[Direct answer]When an executive jumps to a competitor, the company can take three steps to protect its rights: first, fix the evidence of their employment with the competitor (such as the social insurance payment unit, the industrial and commercial registration of their position, and records of negotiating or signing contracts on behalf of the new company); then send a letter to urge them to fulfill their obligation of non-compete and continue to pay economic compensation as agreed; finally, apply for labor arbitration to request the payment of the breach of contract penalty and continued fulfillment of obligations. If they are suspected of disclosing trade secrets, the company may claim compensation for unfair competition in a separate case. According to Articles 23 and 24 of the Labor Contract Law, the maximum duration of the non-compete obligation is two years, and the company must pay economic compensation on a monthly basis. If the company fails to pay for three months due to its own reasons, the employee has the right to terminate the agreement. It is recommended to consult a lawyer as soon as possible to evaluate the evidence and formulate a plan. For more details, please refer to the following link:Labor arbitration legal servicesOrBeijing Henglue 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 (implemented on January 1, 2008 and amended on December 28, 2012)

Article 23 allows employers and employees with confidentiality obligations to agree on non-compete clauses and penalties for breach of contract; Article 24 specifies that the applicable personnel are limited to senior managers, senior technicians, and other personnel with confidentiality obligations. The scope, geographical area, and duration shall be agreed upon by both parties, but shall not violate laws and regulations, and the duration shall not exceed two years. During the non-compete period after the termination or conclusion of the contract, the employer shall provide monthly economic compensation, which is the consideration for the binding nature of the agreement. In practice, agreements that only impose restrictions without compensation are very likely to be challenged by employees and may not be supported by the court.

2. Articles 36, 38, and 39 of the Interpretation of the Supreme People's Court on the Application of Law in the Trials of Labor Dispute Cases (I) (effective January 1, 2021)

Article 36 stipulates that if there is no agreed compensation standard, if the employee has fulfilled the obligation of non-competition, he/she may claim 30% of the average monthly salary in the last 12 months before the termination or expiration of the labor contract, and not less than the minimum wage standard of the place where the labor contract is performed; Article 38 clearly stipulates that after the employee pays the breach of contract penalty, the company may still require him/her to continue to fulfill the obligation of non-competition; Article 39 stipulates that if the company fails to pay the economic compensation for three months due to its own reasons, the employee may request to rescind the non-competition agreement. Enterprises shall pay the compensation on a monthly basis to avoid losing the binding force due to the suspension of compensation payments.

3. Practical adjudication guidelines (evidence of employment and adjustment of the breach of contract penalty)

The court usually determines breach of contract based on "who went where and what was done": the units that pay social insurance or housing provident fund, the shareholders or senior executives registered in the industrial and commercial registration, the contracts and bidding documents signed in the name of the new unit, and the attendance records at industry exhibitions and in public reports are frequently accepted as evidence; mere rumors or simple supervisor nominal participation are often defended as unrelated to the industry. If the agreed breach of contract penalty is significantly higher than the total compensation and actual losses, the employee may request a reduction. The arbitrator will comprehensively consider the compensation standard, job level, breach of contract circumstances, and loss assessment. If the company insists on continuing to perform the contract, the fact that the employee has already worked in the same industry will affect the enforcement method and supervision of performance.

II. Practical experience of Henglue Law Firm

Common forms of disputes:The agreement also includes ordinary employees in the non-compete clause, but the compensation is not paid monthly or not paid at all. The only evidence is "I heard he went to a certain company". The penalty for breach of contract is often millions of yuan, but there is no evidence to support the losses. Some companies immediately stop paying compensation once they find out that an employee has changed jobs, but three months later, the employees terminate the agreement, and the binding force of the agreement becomes invalid from the beginning. For more details, please refer to the relevant pathway.Labor arbitration legal services.

Referee's Tendency:The arbitrator first reviews the validity of the agreement and the payment of compensation, then examines whether the chain of evidence for employment meets the high degree of probability, and finally weighs the reasonableness of the breach of contract penalty. If the company's evidence forms a two-layered proof of "joining a new unit + engaging in the same industry", the probability of determining a breach of contract significantly increases; if only the employment is proven but the engagement in the same industry is not proven, the claim is often rejected or leads to disputes.

The most common pitfalls to avoid:First, they delay the implementation of the agreement, missing the one-year arbitration statute of limitations and allowing evidence to be lost over time; Second, they only sue the employees but fail to investigate whether the new employer has obtained and used the trade secrets, allowing the losses to escalate; Third, the compensation payments lack clear descriptions and records, leading to conflicting accounts between the parties. The standard approach is to gather evidence immediately upon discovery, send a letter of demand, make monthly payments with a clear purpose description, and simultaneously have a lawyer assess whether additional trade secret remedies are needed. Further consultation may be required.Beijing Henglue Law Firm.

