China Non-Compete Agreements: New Limits and Compensation

What is the legal framework for non-compete agreements in China?

China allows post-termination non-compete agreements, but only under strict conditions: limited personnel scope, reasonable duration and territory, and mandatory monthly compensation. These rules come mainly from the PRC Labor Contract Law and the Supreme People's Court's Interpretation II on labor disputes.

Key legal sources include:

• PRC Labor Contract Law (LCL), especially Articles 23 and 24 on confidentiality and non-compete clauses.
• Supreme People's Court Interpretation II on Labor Dispute Cases (effective around 2013), which refines who can be bound, the 30% compensation baseline, and payment consequences.
• Anti-Unfair Competition Law, which protects trade secrets and underpins the legitimate interest behind non-competes.
• Civil Code of the PRC, which governs general contract validity, reasonableness, and liquidated damages.

Core framework features:

• Non-competes must protect a legitimate business interest such as trade secrets, core clients, or key technology, not simple "employee hoarding".
• They must be time-limited (usually not more than 2 years post-termination).
• They must be territory-limited and scope-limited to the employer's actual business and competition.
• The employer must pay monthly economic compensation after termination; otherwise the non-compete is practically unenforceable.

Who can legally sign a non-compete under China's Interpretation II on labor disputes?

Under Interpretation II, enforceable non-competes should be limited to senior management, senior technical staff, and other employees with real access to trade secrets or important confidential information. Courts now routinely reject or severely limit non-competes imposed on low-level staff with no genuine competitive risk, such as receptionists, cleaners, or basic line workers.

Categories of employees suitable for non-competes

The Labor Contract Law and Interpretation II recognize the following main categories:

• Senior management personnel
  • Examples: general manager, deputy general manager, CFO, board secretary, heads of major business units.
  • Criteria: decision-making power, access to core strategy, pricing, key client lists.
• Senior technical personnel
  • Examples: chief engineer, R&D leaders, core algorithm designers, product architects.
  • Criteria: control of key technology formulas, algorithms, source code, or product designs.
• Other personnel with confidentiality obligations
  • Examples: key sales managers handling top customers, staff with direct access to large client databases, pricing models, or marketing strategies.
  • Criteria: direct and regular access to information that qualifies as a trade secret or important business secret.

Who should not normally be bound by a non-compete

Interpretation II and typical court practice push back against "catch-all" non-competes for lower-level staff. Examples that courts often view as abusive include:

• Security guards, janitors, drivers, receptionists, basic warehouse workers.
• Front-line staff with no special access to trade secrets or core client resources.
• Short-term interns or probationary employees in non-key roles.

In these cases, the court may hold that:

• No legitimate competitive interest exists, so the non-compete is invalid or cannot be enforced.
• Compensation obligations still exist for the period already observed by the employee, even if the restriction itself is curtailed.

Practical employer checklist

Before imposing a non-compete in China, employers should confirm:

• Does the position access trade secrets or core confidential information?
• Can you document that access (system permissions, meeting records, document circulation)?
• Is the person in senior management, senior technical, or a clearly justifiable confidential role?
• Have you distinguished between a confidentiality clause (broadly allowed) and a non-compete clause (narrow, with compensation)?

How does the "30% rule" work for non-compete compensation in China?

The "30% rule" in Interpretation II provides a statutory fallback: if the parties did not agree on the non-compete compensation amount, the employee can claim at least 30% of their average monthly salary for the 12 months before termination, or the local minimum wage, whichever is higher. Many employers now treat 30% as the absolute floor and typically pay 30% to 60% to improve enforceability.

Basic legal mechanics of the 30% rule

• Trigger condition: the labor contract or non-compete agreement does not clearly state the compensation amount or calculation method.
• Calculation base: the employee's average monthly salary in the 12 months before the labor contract ended.
• Minimum amount:
  • 30% of that average monthly salary, or
  • the local monthly minimum wage,
  • whichever is higher.
• Payment frequency: usually monthly after the employee leaves, not as a lump sum in advance.

