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Non-Compete Clauses in China Require Compensation

Non-compete clauses are often utilized by companies to help protect important proprietary assets and information. These clauses are generally permitted in China and can last for up to two years after employment ends. However, many restrictions to these agreements exist. Often, Western companies include non-compete clauses as moral clauses – they don’t really have an intention to enforce but put it in regardless. This approach exposes the employer to payment.

Application of Non-Compete Clauses

Chinese non-compete agreements apply to specific types of employees. They usually apply to senior management and senior technical staff who have access to confidential corporate information. Relevant facts to consider when determining if an employee is in a confidential role and subject to non-compete status is their compensation (usually high), job title, responsibilities, likelihood they’ll have access to and use confidential information and whether they’ve signed a confidentiality agreement with the company.

Duration of Non-Compete Clauses

Non-compete periods in China last no more than two years from the date when the employment ends or is terminated.

Mandatory Compensation of Non-Compete Clauses

China requires employees be compensated for not competing during the entire post-employment non-compete period. Should an employer fail to pay, former employees may then compete OR ask for payment if they did not compete (even if they had no intention to). It’s therefore wise to have non-compete provisions in employment contracts that specify payment amounts.

Should there be no written agreement related to compensation, the employer must pay the employee 30% of their average monthly salary for the previous 12 months before termination – or the local minimum wage (whichever is higher) – for not competing. There are, however, local differences in the required amount of compensation for non-competes.

Ensure You Avoid These Potential Pitfalls When Creating China Non-Compete Clauses

To bind employees in China to a non-compete clause, you must pay them during the entire post-employment non-compete period. A signing bonus doesn’t count, and payments must be made by monthly bank transfer. Not complying with Chinese law in employment contracts will increase the chances you will be sued, and judges will not look favorably to terms which are not consistent with Chinese law. It’s advisable to create non-compete compensation above the minimum wage, even where compensation is low. Judges are known to strictly enforce non-competes. 

Contractual penalties exist in China against employees who breach non-competes. Employers should add a contract damages provision to employee contracts to enforce these conditions. But they must be reasonable. Chinese courts may reduce or eliminate damage amounts they deem unreasonable. Geographic scope of non competes must be reasonable. Employers may not terminate non-competes early without paying employees three additional months of non-compete compensation. A Chinese employee may unilaterally terminate a non-compete when the employer has failed to make non-compete payments for three month or longer.

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