China: Non-compete Obligation Was Held Transferred along with Employment Relation Transfer.

Mr. Tao (“Employee”) signed an employment contract as well as a non-compete agreement (“Non-compete Agreement”) with Company A. The Non-compete Agreement is referred to as an attachment to the employment contract, which prescribes that the Employee shall not work in a company that has competitive relation with Company A for two years after employment separation. Later, the Employee and Company A both agreed to sign an amendment letter that changes the employer in the employment contract from Company A to Company B and arranges Company B to continue to perform the rights and obligations of Company A in the employment contract. After Company B terminated employment with the Employee, the Employee filed labor arbitration and litigation against Company B and claimed for its payment of non-compete compensation. Company B argued that it was not a party to the Non-compete Agreement and did not have non-compete related obligation with the Employee. Shanghai No.1 Intermediate Court heard this dispute and ruled in favor of the Employee. The Court came to this decision based on the reasoning that, under employment relation transfer, Company B shall have inherited all rights and obligations of Company A including those under the Non-compete Agreement, and thus Company B shall pay compensation to the Employee for his performance of non-compete obligation after employment termination.

Key Action Points

Employment relation transfer usually take place under scenarios such as asset or business transfer. To avoid potential dispute, it is still advisable for employers to explicitly state in the employment relation transfer agreement whether employees’ restrictive obligations, such as non-compete and service period obligation, will also be inherited by the new employer.