China: Typical Labour Dispute Cases Involving Non-Compete in Chongqing (2025): Employers’ Claim for Automatic Termination of Non-Compete Agreement Without Paying the Non-Compete Compensation Will Not Be Supported by the Court

In this case, Mr. Wang entered into an Employment Contract (“Contract”) with a teaching equipment company (the “Company”) in December 2020, in which the non-compete obligation was incorporated.  Meanwhile, both parties agreed in the Contract that if the Company did not pay non-compete compensation, it shall be deemed that the Company would not claim the agreed non-compete obligation.  Nevertheless, Mr. Wang remains perpetually obliged to protect the Company’s confidential information.  In May 2022, Mr. Wang and the Company terminated the employment relationship. Thereafter, Mr. Wang fulfilled his non-compete obligation. Due to the Company’s failure to pay the non-compete compensation for more than three months, Mr. Wang filed a lawsuit following labour arbitration, requesting for the rescission of the non-compete covenant in the Contract and the Company’s corresponding compensation.

According to Article 23 of the PRC Employment Contract Law, where an employee is obliged to keep confidentiality, the employer may agree with the employee in an employment contract or confidentiality agreement on non-compete obligation, and agree that upon the termination of employment contract, the employer shall pay economic compensation on a monthly basis during the non-compete restrictive covenant period. The court found that since Mr. Wang and the Company agreed on the non-compete obligation, both parties shall be subject to the Contract. Although the non-compete clause stipulated that it shall be deemed the Company would not claim the agreed non-compete obligation if the Company did not pay non-compete compensation, the non-payment of the Company could not explicitly result in notifying Mr. Wang that he has no longer to be subject to the non-compete obligation. In other words, it was hard for Mr. Wang to determine whether to comply with the non-compete clause or to seek for his job freely, which substantially deprived him of free choice of employment within a period of time. In light of the above reasoning, the court ordered that the Company shall pay the compensation considering Mr. Wang has fulfilled the non-compete obligation.

Key Action Points

In this case, the court makes it clear that the Company’s claim for automatic termination of non-compete agreement without paying the compensation is considered unlawful as it restricts the employee’s right to free choice of employment. Even if such kind of automatic termination clause is incorporated into the non-compete agreement, it is also invalid because it constitutes an abuse of the employer’s dominant position to harm the legitimate rights and interests of the employee. Therefore, if the employer intends to terminate the non-compete agreement in order to be exempted from the payment obligation, it should express the termination to the employee directly and clearly.  Otherwise, the employer shall fulfil the obligation to pay compensation when the employee has fully performed the non-compete obligation in accordance with the principle of good faith, so as to balance the employee’s expectation after complying with the non-compete agreement.