As one of the core carriers of trade secrets and business resources, employees have gradually become the main target for enterprises and capitals in business competition. This further drives the flow of senior officers, key technicians and other important employees among competing enterprises and capitals. Out of legislative and judicial practices and other considerations, entering into non-compete agreements (“NCA”) with employees has become a very important, or even the most important, defense in practice for enterprises to protect their own trade secrets and business resources. A great number of labor dispute cases arising out of breach of NCA has emerged in recent years and continues to increase rapidly. As showed in the White Paper of Labor Dispute Adjudication in Haidian District, the People's Court of Haidian District accepted 332 labor disputecases concerning non-competition from 2010 to 2016. The number of non-competecases have increased year by year, which have become the primary type of labor disputes for high-tech enterprises.
It is stipulated in the NCA between a Company and one of its sales employees that:
Author's Comments and Analysis:
The period for Party B to fulfill the non-compete obligation is the term of employment with Party A and one year after separated from Party A.
1. The total package of salary and benefits of Party B is RMB80,000/month, including basic salary (40%), performance-based salary (30%) and non-compete compensation (30%), paid on the 6th day of each month.
In this Case, the Company's practice to pay the non-compete economic compensation (herein after referred to as the “Compensation”) together with salary is very likely to be considered as invalid, and therefore the Company faces legal risks such as having to make additional payment of Compensation and liquidated damages be substantially reduced.
2. Such non-compete notice must be sent by fax, express mail service or registered mail.
Pursuant to the provisions of the NCA, the Company may only send the NC Notice by fax, express mail service or registered mail, which easily causes the NC Notice not be served. Firstly, employees generally have no fax machine at home. The fax numbers of the employees are not provided in this Case, thus the company is unable to serve the NC Notice by fax. More over, circumstances such as rejection and invalid consignment could render the service ineffective to both express mail service and registered mail service. Besides, if an employee plans to engage in competing activities after departure, generally, he/she will not accept any notice or give any reply after submitting the resignation letter. It makes it difficult for the Company to prove that the NC Notice has been properly served. While effective evidence could not be obtained through other means, and the Company gives notice by public announcement, such notice will be deemed properly served only upon expiration of the period of notice. However, pursuant to the Labor Law, the labor relationship will be terminated after 30 days upon submission of the resignation letter by the employee. If the NC Notice isserved after the termination of the labor relationship, it would not be conformed to the stipulation in the NCA, as such the NCA would not be binding, and the Company has no right to demand the employee to fulfill the non-compete obligation. Hence, in this Case, the unreasonable restriction on NC Notice actually traps the Company itself, making it difficult to timely serve the NC Notice as required in the NCA and causing the NCA unable to take effect.
Case V: Loopholes in Liquidated Damages Clause
2. The total non-compete compensation shall be equal to total salary of Party B in the last half year before departure.
The liquidated damages criteria stipulated in the NCA in this Case is “four times of the non-compete compensation obtained by Party B”. As the senior officer joined and worked for the competitor immediately after departure, the Company has not yet paid any compensation to the employee. Also, the Company is not required to pay anycompensation to the extent that the employee has breached the non-compete obligation. In this sense, the compensation obtained by Party B is zero, making the liquidated damages of four times of the compensation is also zero. Under these circumstances, the Company cannot demand the employee to pay any liquidated damages according to the NCA.
It is stipulated in the NCAs between a PRC Company and its Chinese employees working in Shanghai that:
The choices of law and jurisdiction in this Case is invalid. It is difficult for the Company to hold the employees accountable for legal liabilities through courts in Hong Kong or by applying Hong Kong laws, as agreed in the NCA.
It is stipulated in the NCA between an Internet company and its CTO that:
The salary of this CTO was about RMB 1 million/year, with restricted stocks worth RMB 3,000,000 released each year.
Moreover, the standard for liquidated damages is twice of the salary of the employee in the last year before departure. On the one hand, most of the remuneration and benefits of this CTO are paid in the form of restrictive stocks, which are not salary. On the other hand, twice of one-year salary is RMB2,000,000, which is too low for the business value and significance of a CTO who possesses the company’s management and technical secrets. If this CTO starts his/her own business or joins a competit or after departure, the benefits he/she obtains and the damages the Company suffers are very likely to be much higher than this amount. Thus, the liquidated damages in this Case can barely stop or deter the CTO from doing any of the aforesaid.
1. Competency of the Contracting Parties
2. Non-compete Territory
3. Non-compete Term
4. Non-compete Method
5. Non-compete Compensation
6. Non-compete Notice
7. Determination of Breach of NCA
8. Liquidated Damages
9. Governing Laws and Jurisdiction
10. Non-compete Degree