How a company should use a non-compete clause

A non-compete restricts a worker's freedom to choose his employment to some extent, and the law has therefore set comparatively high requirements for its use. A company should grasp the correct use of a non-compete clause in the light of its own circumstances, so as to avoid defects in its validity and to give full effect to the restriction the clause imposes.

1. What should a non-compete clause contain?

Under the Employment Contract Law a non-compete clause must contain the following: the parties to the agreement, the period of the obligation, the compensation, and the liquidated damages. When signing a non-compete clause a company should ensure that these are set out in the clause completely and clearly.

2. May a non-compete clause be signed with every employee?

It is not every employee who needs a non-compete clause: only those employees who hold the company's trade secrets become subject to a non-compete.

Under article 24, paragraph 1, of the Employment Contract Law, a non-compete applies to a company's senior managers, senior technicians and others under a duty of confidentiality, which confines those subject to it to the range of persons who know the company's trade secrets. The institution arose in order to protect a company's trade secrets by restricting the worker's freedom of employment; to apply it indiscriminately to workers whether or not they hold trade secrets would defeat the very purpose for which it was created. Moreover, the institution requires the company to pay compensation to a worker who bears the obligation, so that signing a non-compete with a worker who holds no trade secrets gains the company no protection of any trade secret and costs it a sum in compensation, which makes no commercial sense.

In practice companies generally sign non-compete clauses with the following: 1) senior managers; 2) research and development staff; 3) senior marketing staff; 4) those in important managerial posts, such as financial managers and legal managers.

3. Is there a minimum standard for the compensation?

When signing a non-compete clause a company and a worker generally have to deal with the amount of the compensation. The Employment Contract Law lays down no standard for fixing it, leaving it to the parties to agree. Where they have not agreed, the relevant judicial interpretation and local rules may be consulted.

Nationally, under the judicial interpretation of the Supreme People's Court, a worker may at the least require monthly compensation of 30 per cent of his average wage for the twelve months before he left. Where 30 per cent of the average monthly wage is below the local minimum wage, payment is made at the local minimum wage.

In Shanghai, where the amount of compensation is unclear, the parties may continue to negotiate the standard; where they cannot agree, the company shall pay 20 to 50 per cent of the worker's previous normal wage. The standard in Beijing is 20 to 60 per cent, in Tianjin not less than 50 per cent, and in Jiangsu not less than one third. For technical staff, Shenzhen provides for not less than 50 per cent, while Zhejiang calculates the annual compensation at two thirds of the total remuneration the person received in the last year before the contract ended.

In fixing the amount a company may agree any reasonable figure with the worker, but it may not be lower than the minimum standard laid down locally.

4. Is a non-compete clause without an agreed compensation still valid?

Under the Employment Contract Law, the invalidity of one part of an employment contract does not affect the validity of the rest. A non-compete clause that omits the compensation is therefore only partly invalid, not invalid as a whole. The local rules too are chiefly concerned to uphold the validity of such a clause.

The Shanghai Higher People's Court holds that where the company and the worker have not agreed the compensation, or the agreement is unclear, they may sign a supplementary agreement; and where the worker claims the compensation directly from the company, the court shall support him. It can be seen that Shanghai does not deny the validity of the clause outright, but allows the omission to be made good by a supplementary agreement and through the courts. The rule in Beijing is the same as in Shanghai.

What does make a non-compete clause invalid is a refusal by the company to pay the compensation. In Shanghai the rule is that where the company states expressly that it will not pay, the worker may rescind the clause. In Beijing and Jiangsu the rule is that where the company states expressly that it will not pay, the clause is not binding on the worker.

Where a non-compete clause omits the compensation, therefore, the company may agree a supplement with the worker. Once the compensation has been agreed, the company must keep to its duty to pay, or it will bear liability for breach.

5. May a company terminate a non-compete clause unilaterally?

A non-compete is an obligation for the worker and a right for the company: once the clause is signed the company is entitled to restrict him, but that right may be given up, and the company may cease to require him to bear the obligation.

In Shanghai judicial practice, for instance, where the company gives up its requirement before the clause takes effect or during its performance, it shall give the worker one month's notice. On that rule, once the company has given a month's notice the worker's obligation is at an end, and the company need pay no further non-compete compensation.