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China – Securing IP Through Employee Non-Compete Obligations.

2 March, 2013

 

IP protection in China requires the implementation of various strategies. The imposition of post-termination non-compete obligations on employees who have access to IP should be considered. This e-bulletin sets out the basic requirements to ensure the effectiveness of post-termination non-compete obligations.

 

Background

 

The PRC Labour Contract Law specifically permits an employer to include post-termination non-compete obligations in labour contracts or confidentiality agreements with certain employees. Such clauses may prohibit an employee from working for one of the employer’s competitors, or from engaging in the same business as that of the employer, for a certain period of time following the termination of his/her labour contract with the employer.

 

Only senior management, senior technical staff and any other staff who have confidentiality obligations may be subjected to post-termination non-compete obligations. Moreover, the following requirements must be satisfied in order for such a clause to be valid:

 

  • the employer is required to pay the employee monthly compensation during the agreed non-compete period; and
  • the non-compete period may not be longer than two years in duration.

 

The geographic area and specific scope of non-compete may be agreed between the parties. Although not explicitly required by law, such restrictions should be reasonable.

 

Compensation

 

One of the trickier aspects of post-termination non-compete obligations has been the amount of compensation that must be offered. Until very recently, there was no national-level guidance on how much was enough. Although some local guidance was issued, parties in most areas in China were left to negotiate the amount. The risk for employers was that a labour arbitration tribunal or court would find a clause invalid due to insufficient compensation being specified. Contracts that were entered without specifying a particular amount ran the risk of enforcement issues when an ex-employee refused to accept the amount offered.

 

Recent interpretations from the PRC Supreme People’s Court (SPC) have now provided national-level guidance. The interpretations provide that if the amount of compensation is not specified in a post-termination non-compete clause, and the employee has duly performed his/her non-compete obligations, then the compensation for each month should be 30% of the employee’s average monthly salary over the previous twelve months. If such amount is lower than the local statutory minimum salary, then the compensation each month shall be equal to the local statutory minimum salary.

 

For clauses currently being negotiated, the 30% rule might be taken as the minimum allowable compensation for a post-termination non-compete clause to be valid. The parties would, of course, be free to agree to a higher compensation amount.

 

Early termination

 

The SPC interpretations also provide that:

 

  • An employee may terminate a non-compete clause if, for reasons attributable to the employer, the employer fails to pay the non-compete compensation for at least three months.
  • An employer may terminate a non-compete clause at any time, provided that the employee is offered additional compensation equal to three-months of the non-compete compensation.

 

 

 

For further information, please contact:
 
Betty Tam, Partner, Herbert Smith, Freehills
betty.tam@hsf.com 

 

Karen Ip, Partner, Herbert Smith Freehills
karen.ip@hsf.com
 
Andrew Tortoishell, Partner, Herbert Smith, Freehills
andrew.tortoishell@hsf.com 

 

 

 

 

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