China: Ten Typical Cases from Shanghai Baoshan District White Paper on the Diversified Resolution of Labour and Personnel Disputes (2021-2024): Case of an Employee Engaging in Covert Competitive Activities Through an Outsourcing Relationship

On the afternoon of 28 May 2025, the Shanghai Baoshan District People’s Court jointly released the White Paper on the Diversified Resolution of Labour and Personnel Disputes in Baoshan District (2021-2024) with the Baoshan District General Trade Union and the Baoshan District Human Resources and Social Security Bureau. The white paper also features ten classic cases, covering key issues such as collective wage disputes, breaches of non-compete agreements, and the determination of employment relationships in new business formats, providing practical guidance for dispute resolution. Among these, one exemplary case focuses on competitive activities concealed by outsourcing relationships.

In this case, Mr. Li worked as a project manager at the research and development technology centre for the electric drive system of an electric vehicle drive system company (the “Company”).  The parties signed a non-compete agreement, stipulating that Mr. Li would be bound by non-compete obligations upon leaving the Company and would be required to pay liquidated damages in case of breach. After Mr. Li left the company, he joined a software company the following month, and the Company began paying monthly non-compete compensation. Subsequently, the Company learned that the software company was actually engaged in human resources outsourcing services, and Mr. Li’s actual employer was a technology company, which also engaged in developing electric vehicle drive systems and had a competitive relationship with the Company. Therefore, the Company sent a letter to Mr. Li, requesting him to provide additional employment information, but Mr. Li did not respond. Subsequently, the Company applied for a labour arbitration against Mr. Li and then filed for the litigation, alleging that Mr. Li violated his non-compete obligations and seeking repayment of the compensation plus liquidated damages for the breach.

After reviewing the case, the court found that while Mr. Li had signed an employment contract with the software company, received wages, and had his social insurance contributions paid by the software company, during the proceedings, Mr. Li failed to provide a clear address of his workplace. Initially, he stated the address of the technology company, but later provided a written supplementary statement with another address, which was contradictory and clearly indicated concealment. There is also evidence showing that the software company was actually engaged in human resources outsourcing services and the technology company was its client and Mr. Li had obtained a long-term monthly rental parking space in the technology company’s industrial park as an employee and had frequently visited the location.  Additionally, Mr. Li had obtained invoices from the technology company after staying at a hotel in another city.  Currently, Mr. Li has not provided a reasonable explanation for these circumstances. As his former employer, the Company has submitted probative evidence to substantiate its claims, which reaches the standard of a high degree of probability. Therefore, the court determined that Mr. Li had engaged in competitive activities, violated the non-compete agreement, and should bear the liability for breach. In conclusion, the court ordered Mr. Li to return the non-compete compensation and pay liquidated damages for violating the non-compete agreement.

Key Action Points

This case demonstrates that whether or not an employment contract is signed with a competing company does not necessarily affect the determination of a breach of non-compete obligations. The key issue lies in examining whether the person subject to non-compete obligations provides labour to a competing company in a way that may harm the original employer’s trade secrets and competitive advantages.  Providing service to a competing company through outsourcing, even without signing an employment contract, may still be deemed a breach of non-compete obligations.

The non-compete system is designed to protect an employer’s trade secrets and competitive advantages.  However, with the rise of flexible employment arrangements, cases where employees provide service to competing companies through outsourcing or similar means have gradually increased. In judicial practice, there is a growing emphasis on substantive review in determining breaches of non-compete obligations through such means to fully protect the employer’s trade secrets and prevent employees from using information to harm the interests of their former employers.