Different Local Regulations on Compensations and the Effect of Non-competition Agreement

The system of noncompetition is regulated in China Labor Contract Law, “If　a　Employee　has　a　confidentiality　obligation,　the　Employer　may　agree　with　the　Employee　on　competition　restriction　provisions　in　the　employment　contract　or　confidentiality　agreement,　and　stipulate　that　the　Employer　shall　pay　financial　compensation　to　the　Employee　on　a　monthly　basis　during　the　term　of　the　competition　restriction　after　the　termination　or　ending　of　the　employment　contract.” By the article, a financial compensation is demanded for the conclusion of non-competition agreement, while no legal regulation on the effect of such articles when no compensation is paid. Therefore, on the issue, the adjudication or decision made by local courts or labor arbitration committee in China varies much, and today’s post is our analysis on it.

I. Different standards in local

Despite the legislature in China is unified, each province may make its own interpretation or judicial opinions on the laws, which shall also be the reference in case hearing. For the relationship between compensation and non-competition clause effect, there have also promulgated different judicial opinions as concluded as follows:

1. Shanghai: the payment of financial compensation produces no influence on the effect of the non-competition clauses

By Several Opinions on the Application of Labor Contract Law by Shanghai Higher People’s Court (note: the link is in English), its Article 13 says that when the agreement of non-competition between employers and employees, but no agreement on the compensation or no specific regulations on the compensation payment, the non-competition agreement may still be deemed effective basing on the intentions of the parties. By the Opinions, the clauses on non-competition shall be effective no matter the compensation has been paid or not, and it shall binds the employee who shall be also entitled to demand the payment of compensation.

2. Jiangsu and Zhejiang: no payment of compensation may lead to the invalidity of the non-competition clauses

By Article 13 of the Guideline on the Hearing of Labor Dispute (note: the link is in English) issued by Jiangshu Higher People’s Court, when no compensation is agreed in the non-competition clauses or no such payment has been made on the compensation agreed, the clauses of the non-competition shall not be legally binding. This provision is contrary to the one in Shanghai, by which the employee shall not adhere to the non-competition clauses when no compensation has been paid by the company. Not alone, the similar provisions are also adopted in Zhejiang provinces, and it even regulates the unreasonable low compensation could also be a condition to the invalidity of the non-competition clauses.

3. Beijing: the refusal on the payment of compensation will make the non-competition clause invalid

By the relevant regulations in Beijing (actually a meeting minute of a Beijing Higher People’s Court) (note: the link is in English), the non-competition will not be binding on employees when the employer express its refusal on the compensation payment, while it shall remain effective when only emerges the dispute over the amount, payment date or method.

II. Opinions from us

Basing on the regulations in provinces, we agree the provisions in Shanghai more with the following reasons:

1. it’s more sound in judicial theory claiming the effective of non-competition clauses

For no specific regulations in Labor Contract Law on the non-competition clause’s effectiveness, therefore it shall be considered by the Contract Law, which regulates that the contract shall come into effect on its conclusion by the law, and that means any contracts between employees and employers shall be effective once it’s signed by the parties, even it lacks the necessary clauses which may be amended on the negotiation or supplementary agreement by the parties, and it shall not mean it has less binding on the parties. And the same, when a party is in material breach against the contract, the other party has the right to terminate the agreement by the Contract Law, and before the termination, the other party shall not be exempted from its liability.

2. The claim of validity of non-competition clauses shows more fairness

The employees subject to the non-competition agreement are normally the senior manager or major technician of the company and it may trap the company in a disadvantage situation when such employees are free to choose a new company on the defect of the compensation payment which leads to the invalidity of the agreement. Also the order of market may also be influenced. Therefore, to determine the effective of the contract could not only grant the employee the right to demand the compensation but also a chance to make up for the company, which seems to be more fairness.

Author: Mr. Luo Yanjie
Attorney-at-law of DeBund Law Offices
Co-author: Mr. You Yunting
Founder & Editor-in-Chief of Bridge IP Law Commentary
Partner & Attorney-at-law of Shanghai DeBund Law Offices
Email: Bridge@chinaiplawyer.com, Tel: 8621-5213-4900,
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