New Labor Rules Clarified Non-Compete and Other Employment-Related Issues

11 June 2009 Publication

Article

On June 29, 2007, the Standing Committee of the National People's Congress (NPC) of the PRC adopted the new Labor Contract Law (LCL), which came into effect on January 1, 2008. The corresponding Regulations on the Implementation of the PRC Labor Contract Law (Implementing Regs), adopted by the State Council, were made effective on September 18, 2008.

The LCL clarifies that a non-compete clause or agreement must satisfy certain conditions: (1) applicable only to senior managers, senior technicians, and the other employees who have confidentiality obligations; (2) duration not exceeding two years after the dissolution or termination of labor contracts; (3) the scope, territory, and duration being agreed upon by former employees in writing; and (4) the former employee is paid consideration post-employment for undertaking non-compete obligations during such period. Neither the LCL nor its Implementing Regs address what constitutes an adequate amount of compensation. Therefore, existing local regulations still govern the minimum amount of compensation for undertaking non-compete obligations. Local compensation requirements vary from one-third to two-thirds of the former employee’s annual remuneration received prior to his or her departure. For example, in Ningbo, the mandatory annual non-compete compensation shall not be less than half the total remuneration received by the former employee during the last year prior to his or her departure. In Shenzhen, the amount of annual non-compete fee shall not be less than two-thirds of the total remuneration received by a former employee during the last year prior to his or her departure.

The new labor rules imposed more obligations on the employer to protect employees’ interests. One aspect relates to the term of labor contract: A series of short-term contracts may in fact result in a binding non-fixed term contract that may subject employers to pay additional severance. Another aspect relates to a limitation of damages to be paid by employees for breach of employment contract. An employer can only obtain damages for breach by an employee based on two grounds: (1) violation of confidentiality and non-compete obligations; and (2) violation of service period where an employee received employer-provided training, and the maximum damages shall not exceed the invoiced employer-paid training expenses.   

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