Answer: The law does not specify during employment relationship whether employee have the obligation of non-competition, whether the obligation requires their employers to pay non-competition allowance, and whether agreed liquidated damages are binding.

At present, the judicial decisions of courts around the country tend to hold that employees have the duty of loyalty to their employers. If both parties agree in the agreement that they shall not engage in competitive industries during their tenure, the violator shall pay liquidated damages, and the liquidated damages clause shall be valid even if the employer has not paid non-competition allowance during the employment tenure.

For example, in the case of Zhai Haiyang before Guangdong Provincial High Court in 2020, the court held that the non-competition liquidated damages during the employment tenure did not need non-competition allowance as a consideration, because employees had a duty of loyalty to the employer.¹
Zhai Haiyang, Foshan Sanmu Lighting Electrical Appliances Co., Ltd. Civil Ruling on Labor Dispute Retrial Review and Trial Supervision Civil Ruling of Guangdong Provincial People’s High Court (2020) Yue Min Shen No.6056.

Sichuan High Court, Beijing High Court, and Shanghai High Court all have similar decisions.² The labor dispute application case between Li Lun and Sichuan Xingdeli Membrane Structure Technology Co., Ltd., Civil Ruling of Sichuan High Court (2013) C.M.S.Z. No.2572. In the case, the court held that the non-competition clause of the Employment Contract Law included two non-competition obligations, namely, on-the-job and post- resignation, and that the agreed liquidated damages were legal. The court however reduced the on-the-job liquidated damages from RMB 300,000 to RMB 150,000. Civil Ruling on Labor Dispute Retrial Review and Trial Supervision of Tian Weixing and Guangzhou Hilali Cosmetics Co., Ltd. Civil Ruling of Guangdong Provincial People’s High Court (2018) Yue Min Shen No.1825. In the case, the on-the-job non-competition liquidated damages penalty are five times the amount of wages, and the court confirms that the agreement is valid. Li Zhiyang and Shanghai Huige Technology Development Co., Ltd. Civil Ruling on Trial and Supervision of Other Labor Disputes Civil Ruling of Shanghai High Court (2017) Hu Min Shen No.2217. Labor Dispute Case of Gao Zeyan v. Shenzhen Henglida Electronic Weighing Instrument Co., Ltd. Civil Ruling of Guangdong High Court (2014) Yue Gao Fa Min Shen Zi No.1740.

Therefore, if the agreement between the two parties stipulates the liquidated damages for on-the-job non-competition obligation, the employee shall bear the obligation to compensate for the liquidated damages if they violates the non-competition obligations. This liability is not conditional of the payment on a non-competition allowance. Of course, for whether this kind of liquidated damages is established or not, we also need to consider whether the liquidated damages constitute a fine imposed by the employer on employees. If it constitutes a fine, the employer must also meet the monthly wage deduction limit on the employee. Please see Can an employer impose a fine on an employee and deduct their wages?

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Mr. Wangdong

Mr. Dong Wang has been in practice for over 20 years, specializing in business law, including employment law, commercial law, company law, and intellectual property law. Mr. Wang has earned respect and trust from his clients due to his professionalism, fidielty, and kindness.

Email: wangdong@royalaw.com

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  Zhai Haiyang, Foshan Sanmu Lighting Electrical Appliances Co., Ltd. Civil Ruling on Labor Dispute Retrial Review and Trial Supervision Civil Ruling of Guangdong Provincial People’s High Court (2020) Yue Min Shen No.6056.
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  The labor dispute application case between Li Lun and Sichuan Xingdeli Membrane Structure Technology Co., Ltd., Civil Ruling of Sichuan High Court (2013) C.M.S.Z. No.2572. In the case, the court held that the non-competition clause of the Employment Contract Law included two non-competition obligations, namely, on-the-job and post- resignation, and that the agreed liquidated damages were legal. The court however reduced the on-the-job liquidated damages from RMB 300,000 to RMB 150,000. Civil Ruling on Labor Dispute Retrial Review and Trial Supervision of Tian Weixing and Guangzhou Hilali Cosmetics Co., Ltd. Civil Ruling of Guangdong Provincial People’s High Court (2018) Yue Min Shen No.1825. In the case, the on-the-job non-competition liquidated damages penalty are five times the amount of wages, and the court confirms that the agreement is valid. Li Zhiyang and Shanghai Huige Technology Development Co., Ltd. Civil Ruling on Trial and Supervision of Other Labor Disputes Civil Ruling of Shanghai High Court (2017) Hu Min Shen No.2217. Labor Dispute Case of Gao Zeyan v. Shenzhen Henglida Electronic Weighing Instrument Co., Ltd. Civil Ruling of Guangdong High Court (2014) Yue Gao Fa Min Shen Zi No.1740.