Definition and Types of Restrictive Covenants
In PRC Labour Contract Law, there is no express definition of restrictive covenants. Nevertheless, restrictive covenants are commonly used in practice. For example, an employment contract and a separation agreement may include an obligation not to violate the conflict of interest policy, confidentiality obligation, non-disparagement obligation, non-solicitation obligation and non-compete obligation.
Types of Restrictive Covenants
Regarding post-termination non-compete clause, the maximum non-competition term is 2 years and the default standard for the monthly non-compete compensation is 30% of employees’ average monthly salary under PRC laws. Regarding non-solicitation clauses, they are not expressly incorporated into PRC Labour Contract Law, but are requested by most employers in practice.
According to PRC Labour Contract Law, an employer and an employee may add a post-termination non-compete clause in a labour contract or confidentiality agreement. Employees who may be subject to non-compete obligation include senior management, senior technical personnel and others who have confidentiality obligations.
The maximum non-competition term is 24 years. During the non-compete period, the employer is obliged to pay compensation to employees for the performance of non-compete obligations after termination of employment, and the employer is entitled to have the employee assume the agreed liabilities for the violation of non-compete obligations.
The regulations and practical rules for post-employment non-competition usually vary by region. However, the Interpretations of the Supreme People’s Court on Issues Relating to Laws Applicable for Trial of Labour Dispute Cases (I), effective as of 2021, enjoys a nationwide legal effect and contains several important rules about non-compete obligations.
The following rules deserve special attention:
- if the compensation for employees abiding by the non-compete obligations is not explicitly stipulated in writing, then the non-compete clause is still binding upon the employees;
- the default standard for the monthly non-compete compensation is 30% of employees’ average monthly salary in the last 12 months prior to employment termination, which shall be no lower than the monthly minimum wage announced by the local government;
- if an employer fails to pay such compensation for three months, the employee is entitled to request relief from the non-compete clause; and
- an employer may waive the employee’s non-compete obligation during the restricted period and such employer shall pay three additional months of compensation, if so requested by the employee.
Non-solicitation of customers
Although a non-solicitation obligation is not expressly incorporated into PRC Labour Contract Law, normally in the employment contract or specific non-competition and non-solicitation agreement, the employer will request that during the employment period, and for a certain period of time after termination of the employment relationship, the employee shall not solicit any customer, consultants, agents, representatives, vendors, etc. of the employer or its affiliates.
Non-solicitation of employees
In addition to the obligation of non-solicitation of customers, non-solicitation of employees is also requested by most employers in practice. For instance, the employer will request that during the employment period and for a certain period of time after termination of the employment relationship, the employee shall not directly or indirectly solicit, induce, recruit or encourage any employees or any other member of the employer to leave their employment.