Legal effects of non-competition trigger clauses

By Leo Yu and Gao Ying, Jingtian & Gongcheng
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With increasingly fierce competition for talent, many enterprises have agreed with their employees on “non-competition trigger clauses”, meaning that enterprises are entitled to unilaterally determine whether to require employees to perform their non-competition obligations. As a result, various types of trigger clauses have emerged, along with disputes arising from them.

喻鑫, Leo Yu, Partner, Jingtian & Gongcheng.
Leo Yu
Partner
Jingtian & Gongcheng

Determine after exit

Many enterprises prefer to wait and see whether employees join a competitor after the termination date of the employment contract, and then decide whether to start their non-competition obligations. Therefore, this clause is widely used: “The company has the right to decide whether to require the employee to perform a non-competition obligation within a certain period after the employee leaves the company.”

Courts generally uphold that employees have a right to a livelihood and their freedom of employment should not be restricted by uncertain factors. Therefore, enterprises should determine whether to require employees to perform non-competition obligations on the termination date, at the latest.

In Jing Min Chu (2016), the enterprise and the employee had agreed: “The company has the right to make the choice whether to require the employee to perform the non-competition obligation within 30 days after the employee leaves the company.” The court held that non-competition deprives employees of freedom to choose their jobs, so whether employees must abide by non-competition clauses should be in a certain state on the termination date.

The court did not recognise the validity of the above clause, and ruled that the enterprise should pay non-competition compensation to the employee.

Compensation payment

In general, courts determine whether to start non-competition obligations according to whether enterprises have paid compensation. Enterprises have to pay employees the compensation during the period that they perform the non-competition obligations, and according to the judicial interpretations, employees have the right to claim the compensation for an additional three months.

In Jing Min Zhong (2020), both parties agreed: If the enterprise decides to let the employee fulfil the non-competition obligation, the enterprise only needs to pay compensation monthly after the employee leaves, and if the enterprise decides not to pay compensation, the employee does not need to fulfil the obligation. The two parties did not specify the payment date, nor did they clearly agree on how long the enterprise has to not pay compensation before the agreement is invalidated.

The court upheld the validity of the above clause, ruled that the agreement had been terminated one month after the termination date, and that the enterprise shall pay compensation to the employee.

In another case, Jing Min Zhong (2018), both parties agreed that if the enterprise failed to pay compensation for two consecutive months, the employee’s non-competition obligation will be relieved on the second due date. Both parties also clearly agreed on the payment date. The court upheld that the above clause was effective, and ruled that the employee’s non-competition obligation was relieved from the second due date, and the enterprise should pay compensation.

Gao Ying, Senior associate, Jingtian & Gongcheng
Gao Ying
Senior associate
Jingtian & Gongcheng

No explicit notification

Some enterprises agree with employees that the enterprises have the right to choose whether or not to require employees to perform their non-competition obligations when they leave, but fail to make a clear choice when employees do. The court often holds that where enterprises fail to clearly inform employees, it will be deemed the employees should perform their non-competition obligations.

In Zhe Min Zhong (2020), both parties agreed that the enterprise has the right to inform the employee to perform the non-competition obligation when the employee leaves. However, the enterprise failed to make clear whether the employee was required to fulfil the obligation on the termination date. After that, the employee fulfilled the non-competition obligation. The court held that although the enterprise did not explicitly require the employee to perform the obligation, it should inform them of the exemption and must therefore pay compensation.

In Hu Min Zhong (2018), both parties agreed that “the company has the right to choose whether to require the employee to perform the non-competition obligation when the employee leaves”. After the employee left, the enterprise did not pay him compensation, and he joined a competitor nearly two months after his termination date. The court held that the employee knew he had signed a non-competition agreement, and there was no proof that the enterprise clearly informed the employee that he had been exempted from it, so the employee should perform his obligations.

It is worth noting that the court held that the clause “if the company chooses
not to require the employee to perform the non-competition obligation, the company does not need to pay compensation” should not be inferred as “if the company fails to pay compensation, the employee does not need to perform the non-competition obligation”. The court pointed out that if the enterprise fails to pay compensation, the employee can exercise his/her rights but still should fulfil the obligation. The court ruled that the employee should bear liability for breach of non-competition obligation.

Courts seek to balance the interests of both parties according to the principle of fairness, and restrict enterprises from abusing the right of choice when judging trigger clauses. If trigger clauses have a defective design, they may lead to the invalidity of the non-competition clauses or fail to achieve the expected results. When designing non-competition clauses, enterprises should fully consider the effectiveness, operability, management costs and convenience of the clauses according to their actual conditions, so as to ensure the accuracy and effectiveness of the trigger clauses.

No matter what kind of trigger clauses are agreed, on the termination date or before, enterprises should clearly inform employees whether they are required to perform their non-competition obligations, and this should be an essential process in the management of employment contract termination.

Leo Yu is a partner and Gao Ying is a senior associate at Jingtian & Gongcheng

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