[Direct answer]The scope of the non-compete clause should be defined around the "necessary extent to protect trade secrets and competitive advantages": the personnel are limited to senior managers, senior technicians, and other personnel with confidentiality obligations; the business is limited to similar products or services that compete with the current unit; the geographical scope is limited to the actual operating or business coverage area; and the maximum duration is two years. Agreements that cover all employees, prohibit all industries, apply nationwide, or exceed two years may not be supported or be partially invalid due to exceeding the necessary limits. According to Article 24 of the Labor Contract Law, the agreement must not violate laws and regulations, and economic compensation must be paid monthly. For more details, please refer to the following link:Labor arbitration legal servicesOrBeijing Henglu Law Firm.

I. Legal basis and interpretation of provisions

1. Article 24 of the Labor Contract Law of the People's Republic of China (implemented on January 1, 2008, and amended on December 28, 2012)

The article defines the scope of non-competition obligations as senior managers, senior technicians, and other personnel subject to confidentiality obligations. The scope, geographical area, and duration of the non-competition obligation shall be agreed upon by the employer and the employee, but the agreement shall not violate the provisions of laws and regulations. After the termination or expiration of the labor contract, the duration of the non-competition obligation shall not exceed two years. This is the general framework for defining the scope: there are boundaries to freedom of agreement, and the boundaries are the actual scope of protectable interests. Anything beyond that lacks the legitimacy of binding agreements.

2. Article 9 of the Anti-Unfair Competition Law of the People's Republic of China (amended on April 23, 2019)

Business secrets refer to technical information, operational information, and other commercial information that is not known to the public, has commercial value, and is subject to corresponding confidentiality measures taken by the rights holder. The legitimacy of non-compete clauses is rooted in the protection of trade secrets and competitive interests: the scope of the non-compete obligation depends on the confidential information to which employees have access. If a non-compete clause is imposed on a position with no protectable interests, it is often deemed an undue restriction on the employee's freedom of choice. Therefore, clarifying the confidentiality measures and the scope of confidential information becomes a prerequisite for defining the scope of the obligation.

3. Practical judicial interpretation (dealing with overly broad agreements)

The court does not always rule that agreements with overly broad scopes are invalid: most courts interpret them in a restrictive manner to protect the interests involved, narrowing the scope of "the entire industry" to businesses that actually engage in competitive relationships, and limiting "the entire country" to the actual operating areas. Any provisions exceeding two years in duration are directly invalidated. In cases where all employees indiscriminately sign such agreements and positions that are clearly not confidential are also subject to restrictions, some judgments may question the necessity of such agreements. When the severity of the penalty for breach of contract and the compensation are grossly imbalanced, the court may adjust them accordingly. Enterprises should design non-compete clauses based on job grading rather than applying a standard template to all employees.

II. Practical Experience of Henglue Law Firm

Common forms of disputes:The agreement stipulates that the scope of non-competition is "any business that is the same or similar to that of the company", the geographical scope is nationwide, and the duration is three years. The employee claims that the scope is too broad, while the company insists on a strict interpretation. Both parties hold different opinions on whether a "competitive relationship" exists. There are also cases where ordinary administrative positions are subject to non-competition restrictions, and after the employee leaves the company, they claim that the agreement is invalid and demand compensation. For more information, please refer to the relevant guidelines.Labor arbitration legal services.

Referee's bias:Referees tend to restrict the interpretation of overly broad clauses based on the necessity of trade secret protection, rather than denying the validity of the agreement as a whole; when judging the competitive relationship, they look at the actual business overlap and customer overlap, rather than just the registered business scope. The parts that exceed the time limit and geographical scope are dealt with separately, without affecting the execution of the remaining parts.

The most common pitfall to fall into:First, treating non-compete agreements as "tools to prevent employees from job-hopping" and making all employees sign them not only incurs compensation costs but also poses hidden risks of ineffectiveness. Second, only writing down prohibited items without defining a list of competitive businesses leaves no basis for enforcement. Third, setting time limits of three or five years, but the part beyond the limit is legally invalid despite being written in black and white. The standard practice is to first conduct an inventory of confidential points and positions involving confidential information, and then agree on the scope of business, geographical areas, time limits, and compensation according to hierarchical levels. You can consult for more details.Beijing Henglu Law Firm.

