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Shanghai, China: The individuals who are obligated to adhere to non-competition obligations should be strictly limited within the scope defined by law. Labour receiving entities in labour dispatch relationship can enter into non-competition agreements with labour dispatch employees.

Authors: Carol Zhu and Lynsey Liu

In September 2021, Mr. Yang signed a Non-compete Agreement and Confidentiality Agreement with Company A, which stipulated the content, terms, and compensation for non-compete obligations, etc.  On 12 January 2022, Mr. Yang submitted a resignation to Company A. On 27 January 2022, Company A couriered a notice to Mr. Yang stating that the non-compete clause would take effect on 29 January 2022, with a term of one year. Afterwards, Company A filed a labour arbitration claim requesting Mr. Yang to pay liquidated damages for violating the non-compete agreement.

Under P.R.C. employment laws, employees subject to non-compete restrictions are limited to senior management, senior technical personnel, and other individuals who owe confidentiality obligations to the employer. During the hearing, both parties confirmed that Mr. Yang engaged in the operation and maintenance of family broadband equipment during his employment with Company A and was a frontline employee. Except for the training and assessment certificate issued by Company A, Mr. Yang does not have relevant professional or technical titles or vocational skills certificates. Therefore, it is difficult to classify Mr. Yang as senior management or senior technical personnel.  Consequently, Company A argued that Mr. Yang falls under the category of “other individuals with confidentiality obligations.”

Regarding the confidentiality obligations, Shanghai First Intermediate People’s Court (“the Court”) held that from the Cooperation Business Agreement signed between Company A and China Unicom Shanghai Branch it can be seen that the configuration of the broadband line equipment and customer list mentioned by Company A are actually the technical and operational information directly managed and controlled by China Unicom Shanghai Branch, and are not exclusive to Company A or can bring a unique competitive advantage to Company A. Company A cannot prove that Mr. Yang is an individual with confidentiality obligations based on the provided evidence and statements from both parties.

In addition, the Court stated that in the special employment scenario of labour dispatch, where employment and work are separated, the owner of the trade secrets and intellectual property-related secrets known by the labour dispatch employees is usually the labour accepting entities rather than the dispatching entity. Therefore, a non-compete agreement between the labour accepting entities and labour dispatch employees is in line with the legislative intention of the non-compete legal system.

Key Action Points

The individuals who may be obligated to adhere to non-competition obligations are outlined in Article 24 of the Employment Contract Law of the People’s Republic of China. According to this provision, such obligations are applicable to senior management, senior technical personnel, and other individuals who have confidentiality obligations. The determination of whether an employee falls within these categories is based on the nature and content of their work. If an employee does not meet the criteria specified by law, even if the parties have agreed on non-competition provisions, such an agreement will not be legally binding on the parties.