Compensation examples under the 30% rule

What if the contract already sets a different rate?

• If the contract sets a specific monthly amount that is not manifestly unfairly low, courts usually honor it.
• If the agreed amount is below the local minimum wage for that period, many courts will:
  • either adjust it upward to at least the minimum wage, or
  • refuse to enforce the restriction because the compensation is "obviously unreasonable".
• If the agreed amount is extremely high, the employer can ask the court to reduce it as "obviously excessive" under the Civil Code, but they must show evidence of unfairness or mistake.

Consequences of non-payment or underpayment

• 3-month rule: Interpretation II allows the employee to terminate the non-compete unilaterally if the employer fails to pay compensation for 3 consecutive months.
• Underpayment risk: if the employer pays less than the lawful or agreed amount:
  • the employee can claim back pay with interest, and
  • the court may consider the breach when deciding whether to issue an injunction against the employee.
• No payment at all: in practice, if the employer never pays any compensation after termination:
  • most courts will refuse to enforce the non-compete, and
  • employers usually cannot claim damages for the employee's alleged breach.

What restrictions and key terms must a China non-compete include to be enforceable?

An enforceable non-compete in China must have a reasonable duration (typically not over 2 years), clear territory and business scope, identified competitive activities, and agreed monthly compensation. It should also include a realistic liquidated damages clause and a right for the employer to waive the non-compete before or shortly after termination.

Duration limits

• Maximum period: normally up to 2 years after the labor contract terminates, as specified in the Labor Contract Law.
• Common practice: many companies choose 6 to 12 months for most roles, 12 to 24 months for top executives and core R&D staff.
• Longer than 2 years is usually invalid as to the excess period.

Territory and industry scope

• Territory: should match the employer's actual business coverage:
  • City or province for regional roles.
  • China-wide for national roles and major platforms.
  • Specific overseas countries if the business is genuinely international.
• Industry/business scope:
  • Specify the core business or direct competitors (e.g., "online food delivery platform competitors" or "direct competitors in lithium battery manufacturing").
  • Overbroad phrases like "any industry related to the internet" are often narrowed or rejected by courts.

Covered competitive activities

The agreement should describe what the employee cannot do, for example:

• Work for a specific list of named competitors.
• Engage in "the same or similar business" as the employer, within the defined territory and industry.
• Directly or indirectly set up a competing business, hold shares above a certain threshold in a competitor, or provide consulting services to competitors.

Liquidated damages and repayment clauses

• Most China non-compete clauses include a liquidated damages amount payable by the employee if they breach.
• If the amount is extremely high compared with the employee's income and the employer's actual loss, courts can reduce it to a more reasonable level.
• Agreements often require the employee to:
  • repay all non-compete compensation already received, and
  • pay an additional penalty (e.g., 1 to 3 times the total non-compete compensation).
• To survive court scrutiny, employers should document how they calculated the penalty (e.g., typical profit contribution per client or per project).

Employer waiver or early termination

• Non-compete agreements should give the employer a right to waive or terminate the non-compete at or shortly after termination.
• Typical wording: the employer can decide, within X days after the employee leaves, not to enforce the non-compete and stop paying compensation.
• Court practice:
  • If the employer waives before the contract ends, no compensation is usually required.
  • If the employer waives only after the contract ends, some courts require compensation for the period already observed.

What remedies can employers in China use if an employee breaches a non-compete?

If an employee breaches a valid non-compete, employers in China can seek liquidated damages, recovery of paid compensation, and an order requiring the employee to stop working for a competitor. They cannot, however, legally blacklist an employee across the entire industry or permanently block their right to work.

