Non-compete restrictions in China, Germany, Singapore and US

Countries have differing legal views about companies stopping their ex-employees from becoming the next competition. It is common practice for employers in China to establish non-compete obligations with employees on their departure.

However, the recognition and strictness of non-compete agreements and the prerequisites involved vary in other countries and regions. The author compares the legal and practical requirements of non-compete restrictions in China, Germany, Singapore and the US to provide insights for businesses expanding overseas, and how to make informed compliance decisions when investing in these countries.

Laws in four countries

China. The Chinese Labour Contract Law expressly allows employers and employees to agree on post-employment non-compete obligations. If certain basic conditions are met, such as a non-compete period not exceeding two years, Chinese adjudicating authorities generally recognise the effectiveness of signed non-compete agreements.

Typically, both parties are free to negotiate the scope, geographical area and compensation standard, which must not fall below the local minimum wage. Failure to provide for compensation will not directly invalidate an agreement, and adjudicating authorities usually determine the compensation at 30% of the employee’s average salary for the 12 months preceding termination of employment.

Chinese laws and adjudication practices are relatively lenient towards non-compete agreements. However, in recent years, adjudicating authorities have imposed higher evidentiary requirements on employers covered by an agreement, and the existence of a competitive relationship between the former and current employers. This reflects a trend towards exercising reasonable control over restrictions on employment freedom, but a uniform and authoritative viewpoint and practice have yet to be established.

Germany. Employers can sign non-compete agreements with employees. However, since a post-employment non-compete arrangement is a restriction on employment freedom, the German Commercial Code (Handelsgesetzbuch) has strict provisions on this matter. Non-compete agreements failing to meet the following conditions will be deemed invalid and unenforceable:

• The agreement must reasonably specify the geographical scope, business scope and period of the non-compete restriction. Agreements prohibiting employees from working for a specific company or unreasonably favouring the company over the employee’s employment freedom are invalid. The period of non-compete obligations may not exceed two years.
• Employers must pay compensation. The annual compensation amount is not less than half the employee’s average annual earnings for the three years prior to termination under the employment contract.
• The agreement must meet the formal requirements of article 74 of the code, meaning it should be in writing, signed personally by a representative with authority from the company (employer), and delivered to the employee.

Like Chinese labour laws, as long as the employment contract has not ended, a company has the right to unilaterally waive the requirement for an employee to comply with post-employment non-compete obligations. However, according to German law, the company’s waiver becomes effective one year after issuing the declaration.

For example, if the employer issues a waiver on 1 April 2024, and the employment contract ends on 30 September 2024, the employer will still have to pay compensation from 1 October 2024 to 31 March 2025. The employee is also still subject to the non-compete obligations during this period.

Due to the higher compensation standards mentioned above and the notice period required for waiver, many German companies choose not to impose post-employment non-compete obligations.

Non-compete agreements and their clauses must be reasonable. Although Singaporean law does not expressly provide a scope and duration for non-compete agreements, courts consider factors such as the industry and geographical scope involved in an employer’s non-compete requests, as well as the duration of the restrictions, to determine their reasonableness.

For example, industry and geographical restrictions usually apply only to sectors and regions where the former employer has business interests. Non-compete durations typically range from three months to two years, with longer durations carrying higher risks of unenforceability.

One measure to judge whether the period is reasonable is the time required for the employer to recruit and train new employees to a comparable level. Additionally, applying a uniform non-compete duration to all employees, regardless of their roles and levels, increases the risk of unenforceability. While Singaporean law doesn’t mandate employer-provided compensation for non-compete obligations, doing so can increase the likelihood of the agreements being deemed reasonable.

In addition to the above-mentioned federal rule, some states in the US – such as California, Colorado and Minnesota – have always taken a passive stance on non-compete arrangements at the state level, prohibiting the enforcement of virtually all forms of non-compete agreements or clauses.

For example, California employers are prohibited from requiring employees to sign post-employment non-compete clauses or agreements, making them a prerequisite to employment, or terminating employees for refusing to sign them. Furthermore, the California Business and Professions Code mandates employers provide clear written notice to all current or former employees by 14 February 2024 that all post-employment non-compete clauses are invalid. Failure to do so will subject the employer to penalties.

Given the disparities in legislation and practices among various countries, it is suggested that Chinese companies expanding overseas make legitimate and reasonable arrangements in compliance with local requirements to avoid the risk of agreements being held invalid or unenforceable.

Tracy Liu is a partner and Larry Lian is a counsel at Jingtian & Gongcheng