China: Restrictive Covenants

General Principles

The PRC law does not prohibit an employer and employee from agreeing on restrictive covenants.

With respect to non-compete restrictive covenants, there are statutory requirements on applicable positions, period of restriction, geographical area, non-compete compensation, and termination of non-compete covenants.

Non-competition

The PRC Labour Contract Law provides the mechanism for non-compete restrictive covenants. Typically, a non-compete covenant is agreed between the employer and the employee at the time they enter into the labour contract.

• A non-compete restrictive covenant can only be imposed on three types of employees: (i) senior management staff; (ii) senior technical staff; and (iii) any other staff subject to the obligation of confidentiality.
• The employer can restrict the employee from (i) being employed by any of the employer’s competitors which manufacture or sell the same type of products, or engage in the same type of business as such employer; and (ii) engaging in, on their own behalf, the manufacture or selling of the same type of products, or engaging in the same type of business as such employer.
• The period of a non-compete restrictive covenant can be agreed between the employer and the employee. However, this period must not exceed two years from the date of termination or expiry of employment.
• The geographical area applicable to a non-competition covenant must be reasonable.
• The employer is required to pay non-compete compensation to the employee on a monthly basis during the restricted period. The employee will no longer be bound by the agreed restrictive covenants if the employer fails to pay the non-compete compensation for three months. The parties may agree on an amount of compensation, which generally must not be lower than 30% of the monthly average of the employee’s salary over the last 12 months prior to termination, and must not be lower than the local minimum wage. Local rules may have different requirements in this regard (for example, in Shenzhen, it is 50% of the monthly average of the employee’s salary over the last 12 months prior to termination, and in Jiangsu Province, it is one-third).
• During the non-compete period, an employer is entitled to terminate the non-compete covenant with the employee at any time. However, in such cases, the employee is entitled to an additional three months of non-compete compensation.

Liquidated damages for the employee’s breach of non-compete restrictive covenants can be included in the labour contract. When the employer who entered into a non-compete covenant does not breach its obligation to pay the agreed amount of non-compete compensation on a monthly basis after the termination or expiry of employment, but the employee breaches their non-compete restrictive covenants, the employer may claim the agreed liquidated damages. In this scenario, there is no statutory restriction on the maximum amount of the liquidated damages, although the amount must be reasonable.

Non-service or non-dealing

The PRC labour law is silent on the concept of non-service and non-dealing restrictive covenants.

Non-solicitation

The PRC labour law is also silent on the concept of non-solicitation restrictive covenants. In practice, it is not uncommon that a labour contract includes non-solicitation restrictive covenants, where the employer seeks to restrict an employee from soliciting the employer’s current employees and clients without additional compensation payable to the employee.

On the Horizon

Technically speaking, the following restrictive covenants are not under the labour law regime and are included here for completeness. The revised PRC Company Law came into effect on 1 July 2024, strengthening restrictions on a company’s senior officers, in relation to the related party transactions. Any transaction between the company and any of its directors, supervisors, and senior management, as well as their respective close relatives and enterprises controlled thereby, should be approved by the board or shareholders of the company.

This summary was prepared with the assistance of Meng Bo Law Office, a PRC law firm based in Shanghai, with which Mayer Brown has a close working relationship.

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