, this period must not exceed two years from the date of cessation of employment.
  • Compensation: You are required to pay compensation to the employee on a monthly basis during the period of restraint. Otherwise, the employee will no longer be bound by the agreed responsibilities. No currently effective national law or regulation has imposed any minimum or maximum standard. However, according to the Judicial Interpretation IV of the Supreme People's Court on Several Issues Concerning the Application of Law in Hearing Labour Dispute Cases (JI IV), which came into force on 1 February 2013, 30 percent of the monthly average of the employee’s salary over the last 12 months prior to departure may be considered by the courts as the minimum reasonable compensation for non-compete obligations. (Please also note that local regulations may have different requirements in this regard. For example, in Shenzhen, it is 50 percent of same; while in Jiangsu province, it is one-third of same).
  • Termination: According to the JI IV, during the non-compete period, an employer is entitled to terminate the non-competition agreement with the employee at any time. However, in such case, the employee is entitled to an additional three months of non-compete compensation.

What can I do if the employee breaches the non-competition restraint?

The PRC Labour Contract Law allows you to include a liquidated damages clause in the non-competition restraint so that if the employee breaches the non-competition restraint, you can claim liquidated damages from the employee.

However, this does not mean that you can require the employee to pay millions of dollars in liquidated damages. While the law does not specify the amount of liquidated damages, if the employee claims an amount that is extremely high, the judge would review the case and may adjust the amount taking into account all the relevant elements such as your actual loss, the employee's remuneration during his or her employment and the employee’s illegal gains.

Moreover, according to the JI IV, where an employee is in breach of the non-compete restrictive covenant then, in addition to liquidated damages, the employer is entitled to request the employee to fulfil his or her non-compete obligations in accordance with the contract. However, due to the lack of effective judicial measures, in reality it would be difficult to prevent the employee from working with competitors.

Please note that generally speaking the concept of obtaining an injunction to restrain the employee from engaging in the restrained activity (including any expedited route to obtaining an injunction) at the pre-litigation stage may not be available in the PRC.

If you suspect that the employee may have infringed your trade secret (whether as a result of the breach of the non-competition restraint or not), you may be entitled to apply to the court for a preliminary injunction order restraining him/her from disclosing, using or allowing any third parties to use such trade secret. In such case, the asset preservation remedies as security for costs and damages (e.g., freezing a bank account or restricting dealings in property) may also be available.

What can I do to stop my competitors from poaching my employees?

There is no PRC law or regulation prohibiting a company from poaching the employees of a competitor.

While little can be done to stop a competitor from poaching your employees, you may consider taking the following steps to protect yourself, as your competitor may incidentally obtain your trade secrets by poaching your employees:

  • Put in place a proper confidentiality policy and enter into a confidentiality agreement with the relevant employee to make sure that your confidential information and trade secrets are all properly protected;
  • Enter into a non-competition covenant with the relevant employees. Please refer to the above for details of a non-competition covenant.

If our company has no non-competition covenant with an employee, and the employee refuses to sign one following his resignation, can we put such employee on garden leave?

The PRC law is silent on the issue of "garden leave" (which generally means that the employee will be provided with an agreed period of leave with full pay prior to the cessation date of his employment).

Garden leave arrangements are viable if both the employer and employee agree to them. However, if the employee does not agree to such an arrangement, the employer cannot unilaterally put him on garden leave as, legally speaking, the employee is entitled to resign and work out his 30-day notice period. (Please also note that in Jiangsu province's local regulations, an employer may request the employee who is subject to the obligations of confidentiality to give a maximum six-month notice period for termination of employment in the labour contract.)

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