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  • Misunderstandings of Economic Compensation for Non-competition Restrictive Covenant

    Misunderstandings of Economic Compensation for Non-competition Restrictive Covenant

    Many companies have signed a Non-competition Restrictive Covenant (the “NCRC”) with employees. However, the issues related to the economic compensation have been ignored in many cases, due to which many disputes arise.

    This article is aimed to sort out the relevant common misunderstandings and consequences for companies’ reference.

    Misunderstanding No.1: There is no agreed amount of the economic compensation.

    Analysis: If there is no agreed amount of economic compensation, the NCRC is still valid, and the specific amount shall be determined by the judicial authorities.

    Article 6 of the “Interpretations of Supreme People’s Court on Several Issues Relating to Laws Applicable for Trial of Labor Dispute Cases (IV)” (Fa Shi [2013] No.4, has been repealed on Jan. 1, 2021) prescribes that the compensation shall be paid monthly, and the normal amount shall be 30% of the average wage of the worker in the 12-month period preceding dissolution or termination of the labor contract; and the amount shall be made based on the minimum wage standard at the place of performance of the contract.. Article 36 of the “Interpretation of the Supreme People’s Court on Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (I)” (Fa Shi [2020] No.26, be effective on Jan. 1, 2021) has adopted the same article. Therefore, in the absence of corresponding local regulations, the local judicial authorities usually adopt the standard prescribed in the above interpretations.

    If there is any corresponding local regulation, normally the judicial authorities would adopt those regulations. For example, the “Labor Contract Regulations of Jiangsu Province” stipulates that the amount shall be no less than 1/3 of the worker’s monthly average wage; the “Regulations of Shenzhen Special Economic Zone on the Protection of Know-hows of Enterprises”, the “Regulations of Ningbo on the Protection of Know-hows of Enterprises” and some other local regulations stipulate that for those workers who are aware of know-how, the amount shall be no less than 1/2 of the worker’s preceding annual wage. Therefore, enterprises shall check whether there is any corresponding local regulation.

    Misunderstanding No.2: The agreed amount is much lower that the amount as stipulated in the judicial interpretation or local regulations.

    The current laws and judicial interpretations have not explained the validity of the NCRC when the agreed amount is too low. In judicial practice, normally, the NCRC would not be deemed as invalid due to this reason. Some local regulations have stipulated that such NCRC should be deemed as valid, such as the “Notice of the Civil Adjudication Tribunal No.1 of the High People’s Court of Zhejiang Province and the Employment Dispute Arbitration Court of Zhejiang Province on Promulgation of the Official Reply to Several Issues Concerning the Trial of Labor Dispute Cases (III)”. In addition, many judgments also reflect this point of view. 

    Regarding the difference between the agreed amount and the amount as stipulated in the judicial interpretation or local regulations, some local regulations have stipulated that the employer shall make up the difference, such as the “Regulations of Shenzhen Special Economic Zone on the Protection of Know-hows of Enterprises”. In some other provinces or cities, many courts also support the worker’s claim for making up the difference.   

    Misunderstanding No.3: If the employer fails to pay the compensation for more than 3 months, whether the NCRC is still valid.

    Article 38 of “Fa Shi [2020] No.26” only stipulates that where the employer, due to its own reasons, fails to pay economic compensation for three months and the worker requests rescission of the NCRC, the court shall support the request. However, this judicial interpretation has not mentioned whether the worker should implement the NCRC if he has not requested rescission of the NCRC. The main opinion in judicial practice is that the NCRC should not be invalid due to the employer’s failure in paying the compensation, such as (2021) Su 05 Min Zhong No. 1864, (2019) Hu 02 Min Zhong No. 7553, (2020) Jing 01 Min Zhong No. 755, and etc.

    However, some local courts hold different opinions, such as the “Guiding Opinions of Jiangsu People’s High Court and Jiangsu Labor Dispute Arbitration Committee on Trial of Labor Dispute Cases” stipulates that if the employer did not agree to pay compensation for NCRC, or failed to pay the agreed compensation, then the NCRC should not applied to the employee.

    In addition, it is worth noting that in July 2020, the Ministry of Human Resources and Social Security and the Supreme People’s Court jointly issued the “Notice on Jointly Issuing the First Batch of Typical Cases of Labor and Personnel Disputes”, in which Case 12 is about the NCRC, the arbitration commission held that according to the principle of fairness, if the employer failed to pay the compensation for 3 months due to its own reasons, after then, the worker executed a competition behavior, the worker’s behavior should be deemed as a termination of the NCRC, and finally the commission did not support the employer’s claim which was brought after 11 months since the relevant labor contract had been terminated.