Judicial Interpretation on Labor Laws about Non-Competition Clauses

4 min.

The Supreme People’s Court issued the Judicial Interpretation (“Interpretation IV”) on Applicable Laws in terms of Trial on Labor Disputes Cases (about Non-Competition Clauses) on 31 December 2012. The interpretation has entered into force on 1 February 2013.

Interpretation IV provides more detail and clarification on specific terms and Non-Competition Clauses under the PRC Labor Contract Law issued by the National Standing Committee in 2007.

The following key points are of particular importance to those foreign-invested companies in China.

Clarification of the Labor Contract Law

The PRC Labor Contract Law provides the possibility of incorporating non–competition clauses into the labor contract for those employees taking management, technical or with confidential liability equipped positions. There was an ongoing dispute with regard to the validity of non-competition clauses. Especially, if the compensation amount was not specified beforehand.

In addition, some localities have issued a minimum limit for the amount of the non-competition compensation by the employer. However, most localities do not have such regulations. As a result, most employees are forced to accept a lower amount when signing the labor contract. But some still try to bring the matter later into the court.

Non-Competition Clauses

The following key points in the Article offer further clarifications on non–competition clauses:

1. 30% of the average salary of the 12 months preceding the termination of the labor contract shall be paid to the employee who abides by the non-competition clause if the compensation amount is unspecified;

2. The employee has the right to terminate the non-competence clause if the employer fails to pay the non-competence compensation for three months. However, there is no specification whether the three months have to be consecutive or just amount up to a total of three months;

3. The employer has the right to terminate the non-competence clause by paying an additional three months non-competence compensation to the employee. But only if the employee requested so;

4. The employer has the right to ask the employee to perform the agreed non-competence liability and the employee has the right to ask the employer to pay the agreed non-competence compensation; and

5. If the employee violates the agreed non-competence clause, the employee shall pay the liquidation damages to the employer. Moreover, the employer has the right to ask the employee to continue to perform the agreed non-competence liability;

Labor Contract

Orally changes to the labor contract are valid under certain circumstances. These include that the changes have been performed for over one month and do not violate any laws, administrative regulations, state policies etc..

Labor Union

If the employer terminates the labor contract without notifying the competent labor union in advance, the employee has the right to ask the employer to pay compensation in addition to severance pay.

Foreign Expats working in China

The Interpretations IV clearly states that if a foreign expat fails to obtain a working visa and working permit in China, no labor relationship between the foreign expat and the employer exists. This holds even if a written labor contract is signed. The questions thereafter are: 1) labor contract is invalid or not? 2) if the labor contract is invalid, then what is the relation between the foreign expat and the employer? 3) What if there is a work injury or disputes on “salary” or other matters in the future? and 4) how to solve such disputes in the future? Based on what agreement or which law? The Interpretations IV does not address any of these issues. Hence, we have to wait for the practice and/or further interpretation.

Pursuant to the above-mentioned changes, we strongly recommend reviewing the labor contracts and the employee handbook. If necessary, make necessary adjustments to protect your company to a maximum extent. Moreover, it is advisable for an international company to engage an international consulting firm to assist on the compliance matters. Ecovis Beijing China is always glad to be of service.