10 December 2009
What types of restraints can I impose on an employee after termination of employment?
The most common restraints are as follows:
- Non-Competition where you seek to restrain an employee from competing with you; and
- Non-Solicitation where you seek to restrain an employee from soliciting your current employees and clients.
While Non-Competition is specified under the PRC Labour Contract Law, there is no provisions under the PRC law in relation to Non-Solicitation and therefore it is still uncertain as to how a court will deal with Non-Solicitation in the PRC.
What are the legal requirements for an enforceable Non-Competition covenant?
- Typically such a covenant is agreed between you and the relevant employee at the time you enter into the labour contract.
- Not all employees may be subject to a Non-Competition restraint. PRC law allows you to impose a Non-Competition restraint on the following three types of employees: senior management staff; senior technical staff; and any other staff who is subject to the obligation of confidentiality.
- The Non-Competition restraint must set out the restricted activities. You can restrain certain employees from being employed by any of your competitors who manufacture or sell the same type of products or who engage in the same type of business as you; and 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.
- The restricted period for Non-Competition can also be agreed by you and the employee. However, this must not exceed two years from the date of cessation of employment.
- You are required to pay compensation to the employees on a monthly basis. The amount of compensation must not be less than the local minimum requirements (if any).
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 once the employee breaches the Non-Competition restraint, you can claim liquidated damages from the employee.
However, it does not mean that you can require the employee to pay millions of liquidated damages. While the law does not specify the amount of the liquidated damages, if the employee claims that the amount 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.
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) is not available in the PRC.
If the employee is deemed to have infringed your trade secret as a result of the breach of the Non-Competition restraint, this employee may be subject to civil liabilities and even criminal liabilities depending on the specific circumstances. However, it is usually difficult for you to prove that an employee has infringed your trade secret and therefore you should clearly set out the employee’s confidentiality obligations to properly protect your trade secret.
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