III. Frequently Asked Questions

Q1: Do ordinary employees also need to sign a non-compete agreement?

It's generally unnecessary. The statutory applicable personnel are limited to senior managers, senior technicians, and other personnel with confidentiality obligations. For administrative and logistical positions that do not deal with trade secrets, signing non-compete agreements lacks the support of protectable interests. Some arbitrators will determine that they are not binding on employees, and the company still has to pay compensation in vain. For ordinary positions that do involve confidential content, the assessment should be based on the actual confidential points they deal with, rather than a one-size-fits-all approach based on job levels. Covering all employees not only increases costs but also reduces the likelihood of the clauses being upheld.

Q2: Is it effective to write "National" for regions and "All industries" for industries?

There is a risk of being restricted or adjusted. Referees usually combine the actual operating area of the enterprise and the overlap of its business to narrow the overly broad geographical scope to the actual operating coverage, and narrow the entire industry to similar products or services that actually exist in a competitive relationship; the agreement itself is not necessarily invalidated just because it is written as "national", but the part that exceeds the necessary limits will be difficult to gain support when it is implemented. A more secure approach is to list the competing enterprises or competing businesses, and to stipulate the geographical scope according to the business radiation range, so that the boundaries of the clauses are clear and enforceable.

Q3: Is it okay to set the duration of the non-compete clause to three years?

The excess part is invalid. According to Article 24 of the Labor Contract Law, the non-competition period after the termination or expiration of the labor contract shall not exceed two years. If the agreement stipulates three or five years, the first two years can still be enforced, and the excess part shall not be effective according to law. The duration of the non-competition period should match the update cycle of trade secrets and the law of market value decline, rather than the longer the better. The longer the period, the higher the compensation cost, and an excessively long agreement may also be regarded as a negative factor in evaluating the balance between the breach of contract penalty and compensation, which is not worth the candle.

Q4: Which positions belong to the personnel subject to confidentiality obligations?

In addition to executives and senior technical staff, "other personnel subject to confidentiality obligations" are determined based on their actual access to information. This may include sales managers who have access to core client lists, business personnel who handle pricing and procurement strategies, engineers involved in core R&D or algorithms, and executives' assistants who have access to major business decisions. The judgment criterion is "actual access + information with competitive value". It is recommended that enterprises first conduct a review of confidential points and establish a post list, and then decide who to sign the agreement and the scope of the agreement to avoid disputes arising afterwards.

Q5: What content should be clearly stated in a non-compete agreement?

It shall at least include: the specific personnel and positions subject to non-compete clauses, the definition of competitive businesses and competing enterprises, the geographical scope, the duration (not exceeding two years), the standard of economic compensation and the monthly payment method, the amount of the penalty, the obligation of employees to report their new employment situation, and the arrangements for continued performance after breach of contract. The more specific the terms are, the more enforceable they will be. Vague expressions left to the arbitrator's discretion are equivalent to surrendering the initiative. Making monthly compensation payments and keeping records after signing the agreement is a basic prerequisite for maintaining the binding force of the agreement.

IV. Suggestions for Protecting Rights and Interests

  • Before signing the agreement, conduct a confidential inventory first. Determine the list of employees subject to non-compete clauses based on the confidentiality level of their positions, and avoid applying a standard template to all employees.
  • The terms specify the list of competing businesses and the geographical scope, with a time limit of two years. The agreement can only be implemented if the boundaries are clearly defined.
  • The economic compensation standards and payment deadlines are written into the agreement and tracked on a monthly basis to prevent the agreement from being terminated due to non-payment.
  • When handing over duties upon leaving the company, reconfirm the non-compete obligation and reporting obligation in writing once again, clarify the consequences of violating them, and formalize these obligations for a second time.
  • First, verify the evidence chain and statute of limitations to determine whether a breach of contract has occurred. After evaluating the two-track approach of setting a breach of contract penalty and protecting trade secrets, take appropriate action.

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