(By You Yunting) Abstract: Many of Tencent’s non-competition contracts, recently reported online are likely not real due to obvious invalidity. If the contracts were genuine, one might wonder about the intelligence and morality of Tencent’s managers and officers. These agreements are arrogant, domineering, selfish and largely ignorant of relevant laws. It is hard to imagine how these contracts could come from a listed company with billions of dollars. Additionally, Tencent could possibly be required to pay large amounts of compensation to departing employees in order to fully comply with the relevant laws.
In recent days a Sina Weibo user revealed the content of Tencent’s non-competition agreement, writing that “Tencent started forcing employees to sign a non-competition agreement from August. If I were to leave Tencent, the only way out of non-employment is to go back home and plant vegetables…” (intimating that the blogger will not find a new job). The blogger, named “光明左使-杨逍”, disclosed the content on Sina Weibo, along with a partial photo of Tencent’s non-competition agreement. The main content of the alleged non-competition agreement of Tencent’s agreement is as follows:
Employee hereby confirms and warrants that the employee shall not engage in:
1. Participating in competitive businesses with Tencent within the working period of Tencent.
2. Establishing any working relationships with any third party, i.e., labor relations, service relations, labor dispatching, consultation, shareholders and partners, to operate businesses competitive with Tencent, (together with a rather long list that includes all main internet companies in China and some global technological giants such as Facebook, Twitter, Apple Inc. and Samsung [Tencent is notably not on this list]).
3. Self-Operation of the Three Following types of Businesses [coincidentally all three major parts of Tencent’s business] after departure from Tencent:
(1) Instant messaging
(2) Wireless value-added services and Internet value-added services
(3) Online games development and operation
4. Taking away Tencent’s trade secrets after departure from Tencent.
Tencent confirms and warrants that:
- The value of employee confidentiality and non-competition is paid with Tencent’s share options.
- If an employee violates commitments of confidentiality and non-competition, the income from share options shall be returned to Tencent.
Liability for breach of contract:
- Should the employee violate this contract, Tencent is entitled to invalidate unexercised share options and request the income from share options that have been exercised.
- Employee shall make compensation for the losses caused to Tencent, if any, due to the employee’s fault, including, but not limited to damages, employee’s benefits and reasonable fees for rights protection.
First, let’s distinguish the fact from fiction. As far as I am concerned, this contract is fundamentally invalid. If this contract were a genuine one, it would make me question the intelligence and morality of Tencent’s managers and officers. Moreover, it is hard to imagine how this arrogant, domineering, selfish and invalid contract could have originated from a listed company with billions of dollars. Additionally, in order to even entertain the idea that such a restrictive non-competition agreement could be enforced, Tencent would likely have to pay departing employees a significant amount of money to prevent any subsequent legal risks. The three major issues in this contract are the following:
I. Misinterpreting the laws on the non-competition system and trampling an employee’s right to employment
The original intention of the legislation creating the non-competition system was to protect an enterprise’s trade secrets. This legislation stipulates that an enterprise may sign a non-competition agreement with senior management personnel, senior technical personnel and other personnel obligated to keep its trade secrets. The scope of the non-competition clauses in Tencent’s alleged contract includes instant messaging, wireless value-added services and internet value-added services, as well as online game development and operation; covering almost all businesses that typically operate within the Internet and online industry.
If the previous contract were made by Tencent, its employees ought to feel disenchanted with the knowledge that such a restrictive agreement deprives them of nearly all of their employment rights and ability to engage in entrepreneurship related to the Internet, regardless of the scope of your previous work done with Tencent. It is known that the Internet promotes the spread of knowledge and empowers individuals with a greater ability to exercise self-expression. The presence of Internet enterprises brazenly infringing employees’ rights to employment makes a mockery of both the non-competition legislation and the ideology of the Internet.
If a contract is beyond the rational limitations placed by legislation, there is a question of validity pursuant to the Labor Law, as laborers have the right to be employed on an equal basis and choose their occupations, and the Constitution of the People’s Republic of China, which guarantees that citizens have both the right and the duty to work. The contract being reported online is a double-edged sword, which protects the enterprise to the greatest extent but tramples on the employment rights of departing employees by depriving them of their reasonable interests in being gainfully employed. In my personal opinion, the contract in question is invalid, because it contains a broad scope too far beyond the reasonable demands of trade-secret protection, and infringes on the statutorily guaranteed rights of employees.
