China Expat Non-Competes

It has become increasingly common for both  foreign and Chinese companies to require their expat employees sign a non-compete agreement as part of their employment contract package. The below are some of the more common issues that arise with most expat non compete agreements.

Non-compete timing. When it comes to China employment contracts, our China employment lawyers represent both foreign companies and expats. One of the things we’ve been noticing lately when retained to review expat employment documents is what we have taken to calling a “future” non-compete agreement. We mostly see this where a high level expat is negotiating employment with a Chinese company and the Chinese company’s employment contract will explicitly mention a non-compete agreement and explicitly state that the expat will sign a non-compete agreement, but the Chinese company will not provide the expat with a non-compete agreement for signing. To make matters worse, this mention of a non-compete is a lot clearer in the Chinese language portion of the employment contract than in the English portion and always to the expat’s detriment. This really matters because unless specifically specified otherwise in the Chinese language portion of the agreement, the Chinese portion of any China employment contract is all that legally matters in a Chinese court or arbitration. See Dual Language China Contracts: Don’t Get Fooled! This means an expat who is negotiating with its putative Chinese employer without the assistance of an experienced China employment lawyer will be signing on to sign on to a (very likely onerous) non-compete agreement without ever having seen it.

Non-compete compensation. Will the expat receive fair compensation for performing her or his non-compete obligations? According to China’s Supreme People’s Court, if the employee and the employer agree on the employee’s non-compete obligations but the employment agreement is silent on the post-employment compensation for the non-compete, the employer must pay the employee 30% of the employee’s average monthly salary in the twelve months before termination or the local minimum wage where the employment contract was performed, whichever is greater. This generally means the post-employment non-compete compensation agreed to in the employment contract or in the non-compete contract will prevail because the parties are free to agree on this amount by a mutual agreement. There are though some China courts and judges and arbitrators who will disregard the parties’ own agreement and apply the 30% standard if the parties’ agreement calls for a lower than 30% payout. No matter what, it is generally a good idea for both the employer and the employee to agree in writing to a clear and specific compensation amount for the employee’s agreement not to compete with the employer.

Geographic scope. Far too often the agreement that sets forth the non-compete obligation fails to clearly address exactly what this obligation will be. We most commonly see this in its failure even to address the geographic scope of the non-compete. In other words, will the expat be forbidden to compete with her employer in Shenzhen? In China? In China and Hong Kong? In China, Vietnam and Thailand? In all of Asia (and how is that defined?)? In the entire world? Uncertainty on geographic scope usually works against the expat down the road because it can limit the expat’s ability to get hired. Sure, you can as an expat argue that your non-compete does not extend beyond China, but will potential employers in Hong Kong or Vietnam be willing to hire you and take on the risk that it extends beyond that?  On the employer side, one of the more common mistakes we see is a non-compete that extends so far that few courts anywhere would ever enforce it. It behooves both the employer and the employee to have a non-compete that reasonably coincides with the employee’s position/company role and the employer’s business, size, and industry. A multinational with offices in 85 countries will be given more geographic leeway than a company that sells tortillas in just Qingdao.

Non-compete period. China’s legal maximum is two years after the employment contract is terminated or ends so the first thing our employment attorneys do is make sure the non-compete agreement complies with this. We then focus on making sure the non-compete period makes sense for our client. What this usually means is that when we represent the expat we seek a compete duration of less than two years. Because so much of our expat representation is for high level management and physicians, both of whom are in high demand by China employers, we have a very good track record of being able to narrow the scope of the employer’s proposed non-compete, both in duration and in geographic scope.

Termination rights. What are the termination rights (if any) for either party? Is the employer allowed to terminate the non-compete agreement at any time without making any additional payment? Can the employee terminate the non-compete agreement and, if so, how? Keep in mind once a non-compete agreement is signed it is usually difficult for either party to get out of it.

Contract damages. Is there anything in writing specifying the damages the employee will need to pay for breaching the non-compete agreement? If yes, what does it say? When dealing with Chinese employers we often see the damages provision be a lot clearer in the Chinese portion of the contract than in the English portion and always to the expat’s detriment. Since the Chinese portion of any China employment contract is all that legally matters in a Chinese court or arbitration (unless clearly specified otherwise in the Chinese language portion), this really matters. At minimum, the damages you as the expat must pay should be proportional to the non-compete compensation you will receive. Note also that it typically makes sense to impose specific breach of contract damages against the employer as well.

The non-compete agreements my firm’s China employment lawyers review for expats always favor the employer; this makes sense because the employer prepares this agreement. Non-compete agreements are not “just a formality” and it is critical you as the expat fully understand what you are being asked to sign and that you make a concerted effort to negotiate for better terms and protection. The fact that the Chinese language portion of the agreement is nearly always the only portion that legally matters further tilts the playing field against you. Having an experienced Chinese employment lawyer who is completely fluent in Mandarin review your non-compete agreement is usually your only real protection.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.