[Direct answer]In principle, the attorney's fees for non-compete restriction disputes are borne by the party who entrusts the lawyer: there is no general provision in China's labor dispute field that "the losing party shall bear the attorney's fees". Arbitration is free of charge, and the first-instance acceptance fee in court is only 10 yuan. Attorney's fees are not a statutory compensation item. However, if the non-compete agreement and confidentiality agreement clearly stipulate that "the breaching party shall bear the attorney's fees and other expenses incurred by the contracting party in protecting its rights", most arbitration commissions and courts will support this according to the agreement, but there are differences in standards across different regions. The effectiveness, compensation, and penalty issues of non-compete restrictions are handled in accordance with Articles 23 and 24 of the Labor Contract Law, with a maximum duration of no more than two years. If no compensation is stipulated, it shall be paid at 30% of the average monthly salary. It is recommended to include the clause on fee burden in the agreement before deciding on the entrustment plan. Beijing Henglue Law Firm\nLabor dispute lawyer teamIt can assist in the evaluation. For more details, please refer to the following link:Beijing Henglu Law Firm.

I. Legal basis and interpretation of provisions

1. Articles 23 and 24 of the Labor Contract Law of the People's Republic of China (amended on December 28, 2012, and implemented on July 1, 2013)

Article 23 allows employers and employees to agree on non-compete clauses in labor contracts or confidentiality agreements, and to stipulate that the employer shall provide the employee with economic compensation on a monthly basis during the non-compete period after the termination or expiration of the labor contract. If the employee violates the agreement, he/she shall pay the agreed-upon breach of contract damages. Article 24 limits the applicable personnel to senior managers, senior technicians, and other personnel with confidentiality obligations. The scope, geographical area, and duration of the non-compete obligation shall be agreed upon by both parties, but the maximum duration shall not exceed two years. Together, these two articles define the "legal boundaries" of non-compete clauses: clauses exceeding the scope of personnel, exceeding the two-year time limit, or failing to stipulate compensation may be deemed partially invalid, which is also the first line of defense in disputes.

2. Article 36 of the Interpretation of the Supreme People's Court on Legal Issues Applicable to the Trials of Labor Dispute Cases (I) (effective on January 1, 2021)

Where the parties have agreed on a non-compete obligation in the labor contract or confidentiality agreement but have not agreed on economic compensation after the termination or rescission of the labor contract, and the employee has fulfilled the non-compete obligation and demands that the employer pay economic compensation on a monthly basis, the court shall support such claims. The compensation standard shall be 30% of the average monthly salary during the twelve months preceding the rescission or termination of the labor contract, and shall not be lower than the local minimum wage standard. This article addresses the most common loophole in agreements where only a non-compete obligation is agreed upon but no compensation is specified: the employer cannot take advantage of the absence of a compensation clause to claim that the clause is invalid, and the employee cannot claim that the absence of an agreement means they are completely unbound by the obligation. The statutory default standard of 30% of the average monthly salary serves as a safeguard in such cases.

3. Practical adjudication guidelines (handling attorney's fees and breach of contract penalties)

In terms of attorney's fees, the general rule in arbitration and courts is "agreement takes precedence, and if there is no agreement, each party bears their own costs". If the agreement explicitly stipulates that the breaching party shall bear the litigation costs, most arbitrators will support the reasonable portion; if there is no agreement, the worker or the enterprise shall bear their own attorney's fees. In some local legislations, there are special provisions on supporting the worker's attorney's fees if the worker wins the case, but the proportion and conditions are limited. Regarding the penalty clause, if the agreed amount is significantly higher than the actual losses, the arbitrator will adjust it according to the employee's income, the degree of fault, the duration of the competitive behavior, and the employer's losses. If the enterprise fails to pay compensation on a monthly basis for three months, the worker may request to terminate the non-competition agreement. However, if the worker rashly joins a competitor before the termination, they may still constitute a breach of contract. This time lag is the most common pitfall in practice.

II. Practical Experience of Henglue Law Firm

Based on Henglue's practical observations in handling non-compete clauses and labor disputes, there are four common types of disputes: First, the employer fails to pay compensation on a monthly basis but claims that the employee breached the contract and should pay compensation for breach of contract; Second, the agreed penalty for breach of contract is extremely high (often hundreds of thousands of yuan), which is difficult for employees to afford; Third, it is difficult for the employer to collect evidence when the employee joins a competitor company or engages in self-employed business in the same industry; Fourth, the employer applies the non-compete clause to ordinary position employees, the effectiveness of which is questionable. The focus of the dispute usually revolves around the validity of the agreement, the scope of personnel, the payment of compensation, and "whether the employee actually engaged in competitive business". Both parties hold different opinions on these issues, and the direction of the dispute ultimately depends on the evidence presented.

The general tendency of arbitrators and judges is to first review the validity of the agreement and the scope of the personnel involved, then examine whether the compensation has actually been paid, and finally determine whether the breach of contract has occurred and whether the liquidated damages are excessive. Employees can avoid liability by providing evidence that they did not actually engage in competitive business activities (such as social security records, labor contracts, pay slips, and attendance records). If the employer uses publicly available information, competitor websites, or business correspondence to prove the breach of contract, the evidence is more likely to be accepted. The most common pitfalls that parties easily fall into include: employees believing that "not receiving compensation means they are not bound by the agreement," jumping to a competing company without legally demanding compensation or terminating the agreement; employers requiring all employees to sign non-compete agreements but never paying compensation, and failing to provide written notice upon employee departure; and the lack of written handover during the departure process, resulting in unclear rights and responsibilities. Best practices include: employers paying compensation on a monthly basis and clearly defining obligations and scope in writing upon employee departure; employees verifying whether their positions fall within the legally defined scope and whether the compensation standard meets requirements before leaving, and, if necessary, seeking legal advice at the departure stage to resolve disputes at the source.

