Meaning
Employment restrictions on post-employment activities prevent former employees from working for direct competitors or starting competing businesses for a specified duration. Non-compete covenants represent the legally binding agreements that restrict the professional mobility of executives and technical staff to protect the employer’s market position. In China, these agreements are strictly regulated by the PRC Labor Contract Law, which limits their duration to a maximum of two years.
They are only valid if the employer pays the required monthly compensation during the restricted period.
Statutory Limit
The maximum duration of a post-employment restriction is capped by national law at twenty-four months, and any clause exceeding this limit is void for the excess period. During this time, the employer must pay the former employee a monthly compensation that meets both the statutory minimums and local labor standards. If the company fails to pay this compensation for three consecutive months, the employee has the right to initiate labor arbitration to be released from the restriction.
This statutory limit balances the protection of the employer’s trade secrets with the employee’s constitutional right to work. Employers must therefore establish a dedicated tracking system to ensure that these monthly payments are sent on time without fail.
Scope Restriction
Enforceability of these restrictions depends on their application being limited to senior executives, senior technical personnel, and other employees bound by confidentiality obligations. An agreement that attempts to restrict low-level administrative staff or general workers will be rejected by labor tribunals as an abuse of employer power. The geographic scope of the restriction and the list of prohibited competitor companies must be defined with high precision to avoid being strike down as overly broad.
Courts will scrutinize these definitions to ensure they do not unreasonably prevent the individual from earning a livelihood in their field of expertise.
Remedial Penalty
If the employee breaches the covenant, the employer can demand the return of paid compensation and the payment of liquidated damages. These damages must be pre-agreed in the contract and should be proportionate to the employee’s salary. The employer can also obtain an arbitral order to force the employee to leave the competing company.
This remedy protects business investments from being transferred to rivals.
