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Restrictive Covenants in China

1. Definition of Restrictive Covenants

In the PRC Labor Contract Law, there is no express definition of restrictive covenants. However, restrictive covenants are commonly used in practice. For example, an employment contract and a Separation Agreement may include obligation of not violating the conflict of interests policy, confidentiality obligation, non-disparagement obligation, non-solicitation obligation and non-compete obligation.

2. Types of Restrictive Covenants

a. Non-Compete Clauses

According to the PRC Labor Contract Law, an employer and an employee may add a post-termination non-compete clause in a labor contract or confidentiality agreement. Employees who may be subject to non-compete obligation include senior management, senior technical personnel and others who have confidentiality obligations. The maximum non-competition term is 24 months. The employer is obliged to pay compensation to employees who observe non-compete obligations after termination of employment.

b. Non-solicitation of customers

Although non-solicitation obligation is not expressly incorporated in the PRC Labor Contract Law, normally in the employment contract or specific non-competition and non-solicitation agreement, the employer will request that during the employment period and for a certain period of time after termination of the employment relationship, the employee shall not solicit any customer, consultants, agents, representatives, vendors, etc. of the employer or its affiliates.

c. Non-solicitation of employees

In addition to the obligation of non-solicitation of customers, non-solicitation of employees is also requested by most employers in practice. For instance, the employer will request that during the employment period and for a certain period of time after termination of the employment relationship, the employee shall not directly or indirectly solicit, induce, recruit or encourage any employees or any other member of the employer to leave their employment.

3. Enforcement of Restrictive Covenants—process and remedies

If an employer has non-compete agreement with an employee, but does not want to enforce such agreement, the employer should expressly waive the non-competition duties before the termination of employment. Otherwise once the employment is terminated, the employer will be obliged to pay the non-competition compensation on a monthly basis, or would need to pay three additional months’ non-compete compensation if it intends to rescinds the non-compete agreement. If the employee has violated his or her non-compete obligation, the employer may claim liquidated damage against him or her.

4. Use and Limitations of Garden Leave

Although garden leave is not mentioned in the labor law, it is very similar to the period of breaking away from secrets under the PRC laws. The employer and employee could agree that for a certain period (no longer than 6 months) before the employment contract expires or the employee terminates the employment, the employer could adjust the employee’s position and modify the employment contract accordingly. This is the period of breaking away from secrets and is aimed at protecting employers’ confidential information, trade secrets, etc.

For more information, please contact Zhong Lun Law Firm our affiliated member firm in China.
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