II. Non-payment for non-compensation violates the Labor Contract Law.
The contract in question contains an incredibly broad scope of non-competition, and clearly requires too many obligations from its employees. Surprisingly, in addition to such a broad scope of non-competition requirements, the contract provides comparatively little compensation for departing employees; the compensation provided is only paid through share options, which clearly violates the law.
There are two problems regarding the compensation: one is the time of compensation. As the Labor Contract Law stipulates, employing units must agree on the monthly economic compensation payable to the laborer within the competitive period of restriction after the rescission or termination of the labor contract; therefore, the compensation for non-competition must be paid to the laborer after termination of the labor contract. However, the compensation in the contract in question is paid before termination of the labor contract.
The next problem is that the contract must not consider the normal income of the employee within the period of the labor contract as compliance with the requirement for non-competitive compensation. The Labor Contract Law requires that the compensation for non-competition is calculated separately from company expenses, and must be no less than 30 percent of an employee’s typical revenue. However, the contract in question regards an employee’s revenue as sufficient non-competition compensation. In fact, share-option income is also a part of an employee’s revenue, and should be contained within the revenue base, rather than considered the compensation for non-competition itself.
Finally, from the perspective of the original intention of the compensation system for non-competition, an enterprise must make compensation for a laborer’s compliance to the agreement for the purpose of trade-secret protection and non-engagement in competitive business activities. It is clearly in violation of the non-competition system if employing units consider an employee’s income as compensation for non-competition. In other words, the contract in question intends to receive the absurd result of non-competition without payment. If the contract in question were true, my feeling is that Tencent treats its employees very poorly indeed.
III. Tencent could potentially face paying a large amount of compensation for non-competition.
As far as I am aware, Tencent signs non-competition agreements with virtually all of its employees. If the contract in question is true, then according to the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (IV), the laborer, if he or she fulfills his or her non-competition obligations by not being employed or operating competitively in the same field of work previously done at Tencent, is entitled to file a lawsuit against Tencent for economic compensation. I would add that the scope of non-competition should rely on principles of justice instead of the scope of the contract leaked online.
According to the Interpretation, where the parties stipulate non-competition clauses in a labor contract or confidentiality agreement without stipulating payment of economic compensation to the laborer after rescinding or terminating such a labor contract, and the laborer has fulfilled his/her noncompetition obligations, the People’s Court will support the laborer’s application for obtaining economic compensation of no less than 30% of the laborer’s average wage within the past 12 months before the rescinding or termination of his or her labor contract with their employer.
Were the contract in question genuine, as previously stated, and should the non-competition clauses be invalid, they would agree on non-competition clauses without stipulating payment of economic compensation in the contract, in accordance with the Interpretation. The departing employee, if it could be proven that he has not engaged in the same work as previously undertaken after terminating the contract, may be deemed to have fulfilled his or her obligations of non-competition. If he applies for labor arbitration, he may have an opportunity to obtain economic compensation for less than a period of 2 years, counting from the termination of said labor contract, and about 30 percent of the average wage, within a year before termination from Tencent on a monthly basis. That is, multiply the above number by detailed months where the obligation has been observed and you get the proper amount of economic compensation.
If the contract is genuine and Tencent actually signed a non-competition agreement with all of its employees, there is a substantial likelihood that Tencent will be required to pay a large amount of economic compensation to its employees on duty, in addition to departing employees. In my mind, Tencent, as a listed company, ought to consider if it might be necessary to publish a notice on the Hong Kong Stock Exchange for the purpose of warning investors of possibly serious expenses.
To conclude, in my opinion the contract in question, if in fact genuine, evidences extreme corporate selfishness, as well as further evidence of irrational and highly visible local judicial protectionism. There is a word, “win-win,” in modern society. No one that likes working with those who cherish their self-interests and who ignore, nay, even trample on other’s legal interests to realize their own. The superlative matter here is not trade-secret protection. It is this: An enterprise should combine the need to protect trade secrets with the need to respect and uphold an employee’s rights to employment and payment of compensation, in accordance with the relevant laws and regulations. Otherwise, gradual loss of support from employees may make an enterprise like Tencent collapse prematurely. On the surface, what seems like a rather well written contract can be revealed as short-sighted. Were this contract genuine, it would be unclear whether the contract drafters for Tencent are simply incompetent or actually immoral.
Although such provisions as evidenced in this contract are invalid, an enterprise as large as Tencent would not blatantly violate such laws without support from local governments and judicial organs. Due to this poorly hidden pact, the judiciary in these jurisdictions, as well as local labor arbitration committees, may well find such clearly invalid contracts to be valid and sound.
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