Available legal remedies

• Liquidated damages
  • Claim the contractual penalty amount specified in the non-compete clause.
  • Ask the court or arbitrator to adjust the amount only if it is clearly disproportionate.
• Return of non-compete compensation
  • Recover all or part of the monthly non-compete payments already made to the employee.
• Injunction or specific performance
  • Ask the court to order the employee to stop working for a specified competitor or to cease operating a competing business.
  • Courts are more likely to grant this where the role involves trade secrets or highly sensitive information.

What employers cannot do: industry-wide blacklisting

Chinese law does not allow employers to "blacklist" an employee from the entire industry or to deprive them of their basic right to work. Attempting to enforce informal blacklists can create serious legal risks for the employer.

Key constraints:

• No industry-wide ban clauses: clauses that effectively bar an employee from working anywhere in a whole industry, with no clear link to the employer's business, are usually unenforceable.
• No extralegal blacklists:
  • Sharing internal "blacklists" with other companies or industry groups can trigger defamation, unfair competition, or privacy claims.
  • The Personal Information Protection Law (PIPL) restricts sharing personal employment data without a lawful basis and proper notice.
• Credit and "dishonest person" systems:
  • In extreme cases where the employee refuses to perform an effective court judgment, the court can list them as a "dishonest person subject to enforcement" in the national enforcement database.
  • This is a judicial enforcement tool, not an employer-controlled blacklist, and it has high thresholds and procedures.

Practical enforcement strategy for employers

• Gather strong evidence:
  • Signed non-compete agreement.
  • Proof of monthly compensation payments.
  • Evidence that the new employer is a competitor and the role overlaps.
• Send a formal cease and desist letter to:
  • The employee, citing the non-compete terms and potential damages.
  • The new employer, notifying them of the dispute and asking them to reassign or terminate the employee.
• File for labor arbitration to claim damages and request an order to cease competing activities if negotiation fails.

How can employees in China challenge or exit an unfair non-compete?

Employees can challenge an unfair non-compete by arguing lack of legitimate interest, unreasonable scope or duration, or failure to pay adequate compensation. They can also terminate the non-compete if the employer stops paying for 3 consecutive months or if the employer waives the restriction.

Grounds to contest validity or scope

• No legitimate interest: the role never involved trade secrets or core clients, especially for low-level staff.
• Overbroad scope: territory or industry definition exceeds the employer's real business or blocks nearly all reasonable job options.
• Excessive duration: longer than 2 years, or much longer than needed given the industry and technology cycle.
• Insufficient compensation: below the 30% or local minimum wage threshold, or no compensation paid at all.

Steps employees can take

1. Collect documents
   • Copy of the labor contract and any separate non-compete or confidentiality agreement.
   • Payroll records showing whether non-compete compensation was actually paid.
2. Formally notify the employer
   • If compensation has not been paid for 3 months, send written notice to terminate the non-compete in accordance with Interpretation II.
   • Keep delivery receipts (email, registered mail, or WeChat screenshots) for evidence.
3. Apply for labor arbitration
   • Request confirmation that the non-compete is invalid or partially invalid.
   • Claim any unpaid compensation for the period during which you already complied with the restriction.
4. Negotiate a release
   • In many cases, employers agree in writing to waive or shorten the non-compete in exchange for a clean break.

Joining a competitor safely

• Employees should:
  • Share the non-compete with the prospective employer so they understand the risk.
  • Consider roles or departments that avoid direct competition or contact with sensitive clients or technology.
  • Avoid bringing confidential documents, code, or client lists from the former employer.
• Prospective employers should:
  • Assess the non-compete's validity with counsel.
  • Consider an indemnity or settlement arrangement if the risk is high.

What is the typical dispute resolution process and timeline for non-compete cases in China?

Most non-compete disputes in China start with a mandatory labor arbitration, usually within 1 year from when the party knew or should have known of the breach, and then may proceed to the People's Court. From first filing to a final judgment, a contested case can take roughly 6 to 18 months, depending on complexity and appeals.

