Non-Compete Restriction Enforced in Tianjin Court Despite Absence of Compensation Clause

May 5, 2011

Employment Law

by Amit Ben-Yehoshua and Steve David Salem

International law firm Baker & McKenzie reports that a Tianjin Court has reportedly enforced a non-compete agreement on an employer’s ex-employee even though the employment contract did not specify the exact amount of compensation the employee would be entitled to should he refrain from competing with his ex-employer upon leaving. Under PRC labor contract law, non-compete agreements should specify the exact monthly payment terms under which the employee is entitled to compensation upon leaving.

According to the facts, the non-compete agreement specified a term of two years restricting the employee from joining a competitor of his employer. After discovering the employee breached the non-compete agreement by joining a competitor, the employer sought legal action. In his defense, the employee sought to rely on the absence of a term stipulating his compensatory entitlement during the non-compete term. In an attempt to persuade the employee to comply, the employer made an offer pay the employee 50% of his monthly salary as compensation. Whilst declined by the employee, the employer made two payments to his bank account as non-compete compensation.

The court held that even though a compensation provision was not found in the non-compete agreement, this would not affect its effectiveness. Instead, the employee can apply to the court for reasonable compensation rather than disregard the agreement in its entirety. This line of reasoning is consistent with the approaches in both Shanghai and Beijing courts, i.e. that the absence of a compensation clause would not threaten the validity of the non-compete agreement.

Thus, in order for employers to legally protect themselves, it would be wise to add a compensation clause in non-compete agreements. This would add a suitable degree of certainty for employers and employees alike and would reduce the probability of any resultant dispute from going to court. Furthermore, this would also help the employer to dictate the exact level of compensation the employee is entitled to for adhering within the terms of the non-compete agreement rather than having the court deciding what a ‘reasonable’ level would be.

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