China employee non-compete agreements and provisions are an often-litigated area. Many employers (wrongly) assume that they cannot prevail in such a dispute because employees usually win. This belief is not only wrong, but also risky. It is wrong because Chinese courts do not automatically side with the employee; those rare employers that have done things the right way actually usually win. It is also risky because employers with this attitude and approach tend to do an even poorer job of making sure they have a well-crafted contract, complying with the law and preserving good evidence, which are keys to employer success in any employee dispute.
Let’s look at a fairly recent case in Guangdong. The employee was hired as a brand manager and was then promoted to project manager. The employee’s monthly base salary was low: he started at RMB 3000 per month and it was then raised to RMB 4000 per month, plus commission. The employee signed a three year employment contract and he also executed a confidentiality agreement stating that if he violated any term of the agreement, such as competing with his employer in any way, he would be liable for contract damages of twice his total income during the preceding 12 months before termination. There was no agreement on any non-compete compensation. A few months before the employee left his employment, he formed his own company with essentially the same business scope as his employer, and in the same city. The employee was the legal representative of that new company. A few months later, the employer eventually fired the employee and he then sued his former employer, demanding unpaid salary and commissions and double severance for wrongful termination.
The procedural history is somewhat messy (with multiple labor arbitrations and lawsuits), but essentially the employee lost in the lower court and then appealed and lost again. The employee then petitioned to the Guangdong Province High People’s Court for retrial and lost again.
The primary arguments set forth by the employee were as follows: (1) He was not paid any compensation for not competing, so the non-compete should not be upheld. (2) He was a low-paid ordinary employee with no access to confidential information so the non-compete was never valid in the first place. (3) The contract damages in the confidentiality agreement were grossly disproportionate to his salary, so requiring him to pay such a large amount would be greatly unfair.
The court decided against the employee on all counts, finding that: (1) The employee had a duty not to compete with his employer during his term of employment and the employer was not required to pay employee any compensation for preforming the non-compete obligations during such period. (2) The employee signed a confidentiality agreement binding him not to disclose his employer’s confidential information and not to compete with his employer. (3) The employee failed to present any evidence proving the contract damages were so high as to be unfair.
The employee was ordered to pay around 130,000 RMB to his previous employer per the agreed contract damages provision, an amount nearly 33 times his monthly base salary.
There is much to be learned from this case about China employee non-competes, including the following:
- A non-compete with a fairly low paid employee can be enforceable. The key is more the position than the pay.
- Generally speaking, an employer is not required to pay non-compete compensation during the term of employment.
- It is possible to enforce a contract damages provision in an employee non-compete. If you want your non-compete provisions to have real teeth, consider adding an appropriately crafted contract damages provision to your employment contracts that contain a non-compete provision or to your non-compete agreements.
- Proving actual damages in a non-compete dispute is usually difficult and this is all the more reason why you should have a contract damages clause in your employment contracts with non-compete provisions or in your non-compete agreements. See China Contract Damages: More Art than Science, for why contract damages are critical to most China contracts and for how to determine the proper amount of damages to put into your contract.
- Lastly, before you hire any new employee make sure your potential candidate is not violating a non-compete agreement with his or her previous employer because the last thing you want is for your company to be sued by that previous employer. These sorts of lawsuits are becoming increasingly common in China and the Courts are often quick to favor them.