What are “Service Time Period” and “Non-competition” agreements in Chinese laws, and several important issues related in practice

In many labor dispute cases, especially those involving senior technical personnel or management, breach of a service time period agreement and breach of a non-compete agreement (or what we called a competition restriction agreement) are two frequent matters, but the provisions on these two matters in Chinese labor laws are somehow unique and complex. Therefore, through this article, we hope to explain these two concepts to readers and provide a way for understanding several important issues related to them.

What is a “Service Time Period” agreement?

Simply put, the service time period refers to the period during which the employee promises to continue working for the employer after receiving the specialized technical training provided by the employer. According to the law, the employer may sign a service time period agreement with the employee, stipulating that after the employer provides special technical training for the employee and pays the corresponding fees, the employee shall not resign during the specified service time period, otherwise the certain amount stipulated in the service time period agreement shall be compensated by the employee to the employer for liquidated damages. While this explanation may not seem difficult to understand, there are some notable points in practice:

1. What kind of training is so-called special technical training and can be agreed on a service time period?

Not all training provided by the employer can be regarded as special technical training, that is to say, not for any training, the employer can agree on a service time period agreement with the employee. According to our practical experience, the training that can be used to agree on the service time period must be a training for a special skill or technology and must be different from ordinary job training. For example, if you are a HR manager, the ordinary job training provided by the employer may include making personnel files, using the company’s OA system, using online meeting software, etc. Since those training may be provided by most common employers for such position, they are unlikely deemed to be special technical training. However, if the employer provides you with training in a specific foreign language in order to improve your ability to manage a special group of foreign employees, or specially send you to study linguistics or psychology in order to equip you with high-level personnel communication skills to improve your particular performance, then those training belongs to special or specialized technical training. In addition, specialized technical training usually requires employers to pay training costs, and such costs are relatively high. In many cases, specialized technical training may also require the employer to pay for the travel and living expenses of the trainee. Finally, during the training period, the employer must still paying the employee her labor remuneration as normal, even though the employee may be just studying and not working as usual for the employer.

Under such circumstances, a service time period agreement can be initiated between the employer and the employee.

2. Limitation on the amount of liquidated damages.

Although the law allows the employer and the employee to agree on a liquidated damages, so that the employer can claim against the employee who violates its continuous service commitment, but in reality, there may be a limit to the amount of liquidated damages that the court will support. That means the amount of the liquidated damages the court may be favor with could be different to what agreed between the employer and the employee. For example, the amount of liquidated damages cannot exceed the total of training expenses, travel expenses and other direct expenses actually paid by the employer for the training. Note that “actually paid” means that the employer bears responsibility of providing the court with evidence, i.e. invoices, receipts, or transfer records, to prove that those expenses were actually paid. In other words, even though the employer and the employee have agreed on a liquidated damages of 100,000 yuan, in reality the training that the employee participates in is a free training program, and the employer does not pay any specific expenses, such as training fees, travel expenses, or communication, catering or other direct expenses, then the court will not support the employer to claim any liquidated damages against the employee. In addition, if the employee has performed the work obligations for a part of the service time period before resigning, when calculating the liquidated damages, the amount of liquidated damages corresponding to the part of the time served should also be deducted, and that the employer can only ask the employee to compensate the remaining part of the damages.

3. Not all resignations will lead to liquidated damages.

According to the law, if an employee resigns during the service time period because of the illegal behavior of an employer, the employee’s resignation will not be deemed as a breach of the service time period agreement and does not need to compensate the employer for liquidated damages. Such illegal behavior of an employer, typically includes the situation that the employer fails to pay the labor remuneration in full and on time. That is because the purpose of setting a liquidated damages is only for preventing employees from breaching their commitment for their own interests or reasons, but not for the faults of the employer.

4. The agreed service time period can exceed the remaining labor contract term.

The law allows the employer and the employee to agree on a service time period that exceeds the remaining period of the labor contract. For example, even if the labor contract between you and the employer is about to expire in one year, a two-year service time period agreement can still be concluded between you and the employer. In this case, the employer needs to extend the labor contract with you to at least the last day of the agreed service time period.

What is a “Non-competition” agreement?

To put it simply, the employer and some specific employees can conclude such agreement specifying that within a maximum of two years after these employees leave their jobs, they shall not go to work for competitors of the employer, or set up their own enterprises that may compete with the employer. In order for such restriction to take effect, the employer must pay compensation to the employee as agreed upon after the employee leaves the company until the restriction expires. In reality, such conventions may encounter many problems, such as:

1. The competition restriction may not be applied for all types of employee.

According to the law, a non-compete agreement can only be made with an employer’s senior managers, senior technical personnel and other employees who have access to the employer’s important business secrets. In other words, if an employee is not a director, a supervisor, a general manager, nor a core technical personnel of the employer, the employer generally cannot impose the competition restriction with that employee, unless the employer can provide evidence to prove that the employee has obtained or at least has the ability to contact to the important trade secrets of the employer.

2. Conditions for the entry into force of a non-competition agreement.

Of course, there must be a non-competition agreement signed between the employer and the employee, or there is a non-competition clause in the labor contract. In addition, the employer must also pay the employee a monthly compensation after she leaves the company. The amount of compensation cannot be lower than 30% of the employee’s average income in the 12 months before her leaving, as well as the local monthly minimum wage announced by the local government.

3. The scope of the competition restriction.

The law allows the employer to agree with the employee on a list of companies or industries that the employee cannot work for or open by herself. However, the scope of such list should generally be realistic. For example, a restriction that KFC not allowing its employees to engage in any catering industry (rather than only the fast food industry) may be considered overly broad and revoked by the court at the end. If the employer and the employee had not clearly agreed on a list or industry type for restriction (we do not recommend this), then the court will determine whether a certain company is a competitive entity to the employer based on the actual situation, so as to determine whether the agreement of the competition restriction has been violated when a dispute happens.

4. Limit of term for a non-competition agreement.

The law stipulates that a competition restriction can only be limited to a maximum of two years, which means that even if the employer compensates you, they can only ask you not to work for a competitor, or you to not become their competitor yourself for two years.

5. The amount of liquidated damages may be compulsorily adjusted.

The law allows an employer and an employee to agree on a certain amount as a liquidated damages, so that in the future the employer can claim compensation from employee who violates the non-competition agreement. Although the law does not limit the amount of this liquidated damages, it is obvious that the excessive liquidated damages may not be supported by the court. According to our experience, the amount of liquidated damages should usually be around the potential losses that the employees may bring to the employer due to her violation of the non-competition agreement.

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