III. Frequently Asked Questions

Q1: Can the company make employees compensate for the attorney's fees incurred in pursuing breach of contract penalties?

It all depends on whether the agreement stipulates it. If the non-compete agreement and confidentiality agreement explicitly state that "the breaching party shall bear the arbitration fees, preservation fees, and other legal defense costs incurred by the complying party to enforce its creditor's rights", the arbitration tribunal and the court will generally support the reasonable and documented parts; if there is no such stipulation, since the general rule of "the losing party bearing the attorney's fees" does not apply to labor disputes, the attorney's fees paid by the company are usually absorbed by the company itself and can only be included in the breach of contract claim for comprehensive consideration. Enterprises should incorporate the cost-bearing clauses into the agreement at the drafting stage, rather than claiming them after a dispute arises; employees should also pay attention to this clause when signing the agreement, evaluate the cost of breaching the contract, and consult with a lawyer before signing the agreement or responding to a lawsuitBeijing Henglu Law FirmEvaluate the provisions related to risk.

Q2: If the company fails to pay the non-compete compensation, does the employee still constitute a breach of contract?

This needs to be looked at in stages. According to the judicial interpretation, if the employer fails to pay the economic compensation for three months due to the employer's reasons, the employee may request to rescind the non-compete agreement; before the rescission, the agreement remains effective, and the employee can claim compensation at 30% of the average monthly salary (not less than the minimum wage standard) for the period during which the employee has fulfilled his obligations. Therefore, the safe approach is: first, send a written notice to the employer to pay the compensation, then request the rescission according to law, and obtain the basis for the rescission before joining the competing company. If the employee does not send a notice or rescind the agreement and directly changes jobs, even if the company has not paid the compensation before, the employee may still be deemed to have breached the contract and be liable for the breach of contract damages. There are many such cases in practice.

Q3: What should I do if the agreed upon penalty for breaching the non-compete clause is too high?

You can request a reduction. The arbitrator will consider factors such as the employee's pre-resignation income level, the circumstances and duration of the breach of contract, the employer's actual losses, and the fault of both parties to determine whether the agreed amount is significantly excessive and beyond reasonable limits. Employees should prepare evidence including pay slips, salary information from the new position, and a statement of unobtained commercial benefits; while employers need to explain the composition and calculation basis of the losses. In practice, the reduction of the breach of contract penalty is often significant, but this does not mean that breaching the contract can be done lightly. The specific outcome will vary from case to case, so it is advisable to consult a lawyer to evaluate the validity and reasonable range of the breach of contract clause before defending against the lawsuit.

Q4: What is the maximum duration of a non-compete agreement? What is the compensation standard?

The maximum term is two years, and any portion exceeding this period shall be deemed invalid. Regarding the compensation standard, if there is an agreement, the compensation shall comply with the agreement (and shall not be grossly disproportionate to the point of being unfair). If there is no agreement, the compensation shall be paid monthly at 30% of the employee's average monthly salary during the 12 months preceding the termination or dissolution of the labor contract, and shall not be less than the local minimum wage standard. If the employer fails to pay the compensation within three months, the employee has the right to request the dissolution of the agreement. Note that the payment of the compensation shall be made monthly during the post-employment non-compete period. The practice of including the compensation in the salary during the employment period is not recognized in most regions, and employees may claim compensation separately.

Q5: What procedures and timeframes are involved in a non-compete dispute?

This is a labor dispute, which must first go through labor arbitration. The arbitration committee shall conclude the case within 45 days from the date of acceptance, and the case may be extended for no more than 15 days if the case is complex and approved; if the party is not satisfied with the arbitration award, he/she may file a lawsuit with the court within 15 days from the date of receipt of the arbitration award. The first-instance ordinary procedure shall be concluded within six months, and the summary procedure within three months. There is no arbitration fee, and the litigation acceptance fee is only 10 yuan. The procedural cost is not high, and the main input is the lawyer's fee and the time spent on evidence collection. Both enterprises and employees should complete the evidence collection and plan evaluation before arbitration. Most of the evidence in the non-compete dispute is in the hands of the other party or third parties. The earlier the evidence is fixed, the more initiative the party will have.

IV. Suggestions for Protecting Rights

  • The company should specify the compensation standards, the scope of the non-compete obligation, and the provisions on bearing legal costs such as attorney's fees in the non-compete agreement, and pay the compensation on a monthly basis with documented records.
  • Before leaving the company, employees should check whether they meet the legal eligibility requirements and whether the compensation meets the standard, and keep the agreement text and salary records.
  • If the company fails to pay compensation, the employee should first send a written reminder or request termination in accordance with the law, and then consider joining a competing company to avoid breaching the contract due to the "time lag".
  • The party claiming that the other party has breached the contract should fix the evidence as soon as possible, including social insurance records, labor contracts, business transactions, and information from the official website, etc. A single piece of evidence is not enough to determine the outcome of the case.
  • If the penalty for breach of contract is unreasonably high, the party concerned should first conduct a reassessment and then respond to the lawsuit. For cases involving the protection of trade secrets, the party concerned may also take relevant measures in combination with the reassessment.Intellectual property protection and corporate legal servicesCoordinate and handle it comprehensively.

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