Definition and Types of Restrictive Covenants
In 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.
The following restrictive covenants are recognized and may be enforceable under the law:
- Non-compete clauses;
- Non-solicitation of customers;
- Non-solicitation of employees.
Enforcement of Restrictive Covenants—process and remedies
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’ of non-compete compensation, if it intends to rescind 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. For non-solicitation obligations, the employer may enforce relevant clauses in the employment contract, etc. and claim damages for any loss incurred.
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 PRC laws. According to the Circular of the Labor Department on Certain Issues about Enterprise Employee Movement, 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. This period of breaking away from secrets is acknowledged and applicable in many provinces including Shanghai, Jiangsu, etc.