Non-Compete Compliance Under New Rules – Guidance for Foreign Invested Enterprises

Late last year, the Interpretation II of the Supreme People’s Court on Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (“Interpretation II”) and the Guidelines for Enterprises on Compliance in the Implementation of Non-Compete Agreements (“Compliance Guidelines”) were successively implemented. These two documents have refined the provisions on the implementation of non-compete agreements, providing clearer guidance for enterprises to apply the non-compete system in compliance with the law. I here interpret the core points of the new rules and provides compliance suggestions for the foreign invested enterprises.

Non-Compete Subjects and Application Conditions
Previously, the subjects of non-compete obligations are clearly defined as “two highs and one confidentiality”, namely senior management personnel, senior technical personnel and other personnel with confidentiality obligations of the enterprise.

Interpretation II further clarifies that if an employee “does not know or have access to the enterprise’s trade secrets and confidentiality matters related to IP rights”, he may request the people’s court to confirm the invalidity of the non-compete clause.

This specifies that “access to and knowledge of confidential information” is a prerequisite for applying non-compete obligations–even if an employee falls into the “two highs” category, the non-compete agreement signed with the enterprise may be confirmed invalid if he has no access to the enterprise’s confidential information.

In addition, the Compliance Guidelines further refine the application conditions, including that enterprises must first clarify the specific content and scope of trade secrets before setting non-compete obligations; for “other personnel with confidentiality obligations”, they must inform them of the reasons and the specific content of the trade secrets to be kept in advance.

This warns enterprises not to arbitrarily expand the scope of confidential information and restrict employees’ right to choose employment in a disguised form, otherwise the relevant non-compete agreements may be deemed invalid.

Termination of Non-Compete Obligations
According to the Compliance Guidelines, enterprises can terminate non-compete obligations in two scenarios. First, the enterprise clearly informs the employee in the certificate of termination or rescission of the labor contract or other written materials that it will not activate the non-compete obligation.

Second, the enterprise negotiates with the employee to terminate it during the non-compete period or terminates it by paying an additional three months’ compensation. It is recommended that enterprises retain written evidence to prevent potential disputes.

Non-Compete Compensation
In judicial practice, courts generally hold that enterprises do not need to pay additional compensation for agreeing on in-service non-compete obligations. Regarding the amount of non-compete compensation, there were previous principled provisions.

While reaffirming these provisions, the Compliance Guidelines add detailed requirements: if the agreed non-compete period exceeds 1 year, the monthly compensation shall generally not be less than 50% of the employee’s average monthly wage in the 12 months before the termination or rescission of the labor contract.

Liability for Breach of Non-Compete Obligations
Under the current provisions, foreign-invested enterprises can take three measures to pursue liability for employees’ breach of non-compete obligations: requiring the employee to pay liquidated damages, continue to perform the noncompete obligation, and return the paid compensation.

The third measure is formally affirmed in Interpretation II, which further strengthens the protection of enterprises’ trade secret rights and interests

IN SUMMARY
The implementation of Interpretation II and the Compliance Guidelines has improved the legal application rules of the non-compete system.

Foreign-invested enterprises are advised to accurately grasp the core points of the new rules and standardize the entire process to protect their trade secrets and avoid labor disputes.