- New rules could make it more costly for employers to enforce noncompetition clauses
- If a clause fails to provide a compensation amount for the noncompetition obligation, the court will not support employers’ enforcement requests
- Enforceability of noncompetition clauses is now tied to cause of termination
- Final adopted rules may address remaining questions related to invalidation of clauses and performance of the noncompetition obligation
On 27 June 2012, the Supreme People’s Court issued a draft of “Interpretation (4) on Several Issues Concerning the Application of Law to the Hearing of Labour Dispute Cases” (Draft Interpretation) for public comment.
The Draft Interpretation includes 18 articles discussing issues including court jurisdictions, termination and severance pay, employers’ internal rules, noncompetition clauses, employment contract amendments and foreigners working in China.
The Draft Interpretation devotes four articles to noncompetition clauses, an issue creating a lot of disputes between white collar employees and their former employers.
The Draft Interpretation clarifies that if the noncompetition clause fails to provide the compensation amount for the noncompetition obligation, the court will not support the employer’s request to enforce the obligation. But if the employee performs the noncompetition obligation, even if there is no agreed-upon compensation amount, the court will support the employee’s claim for compensation, which will be calculated based on the average monthly salary of the 12-month period immediately before the termination (under the current practice, the court designates an amount of 20 to 60 percent of the normal monthly salary). The Draft Interpretation further provides that while the noncompetition clause itself is enforceable – i.e., it has provided the compensation amount for the noncompetition obligation – if the employer fails to pay the compensation for more than one month, the clause is no longer enforceable unless the employee agrees.
Cause of Employment Termination
The Draft Interpretation also ties the enforceability of the noncompetition clause to the cause of the termination. If employment is terminated by mutual agreement, the clause will continue to be valid and enforceable unless the employer and employee specifically agree to terminate it. If the employer terminates employment wrongfully or the employee terminates employment because of the employer’s violation of law (termination based on Article 38 of the Labour Contract Law), the employer is not entitled to request that the noncompetition obligation be enforced unless the employee agrees. Likewise, for wrongful termination by the employee or termination by the employer due to the employee’s fault, the employee must perform the noncompetition obligation if the employer requests him or her to do so.
It is clear that the Supreme Court’s theory is no one should benefit from his or her own wrongdoing. Such articles in the Draft Interpretation also indicate that the non-defaulting party has the option to enforce the noncompetition clause in a wrongful termination case.
Terminating Noncompetition Clauses
The Draft Interpretation further provides that termination of a noncompetition clause must be done through mutual agreement. The only exception is the employer terminating the clause unilaterally by giving 60 days prior notice if the termination was related to the public disclosure of trade secrets or confidential information regarding intellectual property rights; in this case the noncompetition obligation becomes unnecessary. This is different from the current practice in some cities – for example, Beijing – where the employer has the option to waive and release the employee from the noncompetition clause by giving written notice.
Noncompetition clauses are viewed as a way to protect the employer’s interests. Although the Labour Contract Law makes it clear that such a clause should apply only to senior-position employees or others that have a confidentiality obligation, in practice it is commonly inserted into the employment contract of ordinary white collar employees. The Draft Interpretation seems to try to balance the situation by making it more costly for the employer to enforce the clause (i.e., courts can order the employer to pay a higher rate of monthly compensation, noncompetition clauses can be invalidated if the employer fails to provide compensation and the employer may not unilaterally waive or terminate the clause) so it will be more careful when considering whether to include it in the employment contract. However, the four articles proposed in the Draft Interpretation also raise questions regarding whether an employer that does not want to enforce a noncompetition clause can still easily get out of it simply by not paying the agreed compensation. The Draft Interpretation makes it clear that if the employee performs the noncompetition obligation the employer must pay based on the average monthly salary. However, the next question is what will be considered sufficient evidence of the employee’s performance of the noncompetition obligation and whether the fact that the employee does not work for any employer during the noncompetition period is sufficient.
It will be interesting to see whether these questions are answered in the final adopted interpretation.