(By Albert Chen) The system of competitive restriction is one of the major systems concerning the protection of trade secrets. In the beginning of 2013, the Supreme People’s Court of China (the “Supreme Court”) published its Interpretation IV on Several Issues concerning the Application of Law in Hearing Labor Disputes (the “Interpretation IV”). According to the new Interpretation, the rules related to the labor issue include: 1) a competitive restriction clause is valid when no article has been made regarding payment for the restriction; 2) removal of competitive competition due to delayed payment for the restriction compensation; 3) the employee may claim extra compensation when an employer terminates the restriction.
To remind foreign invested enterprises operating in China in order to avoid unnecessary disputes and prevent risk, our website has concluded the following rules in Interpretation IV:
I. Even if there are no agreements on compensation restriction, a competitive restriction clause could still be applied
According to Article 6 of Interpretation IV, when an employee has agreed with his/her employer to the competitive restriction, and yet no compensation has been clarified at the same time, the employee still has the right to claim compensation from the employer. As for the standard of compensation, it should be “30% of the average salary during the 12 months before the end or termination of the labor relationship.” However, when the 30% part is below the locally mandated minimum wage, the employer shall pay as per the local minimum standard.
In addition, it shall be noted that the condition for the employee to claim compensation from his/her employer subsequent to labor termination or the end of the labor relation. That condition is that the employee shall first fulfill his/her obligations pursuant to the competitive restriction. But in the author’s experience, generally an employee doesn’t have to prove his/her performance of the obligation, but rather the employer should demonstrate the employee’s failure to fulfill that duty when a labor dispute arises.
Actually, before the promulgation of Interpretation IV, several local courts oracticed their own rules regarding the compensation standard, and this regulation has varied among the regions. According to the Opinions on Several Issues concerning the Application of Employment Contract Law (the “Shanghai Opinions”):
“When there are no clear agreements regarding the restriction compensation, and no subsequent agreement could be concluded between the parties, the compensation shall be paid by 20% to 50% of the previous normal salary of the employee.”
Surely, the Shanghai Opinions help explain or define the “normal salary,” and yet in practice, it will be decided according to the average salary during the employment.
On the other hand, as provided in the Opinions on Several Issues in Hearing Labor Dispute by the No. 1 Civil Court of the Zhejiang Higher People’s Court (the “Zhejiang Opinions”), when there has been agreement to no articles on competitive restrictions, it would directly lead to the invalidity of the competitive restriction clauses. Also, in the Guiding Opinions on Several Issues concerning the Application of Labor Mediation and Arbitration Law and Employment Contract Law by the Guangdong Higher People’s Court, the Guangdong Labor Arbitration Committee (the “Guangdong Opinions”), after the work handover, stated when “the employer has made no promise to pay compensation to the employee, the competitive restriction clauses shall not be binding on the employee.” For sure, with the promulgation of Interpretation IV, any conflicting clauses would no longer be applied.
II. Delayed payment of compensation could terminate the competitive restriction clauses.
According to the new rules in Interpretation IV, when the payment of compensation is delayed due to the fault of the employer, and that delay totals more than three months, the employer can demand the termination of the competitive restriction clauses.
Similar clauses regulating that competitive restriction clauses can be terminated due to delayed payment of the compensation can be found in the Notice on the Guiding Opinions concerning the Hearing of Labor Disputes by the Jiangsu Higher People’s Court and the Jiangsu Labor Dispute Arbitration Committee I (the “Jiangsu Opinions I”) and the Notice on the Guiding Opinions concerning the Hearing of Labor Dispute by Jiangsu Higher People’s Court and Jiangsu Labor Dispute Arbitration Committee II (the “Jiangsu Opinions II”). According to the aforementioned opinions, when the employer has not paid compensation as per the agreement, or the agreed compensation is less than the statutory standard, and the employer has not made up for it for more than one month, the competitive restriction clause will not be binding on the employee.
Nevertheless, the above regulation appears to be more abstract as compared with Interpretation IV, and with the promulgation of the new rule, it would necessarily be replaced by the Supreme Court’s regulation.
III. The employer shall pay the employee extra compensation after termination
The other new rule in Interpretation IV is that it clarifies when an employer actively terminates a competitive restriction, the employee has the right to demand the employer pay him or her an extra three months’ compensation. Before this, neither the central government nor local governments have provided any regulations relevant to this issue. However, the author thinks the new regulation is overly corrected. The result is that this new regulation will likely increase the burden on the employer, and on the other hand, it will encourage employers not to terminate the restrictions even if the conditions have been met. For the employees themselves, they are also limited in terms of choosing new jobs.
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