Restrictive Covenants in Taiwan

Definition and Types of Restrictive Covenants

Restrictive covenants in employment contracts are provisions designed to limit the actions of employees during their employment and post-termination, with the objective of safeguarding the employer’s business interests, including trade secrets, customer relationships, and proprietary business information. Common types of restrictive covenants include non-compete agreements, non-solicitation agreements, non-disclosure agreements (NDAs), and no-poaching agreements.

Types of Restrictive Covenants

1. Non-compete clauses

Under the principle of freedom of contract, parties to an employment relationship are generally permitted to agree upon non-compete clauses. However, given that post termination non-compete clauses may impinge upon an employee’s right to work and freedom, Article 9-1 of the Labour Standards Act (LSA) and Articles 7-1 to 7-3 of the Enforcement Rules of the Labour Standards Act prescribe minimum reasonable restrictions, such as limiting the non-compete period to a maximum of two years and stipulating the minimum compensation the employer must provide to the employee. In addition, it is mandatory to sign a written post termination non-compete agreement in order to create binding power.

2. Non-solicitation of customers

Currently, there is no explicit legislation in Taiwan regarding a non-solicitation of customers agreement between the employer and the employee, and under the principle of freedom of contract, parties to an employment relationship may negotiate their own terms.

3. Non-solicitation of employees

Currently, there is no explicit legislation in Taiwan regarding a non-solicitation of employees’ agreement between the employer and the employee, and under the principle of freedom of contract, parties to an employment relationship may negotiate their own terms.

Enforcement of Restrictive Covenants – Process and Remedies

Currently, the only explicitly regulated covenant in Taiwan is the post termination non-compete clause. The minimum monthly compensation the employer must provide to the employee is at least 50% of the employee’s monthly wage before the termination of employment contract. Other restrictive covenants are generally enforceable without the need to pay statutory compensation.

Use and Limitations of Garden Leave

Taiwanese law does not contain specific provisions concerning “Garden Leave.” A comparable legal concept is “paid leave for employees.” This type of leave pertains to a situation where the employer instructs the employee not to report to work, yet the company continues to remunerate the employee. It typically arises when an employee has tendered a resignation, the company suspends the employee pending investigation, or the employment contract is terminated for other reasons. Although not explicitly articulated in labour-related statutes, provided the employer can substantiate the existence of legitimate reasons, mandating paid leave for employees is generally not unlawful.