III. Frequently Asked Questions

Q1: How much can one generally claim as a penalty for breaching a non-compete agreement?

The penalty for breach of contract is agreed upon by both parties, and there is no legal cap on it, but it's not necessarily the higher the better. If the agreed amount is significantly out of balance with the economic compensation and actual losses, the employee may request the court to reduce it. The adjudicator will adjust the total compensation, job level, breach circumstances, and loss situation comprehensively. It is recommended that enterprises set the total amount of non-competition compensation as a reference range for negotiation, and at the same time, pay attention to preserving evidence of losses such as customer loss and order transfer. When claiming the amount, they should have evidence to back it up to avoid being put in a passive position after the agreed amount is greatly reduced due to being unreasonably high.

Q2: What will happen if the company stops paying non-compete compensation?

The risk is great. According to Article 39 of the "Interpretation (I)", 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. After the agreement is rescinded, the employee's job-hopping will no longer constitute a breach of contract, and the company's binding force will be lost. If it is necessary to continue the binding, the employer should explicitly waive the non-compete obligation in writing upon the rescission or termination of the agreement and handle the compensation matters in accordance with the law; if it is necessary to continue the binding, the employer should pay the compensation in full on a monthly basis and keep the transfer records and notes to prevent the passive situation of "wanting to manage but unable to do so".

Q3: How can we prove that the executive has joined a competitor's company?

Common evidence includes: change records of social security or housing provident fund payment units, employment information publicly announced on the new unit's official website or industrial and commercial registration, contracts or bidding documents signed in the name of the new unit, attendance records at industry conferences and public reports, and business correspondence after clients are poached. The evidence should form a two-layer proof of "employment + engagement in the same industry". Single pieces of evidence are often disputed as nominal, consultative, or unrelated to the company's business. Evidence collection must be legal and avoid obtaining it through infringing methods such as stealing communication records. If necessary, supplementary evidence should be obtained under the guidance of a lawyer.

Q4: Can I pursue both the breach of contract penalty and compensation for trade secrets at the same time?

It is possible to pursue claims through two different paths. The breach of contract penalty can be claimed in labor arbitration according to the non-compete agreement; infringement of trade secrets constitutes an act of unfair competition, and a separate lawsuit can be filed under Article 9 of the Anti-Unfair Competition Law to claim cessation of infringement and compensation for losses. In serious cases, it may also involve criminal liability for infringement of trade secrets. The two paths are not mutually exclusive, but the evidence required is different: the former requires proof of the fact of breaching the non-compete obligation, while the latter requires proof of the confidentiality points, confidentiality measures, and infringing use behaviors. It is recommended that lawyers coordinate and plan the litigation strategy to avoid conflicts between the two paths.

Q5: Can I still claim my rights if the process of protecting my rights has dragged on for too long?

The statute of limitations for applying for arbitration in labor disputes is one year, starting from the date when the party knows or should have known that their rights have been infringed. If a senior executive joins a competitor, evidence should be collected, a notice should be sent, and arbitration should be applied for in a timely manner. Delays may lead to the expiration of the statute of limitations or the loss of key evidence. If the breach of contract is in a continuous state, the starting point of the statute of limitations is disputed. It is safer to take action as soon as it is discovered. When the statute of limitations is about to expire, the statute of limitations can be interrupted by written notices and other means, and the delivery certificates should be preserved, and then the arbitration procedure should be proceeded.

IV. Suggestions for Protecting Rights

  • When employees are hired, they are required to sign non-compete agreements according to their positions. These agreements apply to executives, technical staff, and personnel involved in core confidential matters, but not all ordinary employees are subject to them.
  • If you find that the employee is switching to a competitor, immediately secure evidence of social insurance, business registration, and business transactions, form a two-tier chain of proof, and then send a letter to remind the employee to fulfill their obligations.
  • During the non-compete period, the employer shall pay the employee economic compensation on a monthly basis and specify the purpose of the payment. The employer must not stop making the payments without authorization to avoid the employee terminating the agreement after three months.
  • The penalty clause should be commensurate with the compensation and losses to avoid being reduced to an unreasonably high amount. At the same time, it is necessary to evaluate whether to add a lawsuit for trade secrets to the case.
  • Act immediately upon discovery, pay attention to the one-year arbitration statute of limitations, and, if necessary, hire a lawyer to develop a dual-track plan for arbitration and unfair competition.

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