According to China labor law, a Non-Competition Agreement (NCA) refers to a mutual agreement between a company and its employee which specifies that the employee cannot compete with his previous employer after the dissolution or termination of the labor contract.
For example, an employee cannot work with a company which produces or sells similar products, engages in a business that is similar to his/her previous employer; an employee cannot run a business to produce or sell similar products or engage in a business similar to his/her previous employer within a certain period of time.
To whom does an NCA apply?
Although a confidentiality agreement may apply to all employees of a company( you may check our post: Confidentiality Agreement or Non-competition Agreement? for more information), an NCA is usually limited to higher-level employees, such as Senior Managers, senior technical personnel and other personnel who may also have confidentiality obligations to their employer. Generally speaking, senior managers refer to company Managers, Deputy Managers, heads of financial departments, the secretaries of the boards of directors of listed companies and other personnel stipulated in the company’s articles of association. In addition, for companies in the manufacturing and technology industries, a non-competition agreement also applies to all employees who have easy access to the company’s trade secrets, including senior research developers, technical personnel, skilled workers in key positions, etc. Also, other employees who may be aware of the company’s business secrets, such as marketing staff, accountants, secretaries, and so on, should also assume non-competition obligations.
Although a confidentiality agreement may apply to all employees of a company (you may check our post:
In short, an NCA applies to all staff who have access to a company’s key (proprietary) information and important trade secrets.
Term of NCAs
Generally speaking, the term of a non-competition agreement commences upon the dissolution or termination of the labor contract and shall not exceed two years. Even if the company illegally terminates the labor contract, or the employee is forced to terminate the labor contract, the NCA is still binding on the employee. Of course, the premise is that the company pays compensation to the employee as agreed.
Amount of compensation for complying with an NCA
There is no uniform provision about the amount of the compensation. However, according to relevant judicial interpretation, the amount for monthly compensation should be something equivalent to 30% of the employee’s average monthly salary for the past 12 months before dissolution or termination of the contract, or no less than the local minimum salary. However, if the company does not pay any compensation, the employee is entitled to rescind the NCA, as long as:
- The company has failed to pay compensation, as agreed in the NCA, for three months, and;
- The employee has notified the company of his/her intention of rescinding in writing.
What is the penalty for breach of an NCA?
In an NCA, the company may specify that the employee has to pay a penalty in the event he/she fails to perform the NCA duty/duties, as specified. There are no provisions regarding any specific standard for such penalty, but if the penalty is too much higher than the actual loss suffered by the company, the court probably will reduce the amount of penalty at their discretion.
Useful Link:
Beijing Municipal Human Resources and Social Security Bureau
Shanghai Municipal Human Resources and Social Security Bureau
Guangzhou Municipal Human Resources and Social Security Bureau
Shenzhen Municipal Human Resources and Social Security Bureau
