In practice, a company might request its employees to sign a non-compete agreement with the aim of protecting the company’s interest. PRC Employment Contract Law(“ECL”) allow a company to enter into a non-compete agreement with its employee provided that the company comply with the requirements in respect of non-compete obligation as set forth by the ECL.
According to the ECL, not every employee should bear non-compete obligation. The non-compete restriction is limited to the company’s senior management personnel, senior technical personnel and other persons with an obligation of confidentiality. The scope, territory and term of a non-compete restriction should be agreed upon by the company and the involved employees.
Also, the term of a non-compete restriction should not exceed two years, namely, once an employment contract is terminated or ends, the term of the non-compete restriction that prohibits an employee from serving with a competitor that produces or deals in the same type of product or engages in the same type of business as the company, or prohibits him/her from opening his/her own business to produce or deal in the same type of product or engage in the same type of business may not exceed two years.
Additionally, the ECL requires the company to pay monthly compensation to the employee for the non-compete period; however, the law does not stipulate how much the compensation should be. In practice, the court or arbitration authority accept if the monthly compensation for non-compete restriction ranges from 20% to 60 % of an employee’s monthly salary.
If the employee fails to comply with non-compete restriction, the company is entitled to claim the liquidated damages as stipulated in a non-compete agreement. In the event that the liquidated damages stipulated in agreement are lower than the loss incurred, the company has the right to request the employee to assume the incurred loss. If the liquidated damages stipulated grossly exceed the loss incurred, the employee is entitled to petition the court or arbitration authority to reduce the amount of liquidated damages appropriately.
By Adam Li