issue 255 August 2007
China – new employment law will affect employee ‘non-compete’ clauses
A new law, the Labor Contract Law (LCL), designed to clarify and strengthen the legal protection of Chinese workers, will take effect on 1 January 2008. It contains a range of provisions, including provisions relating to non-compete obligations, that will enhance the position of employees. background Prior to the introduction of the LCL, China’s employment law was contained in the 1995 Labor Law (LL). Although all existing contracts signed in accordance with the LL will remain in force, it is likely that any clauses that do not comply with mandatory rules under the LCL will cease to have effect. ‘non-compete’ provisions Employers frequently rely on confidentiality and ‘non-compete’ clauses in employment agreements to protect their IP and trade secrets. Although the inclusion of noncompete clauses was previously permitted under an administrative rule, the LCL introduces specific provisions relating to these clauses. Under the new law, non-compete clauses may be included subject to the following: • they may be included only in contracts with senior management, high-level technical personnel and other employees who are under a specific obligation of confidence; although the geographical restriction can be agreed, the term of the obligation must not • exceed two years after termination of employment; and employees are entitled to compensation for loss caused by compliance with ‘non-compete’ clauses. The LCL does not provide guidance on compensation. Past judicial practice, however, suggests any agreed compensation must be reasonable.
other key provisions Other key provisions include: a written agreement must be entered into within one month of commencement of employment; internal rules substantially affecting employee rights must be negotiated with appropriate employee representatives; restrictions on the length of probation periods have been introduced; employers cannot impose liquidated damages except for breach of ‘non-compete’ provisions or early termination by the employee where the employer has provided training; and severance payments on termination must be made in certain specified cases. comment The LCL will certainly enhance the protection of Chinese employees. In doing so, however, it imposes a number of important new obligations on employers. All employers in China should now be re-examining their employment agreements and updating them where necessary to ensure compliance with the new law.
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