This article was initially published in Nikkei Asian Review and is reproduced with permission from the publisher.

The Chinese government announced plans in May to promote innovation-driven development, with the aim of becoming an 'innovative nation' by 2020, an international leader in innovation by 2030, and a scientific and technological powerhouse by 2050. As the country's economy shifts from manufacturing to innovation-driven technology, demand for talented workers will continue to rise.

However, since 2012, there has been a steady decline in the size of the working-age population, with the biggest drop coming last year with a 4.87 million fall to 911 million. Competition for skilled workers in China will thus continue to intensify, especially in industries such as e-commerce, high-tech, software development, mobile applications and digital entertainment where many domestic companies have been growing rapidly.

Given the complex regulatory environment, with rules that are often unclear or are applied inconsistently, it will be crucial for multinationals operating in China to defend against the loss of talent and know-how to local competitors.

It is common for companies in China to reward employees with large incentive bonuses at the end of the year or quarter, only to see high performers resign to join local competitors immediately afterward.

Companies need to stay on top of salary trends and develop smart incentive packages that reward workers not just for good performance, but also for long-term commitment.

Claw-back provisions and forfeiture clauses in bonus policies are prone to legal challenge in China. The courts normally take the view that it is unfair to take away what employees have earned through past performance on the basis of present conditions. However, when drafted carefully, incentive policies can maximize the value placed on long-term contributions and avoid paying workers who only pursue short-term rewards.

Many companies provide employee incentives in the form of overseas training or secondments. It is not uncommon for talented employees to pursue other opportunities, often with competitors, shortly after their return to China from such travels. A well-drafted and enforceable training contract is needed before the start of the training. China has a very different system of intellectual property protection from many other countries. Foreign-based confidentiality and non-compete agreements may be unenforceable in China, and relying on them can expose companies to loss of know-how and talent to local competitors. Many foreign-based non-compete agreements focus on defining competitive activities and using court injunctions to stop infringement. However, for agreements to be enforceable, Chinese law requires employers to pay compensation to employees for requiring them to sign, and injunctions are difficult to obtain. It is therefore important to include provisions prescribing monthly payment of the compensation due to employees and specifying the damages due from employees for every breach. In many jurisdictions, such penalty provisions are as uncommon as they are unenforceable, but they are very useful in Chinese non-compete agreements.

Differences in ethical standards and expectations between head offices and local employees in China can cause problems. Local industry practices may tolerate more regular sharing of company materials outside of work, or staff taking them home without returning them when employment ends.

To address this, employees should be regularly educated on policies about keeping company information secure and on rules about handling valuable or confidential information or property, including talking about company business in the media or on social media. These policies and rules need to be introduced through legally compliant processes, including employee consultation, in order to be binding.

Employees should also be asked to confirm the company's right to monitor any communications or activity that takes place in the company's premises or using its information technology systems.

Whistleblower protection

When employees decide to join local competitors, taking the company's secrets with them, the first people to find out are often work teammates.

In a country that values group harmony over speaking up, workers are unlikely to report policy violations unless there are clear procedures that encourage this and ensure that whistleblowers are protected. A clear procedure that provides strong protection for whistleblowers would therefore help to identify and defend against any intellectual property or trade-secret infringement by employees.

When a company finds out, say from a whistleblower, that its intellectual property or trade secrets may have been infringed by an employee, it may want to investigate the issue thoroughly before taking any action. This is especially important in China because the law gives employees so much protection.

However, the company also needs to investigate fast enough to avoid further transfers of confidential material by the wrongdoers, who might also be trying to persuade team members to join them in switching employers. It is also often difficult to investigate alleged wrongdoers if they are still part of the organization. Terminating contracts quickly may therefore help to contain the damage and prevent further losses.

Before making a decision, it is advisable to get an intellectual property and labor law expert to provide an assessment of the potential risk of infringement. Intellectual property infringement and breaches of non-compete agreements are difficult to prove in China. However, it is not impossible to win such cases. In July, the Shanghai Intellectual Property Court granted an injunction prohibiting a former employee of drug maker Eli Lilly from disclosing or using company trade secrets which the former employee had downloaded. Companies need to weigh the cost of bringing a lawsuit against the economic or reputational loss suffered and the prospects of recovering losses in the form of cash.

Some companies seek to enforce their rights by offsetting the amount of loss against money that is due to be paid to the employee. While this may breach the company's legal obligation to the employee, some companies that have made a thorough assessment of the preliminary evidence might take the risk. The employee might be unwilling to trigger a counter-claim for intellectual property infringement or breach of non-compete obligations by bringing a claim for outstanding pay.