Background
The Ministry of Human Resources and Social Security (MOHRSS) has formally issued the Compliance Guidelines for the Implementation of Post-Employment Competition Restrictions by Enterprises, providing comprehensive guidance for employers on the lawful application of competition restrictions. Below is a structured overview of the key provisions:
Preconditions for Implementing Non-Compete Restrictions
Employers shall first identify and define the scope of their trade secrets. Restrictions should be applied only when necessary and reasonable. Employers are encouraged to prioritize alternative measures such as:
- Controlling access to confidential information;
- Encrypting sensitive data;
- Implementing reasonable declassification periods;
If non-compete restrictions are implemented, a necessity assessment shall be conducted.
Scope of Personnel Subject to Non-Compete Restrictions
In accordance with the Labor Contract Law, non-compete restrictions shall apply only to senior management personnel, senior technical personnel, and other personnel with confidentiality obligations.
When a company agrees on non-compete obligations with other personnel who have confidentiality obligations, it shall inform them of the reasons in advance and specify the details of the trade secrets to be protected.
Employees who only possess general professional knowledge and skills in the industry and have access only to the company’s general business information do notfall into the category of personnel with confidentiality obligations.
Scope and Geographical Limitations
Companies shall, to the greatest extent possible, make specific and clear agreements on the scope of companies where employees are prohibited from working; if conditions permit, a list of such enterprises may be provided.
The geographic scope of non-compete restrictions shall be consistent with the scope of the enterprise’s business operations. Without sufficient reasons, it is generally not allowed to agree on a nationwide or global scope. If the agreed scope is nationwide or global, sufficient reasons must be fully stated in the agreement.
Amount of Economic Compensation for Non-Compete
The monthly economic compensation paid by an enterprise to an employee shall generally not be less than 30% of the employee’s average monthly wage in the 12 months prior to the termination or dissolution of the labor contract, and shall not be less than the minimum wage standard of the place where the labor contract is performed.
If the non-compete period exceeds 1 year, the monthly economic compensation shall generally not be less than 50% of the employee’s average monthly wage in the 12 months prior to the termination or dissolution of the labor contract (this is a new provision not previously in place).
Liquidated Damages
The amount of liquidated damages shall be reasonably determined based on the potential economic losses caused by the employee’s disclosure of trade secrets and the amount of non-compete economic compensation paid by the employer to the employee.
Generally, it shall not exceed 5 times the total amount of the agreed non-compete economic compensation. This will effectively restrict the practice of many enterprises setting excessively high liquidated damages.
Invalidity of Advance Payment of Economic Compensation During Employment
The Guidelines also stipulate that after the termination or dissolution of the labor contract, the employer shall promptly pay the non-compete economic compensation to the employee in monetary form on a monthly basis during the non-compete period.
It shall not refuse to pay on the grounds that the non-compete compensation has been included in the wages, bonuses, etc. paid to the employee in daily work.
These updated guidelines represent a substantial step in standardizing competition restriction practices across China. We recommend employers carefully review existing agreements and policies to ensure full compliance with the new requirements, particularly regarding compensation thresholds and payment timing.
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Dr. Gerald Neumann
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