In the realm of employer-employee relationships, it’s crucial to establish legal safeguards to protect trade secrets and prevent unauthorized disclosure. Two commonly used measures are the confidentiality agreement and the non-competition agreement ( You may check our previous post for more information: Non-competition Agreement in China Labor Law. However, these terms often create confusion among both employees and employers, leading to misconceptions and misunderstandings. In this post, we will shed light on the differences between confidentiality agreements and non-competition agreements, outlining key aspects that set them apart:
1. Nature of Liability
A confidentiality agreement imposes a statutory or contractual obligation on employees to maintain the employer’s trade secrets, regardless of whether such an agreement is signed. The duty of confidentiality is inherent in the employment relationship. On the other hand, a non-competition agreement is a mutually agreed upon obligation between the employer and employee. The employee is only bound by the non-competition obligation if a specific agreement is in place.
2. Focus of Liability
Confidentiality obligations primarily center around the prohibition of disclosing the employer’s trade secrets. The employee is required “not to disclose” such sensitive information. Non-competition obligations, however, prohibit the employee from engaging in work with a competing company or starting a similar business. The emphasis here is on “not to compete.”
3. Term of Liability
Confidentiality obligations persist as long as the trade secrets remain undisclosed, extending beyond the duration of the employment relationship. This means the duty of confidentiality continues even after the employment ends, as long as the trade secrets are not made public. In contrast, non-competition agreements typically have a shorter duration, usually no longer than two years.
4. Breach of Agreement Liability
Breaching a confidentiality agreement does not generally entail specific penalties. However, employers can seek compensation for actual losses incurred due to the employee’s breach of confidentiality. It is crucial for employers to specify how such losses will be calculated in the confidentiality agreement. Non-competition agreements, on the other hand, often include liquidated damages clauses. If an employee breaches the non-competition obligation, the employer can directly claim the specified liquidated damages without having to prove the actual damages caused.
5. Conditions for Agreement Compliance
The duty of confidentiality is a statutory obligation for employees and does not depend on the employer providing any confidentiality fee or compensation. Employees are expected to safeguard their employer’s trade secrets unconditionally. In contrast, non-competition agreements require employers to compensate employees for adhering to the agreement. Typically, this compensation amounts to 30% of the employee’s salary before the termination of the labor contract, or it should be no less than the minimum local average salary.
In conclusion, while both confidentiality agreements and non-competition agreements serve to protect trade secrets, it is essential to understand the nuances that differentiate them. By comprehending the nature of liability, focus of obligation, term of liability, breach consequences, and conditions for agreement compliance, employers can effectively utilize these measures to safeguard their valuable intellectual property and maintain a competitive edge.
