Case:A consultingunit servedby our team set up a non-compete clause in itsNDA with an employee,and afterthe employee resigned, the unit didnot pay the non-compete compensation to such employee, and then the employee filed a labor arbitration against the unit.

I. Conceptof Non-Compete:

Theemployer shall agree on a non-compete clause in the employmentcontract, intellectual property rights ownership agreement ortechnical confidentiality agreement for workers who are responsiblefor keeping the employer’strade secrets.That is, theworker shall neither,within a certain period after the termination or dissolution of theemployment contract, take up employment with an employer thatproduces similar products, engagesin similar businesses or has other competitive relationships, nor shallhe or she produce similar products or engagein similar businesses that are competitive with the original employer. Theduration of the restriction is agreed in advance by the parties, butmay not exceed two years. The Non-compete Clauseis a delayed effective clausein the employment contract,which becomeseffective after the other provisions of the employment contract haveceased to be legally binding.

II. Doesnon-compete compensation have to be paid?

Where there’sa non-compete agreement between the enterprise and the employee, theenterprise must pay compensation to the employee.

Legalbasis:

Article23 of Labor Contract Law of the People's Republic of China: Anemployer may enter an agreement with his employees in the laborcontract to require his employees to keep the business secrets andintellectual property of the employer confidential.

Foran employee who has the obligation of keeping confidential, theemployer and the employee may stipulate non-competition clauses inthe labor contract or in the confidentiality agreement and come to anagreement that, when the labor contract is dissolved or terminated,the employee shall be given economic compensations within thenon-competition period. If the employee violates the stipulation ofnon-competition, it shall pay the employer a penalty for breachingthe contract.

III. Doesthe non-payment of non-compete compensation signify that the companyvoluntarily terminates the non-compete agreement with the worker?

Thenon-payment of non-compete compensation does not mean that thenon-compete agreement is discharged. The non-compete agreement mustbe notified expressly in writing, otherwise the company will stillpay the compensation.

Ifthe two partiesto an employment contract only agree that the worker shall performthe obligations of the non-competition, but do not agree whether topay compensation to the worker, or if they agree to pay compensationto the worker but do not expressly agree on the specific criteria forpayment, the Non-compete Clausemay be considered binding on both parties based on the parties’ unanimousintention regarding the non-competition. Ifthe amount of compensation is unknown, the parties may continue tonegotiate the rate of compensation; if no agreement can be reachedthrough negotiation, the employer shall pay 20-50% of the worker’sprevious normal wage. If the negotiation fails, the restriction period shall not exceed a maximum of two years. (Fordetails, see the Opinions on Several Issues regarding Application of the LaborContract Law issued by Shanghai High People’sCourt).

Article written by:Zhang Xintian and Zhou Haibo