[Direct answer]There is no unified standard for the liquidated damages for breach of non-compete clauses in the law. The compensation should be the main consideration, and the penalty should be supplementary. The amount of the liquidated damages shall be agreed upon by both parties, but the court may reduce it according to the actual losses. According to Article 23 of the Labor Contract Law, the employer may stipulate the liquidated damages and shall pay the economic compensation; Article 90 stipulates that the employer shall compensate for the losses caused by the breach of contract. In practice, if the agreed amount is far higher than the compensation several times and the employer has difficulty proving the losses, the amount will often be reduced; if the employer fails to pay the compensation for a long time, the employee may terminate the agreement. It is recommended to review the reasonableness when signing the contract. For more details, please refer to the following link:Labor arbitration legal servicesAndBeijing Henglu Law Firm.

I. Legal basis and interpretation of provisions

1. Article 23 of the Labor Contract Law of the People's Republic of China (effective July 1, 2013)

For employees who are subject to confidentiality obligations, the employer may stipulate non-compete clauses and agree on economic compensation. If the employee violates the agreement, they shall pay the agreed-upon breach of contract penalty. This article grants the employer the right to stipulate a breach of contract penalty, but at the same time requires the employer to pay compensation as a consideration; the breach of contract penalty and compensation go hand in hand. If the employer claims the breach of contract penalty without paying compensation, it is often difficult to gain support, reflecting the equality of rights and obligations.

2. Article 90 of the Labor Contract Law of the People's Republic of China (effective July 1, 2013)

If a worker terminates the labor contract in violation of the provisions of this Law, or violates the confidentiality obligation or non-compete obligation agreed in the labor contract, causing losses to the employer, he shall bear the liability for compensation. This article clearly stipulates that the liability for compensation is based on the actual losses, and it is parallel to the penalty for breach of contract in Article 23; when the employer claims both the penalty for breach of contract and the compensation for losses, he must prove that the losses really exist, and cannot claim based solely on the agreed amount.

3. Practical judicial interpretation (reduction of the penalty and burden of proof)

The court determined that the penalty for breach of contract should be primarily compensatory and secondarily punitive. The employer needs to provide evidence of the actual losses caused by the worker's breach of contract, such as the specific amounts of customer loss and technology leakage; if the agreed penalty for breach of contract is excessively high compared to the losses, the worker may request a reasonable reduction. The court will adjust the penalty based on the compensation, the fault, and the extent of the losses. If the employer still insists on collecting the penalty for breach of contract after suspending the payment of economic compensation, it will generally not be supported. Therefore, a high-amount agreement will not necessarily take full effect.

II. Henglue Lawyer's Practical Experience

Based on Henglue's practical observations in handling similar cases, the core of the dispute over non-compete breach penalties lies in the "boundary between compensatory and punitive damages". The law does not set a statutory amount, which is agreed upon by both parties but primarily compensatory in nature. In practice, courts usually refer to the worker's income, the compensation already paid by the unit, and the actual losses that can be verified to determine the amount. If the agreed amount far exceeds the compensation several times and the unit has difficulty proving the losses, it is often reduced according to law. The judge also reviews whether the unit has truly paid the compensation. If the unit fails to pay the compensation for a long time but claims breach penalties, it is often not supported. For more details about related services, please refer to the following link:Business contract disputes.

Common misunderstandings of the parties involved: Firstly, they assume that the amount of compensation for breach of contract will be equal to the amount specified in the agreement, ignoring the rule of discretionary reduction; Secondly, after the employer stops paying compensation, the employee still restrains himself/herself without knowing that he/she can legally terminate the agreement; Thirdly, after leaving the job, the employee fails to confirm whether the non-competition clause has been activated, resulting in a passive breach of contract. It is recommended to review the reasonableness of the breach of contract penalty when signing the agreement, keep the proof of compensation payment during the performance of the agreement, and collect evidence such as the agreement, bank statements, and proof of new employment in a timely manner after a dispute arises. First, negotiate and mediate, and then proceed to arbitration and litigation if necessary. Henglue Labor Team can assist in evaluating the effectiveness of the clauses and collecting evidence. For related services, please refer to the following link:Labor arbitration legal servicesAndBeijing Henglu Law Firm.

III. Frequently Asked Questions

Q1: How is the breach of contract penalty for non-compete clauses usually calculated?

The law does not stipulate a standard amount, and it shall be agreed upon by both parties, but it should be primarily compensatory and supplemented by punitive damages. In practice, the court determines the amount based on the worker's income during employment, the compensation already paid by the employer, and the actual losses, etc. The agreed amount should be commensurate with the damages caused by the breach of contract, and the employer needs to provide evidence of the actual losses. When signing the contract, it is not advisable to blindly accept an excessive amount, and one can raise objections to its reasonableness.

Q2: If the contractual penalty is set too high, will the court reduce it?

Yes. If the agreed penalty for breach of contract is excessively high compared to the actual losses caused, the parties may request the court to reduce it appropriately. The court usually adjusts it based on the amount of compensation, the degree of loss, and the fault of the parties, etc. Although there is no specific case in this case, the practice tends to reduce the penalty for breach of contract when it is far higher than the compensation several times and the unit has difficulty proving the losses. Therefore, a high-amount penalty will not necessarily be fully supported.

Q3: Am I still restricted if my unit hasn't paid me the compensation?

If the employer fails to pay economic compensation during the non-competition period, the employee may request to terminate the agreement in accordance with the law, and will no longer be subject to the restrictions after the termination. The compensation is the consideration for the employer to maintain the restrictions, and the long-term non-payment is regarded as a waiver of the requirement to perform the obligation; in practice, if the employer fails to pay for three consecutive months, the employee can claim to terminate the agreement and does not need to continue to abide by it.

Q4: If the company doesn't mention the non-compete agreement after I leave, do I still need to abide by it?

If the agreement is valid and the employer continues to pay compensation, even without a separate reminder, the employee should still comply with it; however, if the employer explicitly waives or fails to pay compensation for a long time, the agreement may be terminated. When leaving the job, the employee should actively confirm with the employer whether the non-compete clause will be activated and whether the compensation will be paid, to avoid being passively in breach of contract due to information asymmetry. When necessary, written communication should be conducted to leave a record.

Q5: What evidence should be prepared for a non-compete dispute?

You should prepare the labor contract and the confidentiality and non-compete agreement, the resignation certificate, the bank statements showing the compensation paid by the employer, the proof of employment with the new employer, the pay slips, and the evidence of the employer's claimed losses. In practice, the employer needs to prove the losses and the breach of contract, and the employee may raise defenses such as overly broad scope of evidence and unpaid compensation. It is recommended to organize the materials as soon as possible and consult a professional lawyer for evaluation.

IV. Advice on Protecting Your Rights

  • When signing the contract, check whether the penalty for breach of contract is reasonable. If the amount is too high, you can express your objection and request a reduction in the amount during the litigation process.
  • During the performance period, the unit shall keep the bank statements showing the compensation paid by it. If the unit stops making payments, it may lawfully terminate the agreement.
  • After leaving the company, if the employer has not confirmed the start of the non-compete agreement, you should take the initiative to communicate with them in writing to avoid being in a passive position and breaching the contract.
  • After the dispute arises, collect the agreement, compensation vouchers, and new employment certificates. First, attempt to resolve the dispute through mediation. If that fails, proceed to arbitration or litigation. For more details, please refer to the following document.Labor arbitration legal services.

If you are facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the evidence materials, so as to avoid missing the statutory time limit. →Labor arbitration legal services·Beijing Henglu Law Firm