In recent times, the legal concept of non-compete agreements has gained significant attention in the public eye. What exactly are non-compete agreements? From a legal standpoint, what areas should be primarily restricted? How can non-compete agreements avoid becoming overly broad?
This past May, a technician at an internet company in Hangzhou, Zhejiang province, known as Kong Long (a pseudonym), received an unexpected message. His previous employer, an e-commerce company in Shanghai, initiated labor arbitration against him, claiming a violation of the non-compete clause and seeking a staggering compensation of 1.4 million yuan. Kong calculated that this amount was equivalent to his total salary over the past two years.
According to the Labor Contract Law of the People’s Republic of China, employers can stipulate non-compete clauses in labor contracts or confidentiality agreements for employees who have confidentiality obligations. Additionally, it allows for economic compensation to employees during the non-compete period after the termination of their employment.
Kong expressed that the non-compete agreement established by his former company was excessively stringent. As a junior technical staff member, he found the nine-month non-compete period unreasonable, stating, “This essentially makes it very difficult for me to find another job during this time, which is a huge impact on my career.”
As non-compete agreements increasingly enter the public discourse, questions arise: What exactly is a non-compete agreement? What are its legal requirements? What is the appropriate extent and scope of non-compete clauses? To delve deeper into these queries, our reporters conducted an interview.
**The Dilemma of Non-Compete Agreements: Are Junior Employees Included?**
Kong felt a sense of helplessness when he learned about the arbitration claim against him. In July 2020, he graduated and went through multiple rounds of interviews to secure a job with the Shanghai e-commerce company as a technical staff member. Along with signing the labor contract, he also signed a supplementary non-compete agreement, which he initially understood merely as “a measure against unfair competition.” He did not think it would affect someone at his level and signed it without much consideration.
“I entered the company through a campus recruitment program and didn’t feel I had much leverage. If I questioned the agreement or refused to sign, it could jeopardize my chances of getting the job,” Kong reflected.
Once on the job, he realized the reality was different from what he initially thought. “Many of my junior colleagues faced non-compete enforcement after leaving; if they didn’t comply, they were hit with hefty penalties,” he noted.
In May 2023, Kong decided to resign. His supervisor informed him that the company would enforce the non-compete agreement against him. “I was stunned. I was a low-level employee and rarely had access to sensitive data. Why was I being subjected to a non-compete?” he said.
Despite believing the company’s actions were unreasonable, Kong complied to secure his resignation paperwork. During the exit process, he was required to sign a supplementary non-compete agreement, which stipulated that the company would provide him with compensation equal to 30% of his basic monthly salary. “Since most of my salary was performance-based, that 30% was barely a drop in the bucket,” he explained.
In September 2022, another technician named Hu Nuo (also a pseudonym) left a Shanghai-based e-commerce company and did not receive any non-compete compensation for several months, yet was still bound by the agreement.
“Zero compensation for non-compete,” he attributed to a two-year-old agreement signed when he joined the company. Shortly after starting there, he was awarded stock options, which were originally categorized as part of his compensation package. A supplementary agreement confirmed that these would serve as his non-compete compensation.
Though perplexed, Hu felt he had to adhere to the agreement and avoid employment with competitors. After leaving the job, he faced increased family expenses with the recent arrival of his child, pushing him to seek alternative employment.
Stories like Kong’s and Hu’s, where individuals question the fairness of non-compete agreements, are not uncommon. A professor at Capital University of Economics and Business, Feng Wei, pointed out that the Labor Contract Law limits non-compete obligations to “senior management, senior technical personnel, and other employees with confidentiality responsibilities.” However, some employers have broadened the criteria for these restrictions, even extending them to employees’ spouses and family members, which can lead to an overreach of non-compete regulations.
**The Non-Compete Quandary: Is Switching Careers the Only Option?**
As financial pressures mounted, both Hu and Kong found themselves on the job hunt but soon faced problems: the scope of non-compete restrictions was so broad that it limited their options significantly.
Upon resigning, they were required to sign a supplementary agreement that specified the non-compete restrictions extended to any businesses similar to or in competition with their former employer or its affiliated companies—many of which were major players in the internet sector, including firms where their former company held significant stakes.
“I wanted to find a small startup not listed in the non-compete clause, but after months of searching, I had no luck,” Hu lamented. Months later, he received a job offer from a major internet company, which was included in the non-compete list. Reluctantly, he accepted the position.
Simultaneously, his former employer initiated labor arbitration against him for not receiving monthly compensation during the non-compete period, seeking to declare the agreement invalid. However, the labor arbitration committee in Changning District, Shanghai, did not support Hu’s claims.
Kong’s experience was similar: “All internet companies are competitors. How can I avoid violating the non-compete agreement? The only option seems to be switching careers entirely, as even joining a small startup may put me at risk of violating the agreement,” he commented.
Toward the end of last year, Hu found himself in a legal battle when his former company claimed to have evidence of his employment with a competitor and sought 500,000 yuan in damages for breach of the non-compete clause.
As the case unfolded in the spring, Hu maintained that he held a low position and should not have been subjected to such restrictions. The company argued he had access to trade secrets, justifying the non-compete status, yet they failed to provide evidence regarding what constituted those secrets. “My lawyer explained that the courts conduct a formal review rather than a substantive one,” Hu elaborated.
Labor Contract Law stipulates that the scope, region, and duration of non-compete agreements must be mutually agreed upon by both parties, not exceeding two years for individuals moving to direct competitors after their contract ends.
Lawyer Liu Yingjie from Shanghai Dehe Hantong Law Firm noted that some companies further complicate the definition of “competitive relationship” in non-compete agreements, which may lead to an expansive interpretation of the terms.
Professor Liu Junhai from Renmin University pointed out that while protecting commercial secrets is essential, it should not overshadow the protection of employee rights. He emphasized that companies should bear the burden of proof regarding whether employees have access to commercial secrets; if they fail to do so, they should be held legally accountable.
One interviewee, impacted by a non-compete clause initiated by their previous employer, mentioned that while receiving 30% of their monthly salary as compensation, it was insufficient to cover living expenses in a major city.
Liu Yingjie highlighted a regulation effective from January 1, 2021, which states that if a labor agreement includes a non-compete clause without specifying economic compensation, the court should uphold a request for a monthly payment equal to 30% of the average salary from the previous twelve months, or the local minimum wage if that percentage falls below it.
Interestingly, compensation in the form of stock or stock options is not strictly prohibited. In a 2023 study by the Beijing First Intermediate People’s Court, judges indicated that while the Labor Contract Law does not mandate monetary compensation for non-compete agreements, terms that are favorable for the employee can still be recognized as valid; if unfavorable and contested in court, they may be deemed invalid.
It is crucial for employees to thoroughly review non-compete terms before resigning, ensuring clarity on compensation, duration, breach penalties, and other significant points to avoid misinterpretations or disputes.
Feng reiterated the need to clarify the core objectives of legislation regarding non-compete clauses, as practices like unnecessarily extending the periods and scope of such agreements are becoming increasingly common. Liu Junhai suggested further legislative modifications to define the essence of non-compete clauses clearly, balancing the rights of workers while ensuring companies can also protect their interests. “The law should maintain a sense of equity; it needs to support the vulnerable and restrain the powerful,” he concluded.