According to China’s labour law, a non-competition agreement refers to a mutual agreement between a company and it’s employee which specifies that the employee can’t compete with their previous employer after the dissolution or termination of the labour contract. For example, an employee can’t work with a company which produces or sells similar products or is engaged in a similar business as his previous employer; nor can an employee-run a business producing or selling similar products or engaging in a similar business as their previous employer within a certain period.

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To whom does a non-competition agreement apply?

Though confidential agreement may apply to all employees of a company, the non-competition agreement is limited to certain employees, such as senior managers, senior technical personnel and other personnel with confidentiality obligations to a company. Generally speaking, senior managers refer to company managers, deputy managers, head of the financial department, the secretaries of the boards of directors of listed companies and other personnel stipulated in the company’s articles of association. Additionally, for companies in the manufacturing and technology industries, non-competition agreements also apply to all employees who have easy access to the company’s trade secrets, including senior research developers, technical personnel and skilled workers in key positions. Furthermore, other employees who may be aware of the company’s business secrets, such as marketing staff, accountants, secretaries and so on should also assume non-competition duty. In short, non-competition agreements apply to all staff who have access to the company’s key and important trade secrets.

Terms of a non-competition agreement

Generally speaking, the term of a non-competition agreement starts upon the dissolution or termination of the labour contract and shall not exceed two years. Even if the company illegally terminates the labour contract or the employee is forced to terminate the labour contract, the non-competition agreement is still binding for the employee. Of course, the premise is that the company pays compensation to the employee, as agreed.

The amount for the compensation

There is no uniform provision about the amount for the compensation. However, according to relevant judicial interpretation, the amount for monthly compensation should be something equal to 30% of the employee’s average monthly salary for the past 12 months before dissolution or termination of the contract, or no less than the local minimum salary. However, if the company does not pay any compensation, the employee is entitled to rescind the non-competition agreement, as long as:

– The company has failed to pay compensation as agreed for three months, and;
– the employee has notified the company his intention of rescinding in writing.

Penalty for breaching the non-competition agreement

In a non-competition agreement, the company may specify that the employee has to pay a penalty in case he fails to perform the non-competition duty as specified. There are no provisions regarding the specific standard for the penalty, but if the penalty is much higher than the actual loss suffered by the company, the court will probably reduce the amount of penalty, at its discretion.

Source: Sophie Mao from Law

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