China Non-Compete Agreements

Two provisions of the employment contract law determine liability for violations of a non-compete agreement: (1) The worker must, as agreed, pay a penalty for violations; and (2) the worker is liable for damages suffered by the employer if it exists. Proper enforcement of these provisions can effectively protect employers` trade secrets and prevent workers` violations. Interpretations (IV) are that, after the non-competition agreement comes into force, the employer pays non-competitive financial compensation after the non-competition agreement comes into force and even if the parties have not agreed on non-competitive financial compensation, financial compensation if the worker has complied with the obligations under the non-competition agreement. In addition, the employer has the right to unilaterally terminate the non-compete contract if it pays an additional three months` financial compensation for the obligations arising from that contract. If the employer has not paid financial compensation for three months, the worker has the right to terminate the contract by express deed. Therefore, the non-agreement on financial compensation does not result in the inevitable invalidation of the non-competition agreement, which has a binding effect on the parties and allows the company to continue to assert liability for liability in the event of a breach of the non-competition obligation. However, the company may be exposed to the risk of a non-compete clause of the separate worker. The no-competition period, that is, the period during which a worker may be banned from work after the departure of a direct competitor, may not exceed two years. It is unlikely that a court will pass an agreement with a non-competition period of more than two years (even if it is signed by the employee). It is important to remember that what is signed and agreed by both parties in the context of competition is not necessarily applied. Legal rules and uncertainties require companies to carefully consider whether signing competition is profitable.

Failure to take into account the long-term situation can result in very high costs, since non-competition prohibitions cannot be freely terminated without compensation from the worker. When developing a non-competition clause, a company should comply with existing legislation to ensure the validity of the clause.