Six things you need to know about non-compete agreements
Information travels with people, and where talent moves a trade secret may leak, which is why many companies sign non-compete agreements with their staff. This article answers six common questions. If no compensation is paid, the employee may not always be free of the restriction: Shanghai requires a demand first, while Shenzhen ends the clause automatically. It distinguishes the contractual non-compete from the statutory duty of directors and senior officers, explains the 30 per cent compensation standard, when to sign, why an agreement does more than monitoring software, and the routes of remedy.
Information travels as people move, which means that a trade secret is at all times at risk of leaking; many companies therefore sign non-compete agreements with their employees. A few common questions about such agreements are explained here.
1. Question: if a company has signed a non-compete agreement with an employee but pays no compensation, is the employee free to ignore the agreement?
Answer: not necessarily. The law does not lay down the order in which compensation is paid and the restriction performed, so the rules differ from place to place. In Shanghai, the notice on several issues concerning the Regulations on Employment Contracts of Shanghai (No. 2) provides that "where for reasons attributable to the company compensation is not paid as agreed, and it is still not paid after the employee has requested it, the employee may rescind the non-compete agreement". It can be seen that the employee must first make a demand, and only where the company still does not pay after that demand has been made may the employee disregard the agreement. In Shenzhen and other places, by contrast, if the company does not pay the compensation the non-compete clause terminates of itself. In practice, therefore, a company and an employee may, when signing, agree the order of performance and of payment by reference to the local rules.
2. Question: how does a non-compete agreement differ from the statutory prohibition on competing?
Answer: a non-compete agreement is an arrangement by which an employee and a company agree that, for a certain period after leaving, the employee will not engage in the same, similar or competing business as the former employer; it is a contractual obligation. Article 23, paragraph 2, of the Employment Contract Law provides that, for an employee under a duty of confidentiality, the company may agree non-compete clauses with him in the employment contract or in a confidentiality agreement. The statutory prohibition on competing, by contrast, is an obligation imposed by law: article 149 of the Company Law provides that a director or senior officer may not operate on his own account or for another a business of the same kind as that of the company in which he holds office. So if no agreement at all is made, a director or senior officer who competes during his term of office will incur the corresponding legal liability, while other employees, absent any agreement, are free of any non-compete restriction after they leave.
3. Question: is a non-compete agreement really necessary, and why must the company pay the employee compensation?
Answer: an employee has a right to work, and a non-compete agreement deprives him of part of that right, which is why compensation must be paid; the monthly standard is 30 per cent of the employee's average wage for the twelve months before the employment contract was terminated or came to an end. Once a company's trade secret leaks the loss can be very serious, so many companies agree non-compete terms with their employees to reduce the risk of a leak later.
4. Question: when should a non-compete agreement be signed?
Answer: the law sets no limit on when a non-compete agreement may be signed; it may usually be signed when the employee first joins, during his employment, or when he leaves. In practice the best time is when he first joins, since an agreement made at the point of departure will inevitably meet with cases where the employee does not consent, which causes the company unnecessary trouble. A clause may therefore be added to the employment contract when the employee joins, or a separate agreement drafted.
5. Question: what is the relationship between a non-compete clause and monitoring software?
Answer: many companies now buy monitoring software, and since the systems it supports are all Android, the company must equip employees with Android phones and sign an agreement with them on the use of the phones provided, which adds to its costs without more. On the other hand, installing monitoring software helps only at the stage of preventing a leak, whereas once a leak has actually occurred the solution still has to come from a non-compete clause. Compared with monitoring software, therefore, a non-compete agreement runs through the whole process of preventing and controlling a leak, and in practice companies sign non-compete clauses more often.
6. Question: what remedies does a company have if an employee breaches the non-compete obligation?
Answer: where a company and an employee have signed a non-compete agreement, the company has two routes of remedy: it may bring a direct criminal prosecution against the employee for infringing its trade secret, or apply for labor arbitration under the non-compete agreement and then bring civil proceedings. Conversely, where no non-compete agreement has been signed, the company has one route fewer.