China: Employee to Pay Liquidated Damages for Breach of Confidentiality Obligation

The Employer and the Employee signed the Employment Contract with a Confidential Agreement, in which both parties agree on a liquidated damage at the amount of three months’ of the Employee’s salary for breach of confidentiality obligation.  The Employee later disclosed the Employer’s confidential information about program code to an online chatgroup.  The Employer filed a lawsuit against the Employee and claimed for Employee’s payment of liquidated damage.  This case was eventually ruled in favor of the Employer by the People’s High Court of Guangdong Province.  The Court reasoned that anyone in violation of confidential obligation shall bear the correspondent liability and ruled the Employee to pay liquidated damage to the Employer but at a lowered amount which was around one-month salary of the Employee.  The PRC Employment Contract Law explicitly prescribes that the employer and employee cannot agree on liquidated damage borne by the employee unless for employee’s violation of service or non-competition obligation.  The rule applied in this case conflicts with the existing provision in the PRC Employment Contract Law.  The validility of liquidated damaged for breach of confidentiality obligation still waits further examination in more judicial decisions.

For more information on these articles or any other issues involving labour and employment matters in China, please contact Carol Zhu (Partner) of Zhong Lun Law Firm at carol.zhu@zhonglun.com or visit www.zhonglun.com.