Chinese company prohibits an employee from cooperating with other companies - a non-competition agreement under Chinese law

Often, foreign workers in China are faced with the fact that in the Chinese company where they work, they are forbidden to cooperate with other companies. In this case, a so-called non-competition agreement should be provided.

A non-competition agreement is an agreement under which, after the termination of the employment contract, the employee undertakes not to get a job in a competing company or open his own practice in this area. Employer protection clauses are included in the employment contract. Legislatively, these issues in China are regulated by the China Employment Contract Law (中华人民共和国劳动合同法 (2007年6月29日第十届全国人民代表大会常会第二十八次会议通过　根据 人民代表大会常务委员会第三十次会议)

So, let's analyze in which cases the non-competition agreement is invalid and what to do if it is invalid?

1. The subject matter of the employment contract is incorrect. An enterprise signing a non-competition agreement must be the owner of a trade secret, that is, there must be a trade secret, which is a very important condition for non-competition. In this case, the other party to the contract must be a person that meets the applicable conditions of non-competition. If the main conditions for signing the contract are not observed, the contract may be declared invalid.

2. Exceeding the term of non-competitive activities. Article 24 of the Law on Employment Contracts establishes that the term for limiting a non-competition agreement cannot exceed two years. That is, if the period agreed by both parties in the agreement exceeds two years, the excess part is considered invalid.

3. Lack of workers' compensation. When an employer forces an employee to sign a non-compete agreement, he must provide the employee with appropriate economic compensation. If the employer does not agree to pay economic compensation, the agreement will not be valid for the employee. If the non-competition agreement is invalid, the employer may enter into a new agreement with the employee.

Matters Needing Attention When Signing a Non-Competition Agreement

1. Clarify the scope of the non-compete agreement; the area of non-competition should be the production or operation of similar products. If it exceeds this statutory range, it will lose its binding effect on workers.

2. It is usually considered that the time of the beginning of the restriction is counted from the date of dismissal.

3. Conditions for entry into force. Under the Employment Contract Law and other relevant laws, in order for the ban on competition to take effect, compensation must be paid to the worker.

Similarly, Article 24　　of the "Employment Contract Law" stipulates that non-competitive personnel are limited to senior management personnel, senior technical personnel and other personnel subject to confidentiality obligations by the employer. If the employer and employees agree on a non-competition clause, it will be invalid due to an error in choosing the subject of such an agreement.

Consider the practice in the courts of China. Thus, in the "Opinions of the Shanghai High Court on several issues relating to the filing of an application", it is said that if negotiations do not reach an agreement, the employer must pay 20-50% of the amount of the employee's previous regular salary, and if the negotiations do not reach agreement, the period of restriction should not exceed two years;

The "Jiangsu Provincial Employment Contract Rules" stipulate that the annual amount of economic compensation should not be less than one third of the total amount of remuneration received by the employee from the employer in the twelve months prior to leaving the employer. If the employer is unable to provide economic compensation to the worker as agreed, the agreed non-compete clause is usually not binding on the worker.