Covenant not to compete refers to the clause in the labor contract that prohibits the employee doing competitive work during a certain period and range after he leaves the work.
Such agreement can protect trade secrets of the employer and restrain potential competition. However, there’s lots of misunderstanding and confusion about this non competition clause when the employees leave their positions. Therefore it is necessary to learn about the covenant not to compete in details.
Who should the employer sign the covenant not to compete with?
The company should sign the covenant not to compete only with the senior managers, high level technical personnel and other staff who bear the obligation of confidentiality. Senior managers generally refer to the general manager, vice manager , financial director,etc. as regulated by the CORPORATION LAW.Senior technical personals are those who have access to the trade secrets like senior engineers, R&D directors, key technician and so on. Besides, it can also be applied to those who may know the confidential information of the company like sales director, accountant and secretary. It is not necessary to sign it with each employee.
The scope of the covenant
The covenant not to compete mainly restraints the employee in two ways. The employee cannot work for any new employer producing or engaging in products or business of the same category which competes with the employer. The employee himself cannot engage in business of the same category of the employer either. If violated, the employee is subject to pay for the liquidity of damage to the employer. The period shall not exceed two years since the dissolve or termination of the labor contract.The scope of such limitation should be in the specific field that the employee is specialized in instead of any job opportunity in the whole industry or the clause will be considered invalid.If the labor contract is dissolved by the employer illegally , the covenant clause is still effective and both sides should still be bound by it. This means the employee still cannot work for anyone competing with the employer and the employer is subject to pay for the economic compensation.
The economic compensation
According to article 23 of the Labor Contract Law, the employee shall be given economic compensations within the non competition period. If not stated in the labor contract, the compensation per month should be equal to 30% of the average monthly salary paid to the employee before the dissolve or termination of the labor contract. If 30% of the average salary is lower than the minimum wage, the amount of the minimum wage should be applied.The compensation should be paid each month. Some employers choose to pay it as part of the monthly salary when the employee is still hired. However, many courts will deny such payment to be the compensation for non competition. It is recommended that the employer pay the compensation monthly as regulated by the law.If the employer chooses not to pay the compensation for three months, the employee should send a written notice to dissolve the covenant not to compete or he is still bound by it. After three months without receiving proper compensation, the employee can choose to work anywhere after the employer has received the notice to dissolve the labour contract.
If the employee violates the covenant not to compete, he is subject to pay compensation to the employer to cover the liquidity of damage. The employer and the employee can set the standard of the liquidity of damage in the labour contract. If the liquidity is unreasonably higher than the actual loss of the employer, the court can reduce it to a reasonable amount.When the employee pays for the liquidity of damage, he is still bound by the covenant not to compete and the employer can still ask him not to engage in competition.
The dissolution of the covenant not to compete
If the employer does not pay the employee the compensation for three months, the employer has the the right to dissolve the covenant.However, the employee is still subject to receive the economic compensation of three months.If the employee committed to his obligations in the covenant not to compete, he is entitled to obtain the compensation from the employer.
To summarize, the covenant not to compete is double blade sword. The employers should be very careful when signing it instead of thinking such covenant only restrains the employees. The employers should only sign it with the key staff who have access to the trade secrets.
Richard Zhang (张捷) is a lawyer from PW&Partners Law Firm and has a practicing lawyer since 2007.
Richard has represented clients from all over the world in litigation and arbitration cases.He is specialized in business and criminal lawsuits. Richard is also very active in environmental protection and has a lot of experiences in environmental law.His working languages are English, Mandarin and Cantonese.To contact him, you can call 188 0200 7880 or write to firstname.lastname@example.org