Authorities involved

• Labor Dispute Arbitration Commissions (LDACs) at the district or municipal level handle the first stage of most labor disputes, including non-compete issues.
• People's Courts (Basic and Intermediate Courts) hear appeals or separate civil actions after arbitration decisions.
• Human Resources and Social Security Bureaus enforce certain labor regulations but do not usually adjudicate non-compete disputes directly.

Procedural steps

1. Pre-filing assessment
   • Employer or employee reviews agreements, evidence, and calculates claimed damages or unpaid compensation.
2. Labor arbitration filing
   • File with the competent LDAC in the place of work or contract performance.
   • General time limit: 1 year from the date the party knew or should have known of the rights infringement (e.g., breach of non-compete).
3. Arbitration hearing and award
   • LDAC usually issues an award within several months (often 3 to 6 months) from acceptance.
4. Court litigation (if appealed)
   • Either side can file a lawsuit to the People's Court within 15 days after receiving the arbitration award, if the dispute is of a type subject to litigation.
   • First-instance court judgment typically takes another 6 to 12 months.
5. Second-instance appeal
   • The dissatisfied party can appeal to a higher court within 15 days of the first-instance judgment.
   • The second-instance judgment is usually final.

Typical cost considerations

When should companies or employees in China hire a lawyer or expert for non-compete issues?

Companies and employees should hire a China employment lawyer when drafting non-compete templates, facing a serious potential breach, or considering litigation or arbitration. Early legal input often saves costs and reduces risk compared with reacting after a dispute escalates.

For employers

• Policy design stage
  • When introducing or revising non-compete policies for senior roles.
  • To align contracts with Interpretation II, local rules, and current court practice.
• Before termination
  • When planning to terminate or accept the resignation of a key employee with access to trade secrets.
  • To decide whether to activate, waive, or modify the non-compete and to set a clear compensation structure.
• At sign of breach
  • If you discover the employee has joined a competitor or started a similar business.
  • To craft cease and desist letters, preserve evidence, and choose between negotiation and formal action.

For employees

• Before signing
  • When a new employer asks you to sign a broad or long non-compete, especially without clear compensation terms.
• Before changing jobs
  • If you plan to join a competitor or start a similar business and you already have a signed non-compete.
  • To assess the real enforceability and explore options to negotiate a release.
• When compensation is missing or late
  • If the employer has not paid non-compete compensation for 3 months and you want to terminate the restriction safely.
• When faced with a claim
  • If your former employer files arbitration or a lawsuit for alleged non-compete breach.

What are the next steps for employers and employees dealing with non-competes in China?

Employers should immediately audit which roles truly justify non-competes, align their contracts with Interpretation II, and ensure they budget for monthly compensation at or above the 30% threshold. Employees should review any signed non-compete, track whether compensation is paid, and seek tailored advice before joining a competitor or founding a new business.

Next steps for employers

1. Map high-risk positions
   • Identify senior management, senior technical, and confidential roles that justify non-competes.
2. Standardize agreements
   • Update templates to define duration, territory, industry scope, monthly compensation, and liquidated damages in line with current practice.
3. Set internal processes
   • Implement a checklist for resignations of key staff, including whether to enforce, waive, or shorten the non-compete.
   • Ensure payroll can implement timely monthly non-compete payments.
4. Train HR and line managers
   • Explain who can be bound, the 30% rule, and why casual blacklisting is prohibited and risky.

Next steps for employees

1. Locate and read your contracts
   • Find the exact non-compete clause, including compensation, duration, territory, and penalties.
2. Document compliance and payments
   • Keep records of your job search and roles considered, and retain evidence of any non-compete compensation or lack of it.
3. Plan your move
   • Discuss with prospective employers and, if needed, a lawyer to structure your new role to reduce legal risk.
4. Use legal exits where available
   • If the employer has not paid for 3 months, consider formal written termination of the non-compete under Interpretation II before joining a competitor.