FAQs about employees’ non-compete obligations

In practice, disputes arising from the enforcement of non-compete agreements are not uncommon between companies and employees. In this article, the authors combine the latest judicial practices in Shanghai to address common controversial issues in non-compete disputes.

What types of employees and companies may enter into non-compete agreements? These include senior management, senior technical personnel and other individuals with confidentiality obligations. In determining the classification of individuals bearing such duties, Shanghai judicial authorities primarily rely on the confidentiality agreements signed by both parties. For instance, personnel in sales, finance and other such positions can all be parties to non-compete agreements, as was the case in the 2022 non-compete dispute involving Qijin Test Tech.

However, if an employee’s role clearly involves no access to trade secrets, he/she would not be considered an individual with confidentiality obligations. In such cases, even if a company were to enter into a non-compete agreement with them, there would be no legal binding force.

Can companies enter into non-compete agreements with dispatched employees? Although the Labour Contract Law does not explicitly address this issue, courts in Shanghai generally recognise that in the unique employment model of labour dispatch, where employment and utilisation are separate, the owner and the confidant of trade secrets and IP-related secrets are typically the actual employer and the dispatched employee, respectively.

Therefore, the signing of non-compete agreements between the two parties aligns with the legislative intent of non-compete regulations. The law does not explicitly prohibit employers from entering into non-compete agreements with dispatched employees. This viewpoint was upheld by the court in a 2023 dispute involving Yifang Information Technology.

Can companies assert that an employee has violated their non-compete obligations by engaging in competitive activities through their spouse? Generally, yes. The prevailing viewpoint in Shanghai’s judicial practice is that benefits obtained by an employee through their spouse’s competitive actions are considered joint property of the couple.

There is high probability of shared access by the spouse to the commercial information, trade secrets and other proprietary knowledge that the employee has acquired in the course of their employment.

In Zhang v Austar Pharmaceutical Technology Equipment (2020), the Shanghai High People’s Court determined that Zhang, the employee, had violated his non-compete obligations based on this reasoning.

However, there are exceptions to the rule. If an employee’s spouse was already engaged in the relevant activities before the employee signed the non-compete agreement, and there have been no substantial changes in the spouse’s activities compared with before the employee’s departure, then it can be considered an exceptional circumstance where there is no violation.

Is there a minimum amount for non-compete compensation? Yes, there is. In Shanghai’s judicial practice, the agreed upon non-compete compensation cannot be lower than the local minimum wage standard. If an employee requests to be compensated up to that standard, he/she is likely to receive support.

Can employees request a reduction in the excessively high liquidated damages under a non-compete agreement? Generally, they cannot. Shanghai’s judicial authorities tend to respect the autonomy of the parties involved and support the liquidated damages specified in the non-compete agreement.

In a 2021 case involving Feiyu Internet Technology, the employee’s request for reduction was not supported by the court. However, if the amount is deemed to be clearly excessive, it is possible that the judicial authorities may exercise their discretion to make adjustments.

Factors to be taken into consideration may include the employee’s original position, income status, degree of fault, duration of non-compliance, whether the compensation has been paid and how much, and the actual losses suffered by the company.

Can companies claim liquidated damages from employees who violate non-compete obligations during their employment? No, they cannot. The prevailing judicial view in Shanghai is that companies can agree with employees on liquidated damages for violations of non-compete obligations after their employment ends, but cannot do so for violations that occur during the employee’s tenure.

How can it be determined that an employee has violated a non-compete obligation? The judicial authorities focus on two aspects when making a determination: competitive relationship and competitive action.

When examining a competitive relationship, the authorities review whether the registered business scope of the two entities overlaps. They also consider factors such as the actual products and services offered, promotional materials on the company’s official website, and testimonies from shared suppliers or customers.

When examining competitive actions, the authorities primarily investigate whether the employee has provided labour to a competing entity or is directly engaged in competitive business activities. The former can include signing a labour contract directly with a competitor or providing services through labour dispatch or outsourcing arrangements.

How can it be proven that an employee has violated non-compete obligations? It is often challenging for companies to obtain direct evidence, such as newly signed labour contracts, salary and tax payment documents, or social security payment records, to prove that an employee has violated non-compete obligations.

However, supplementary evidence can still be provided to demonstrate that an employee has joined a new organisation and thus violated non-compete obligations. This can include video recordings of the employee frequently entering and leaving the premises, delivery receipts of packages received by the new entity, phone call recordings where the employee admits to being an employee of the new entity, chat records, as well as evidence such as business cards or email signatures used by the employee at the new entity.

To minimise the risk of employees claiming that video evidence obtained through surveillance infringes on their privacy, which may render the evidence inadmissible, companies should strive to capture relevant video evidence in public areas. In Li Benchao v Huace Navigation (2022), the appellate court considered video evidence obtained in a public place as not infringing on the employee’s privacy and deemed it admissible as legal evidence.

Tracy Liu is a partner and Larry Lian is a counsel at Jingtian & Gongcheng tracy.liu@jingtian.com | larry.lian@jingtian.com