Answer: If a non-competition agreement does not stipulate non-competition allowance, the employee usually faces two problems: the first is that, if if the employee abides by the non-competition obligation, should the employer pay them the allowance, and if yes, at what standard? The second is whether the non-competition agreement is binding on the employee, that is, if the employee engages in the competitive industry, are they liable for the liquidated damages stipulated in the agreement?
The judicial interpretation of labor disputes of the Supreme Court in 2020 stipulates that if an non-competition agreement only stipulates the obligation of non-competition but does not stipulate the non-competition allowance and the employee fulfills the obligation of non-competition, the employer shall pay the non-competition allowance at 30% of the average wages of the employee from the 12 months before their termination.1 Article 36 of the Interpretation of the Supreme People’s Court on the Application of Law in the Trial of Labor Dispute Cases (I) (Fashi (2020) No.26). “If both parties have agreed on non-competition in the employment contract or confidentiality agreement, but have not agreed to provide non-competition allowance to the employee after the termination or dissolution of the employment contract, the employee has fulfilled the non-competition obligation, and now requires the employer to pay monthly economic compensation at 30% of the average wage of the worker from the 12 months before the termination or dissolution of the employment contract, the people’s court shall support it. If 30% of the average monthly wage stipulated in the preceding paragraph is lower than the minimum wage standard at the place where the employment contract is performed, it shall be paid according to the minimum wage standard.”
Therefore, the answer to the first question is: in the case that the non-competition agreement does not stipulate the non-competition allowance and the employee fulfills the obligation of non-competition, according to the aforementioned judicial interpretation of the Supreme Court, the employee can claim the non-competition allowance according to the standard of 30% of their average wage from the 12 months before their termination. The average wage from the 12 months here refers to all wage items including overtime wages, bonuses, allowances and so on.2Beijing Lepu Diagnostics Co., Ltd. Civil Judgment of Second Instance of Labor Dispute Civil Judgment of Beijing First Intermediate People’s Court (2022) Jing 01 Min Zhong No.4663.Moreover, the amount of non-competition allowance shall not be lower than the local minimum wage standard.
An exceptional situation is that there are higher local non-competition allowance standard in terms of percentage of average wages in some provinces and cities with legislative authority, different from the 30% stipulated by the supreme court’s judicial interpretation. For example, in the case of Wu Zhisheng before the Guangdong Provincial High Court in 2016, the court pointed out that Shenzhen Special Economic Zone, based on its legislative power, stipulated a different proportion of non-competition allowance not less than 50% of the average wage from the previous 12 months, and that the calculation of non-competition allowance standard should be applied to this special economic zone standard.3Wu Zhisheng and Shenzhen Kangdaxin Real Estate Management Consulting Co., Ltd., Labor Dispute Retrial Civil Judgment No.177 of Guangdong Provincial People’s High Court (2016). The court held that if the parties did not stipulate non-competition allowance, but the employee fulfilled the non-competition obligation, the average wage standard shall apply 50% wages from the 12 months before their termination in Shenzhen Special Economic Zone (rather than 30% according to the judicial interpretation of the Supreme Court).
For the second question, the judicial interpretation of the Supreme Court does not specify whether the non-competition obligation in absence of non-competition allowance is binding on employees if the employee is unwilling to fulfill their non-competition obligations.
At present, the vast majority of courts hold that even if there is no provision on non-competition allowance, the non-competition agreement is still binding on both parties. If the employee engages in a competitive industry without cancelling the non-competition agreement, they shall be liable for liquidated damages stipulated. There are unequivocal cases in the high courts of Hebei and Zhejiang provinces.4Civil Ruling on Labor Dispute Retrial Review and Trial Supervision of Zhang Xinjun and Chengde Pute Intelligent Electronics Co., Ltd. Civil Ruling of Hebei High Court (2018) Ji Min Shen No.2681. Application for Labor Dispute between Chen Xiaotuan and Zhejiang Crystal Photoelectric Technology Co., Ltd. Civil Ruling of Zhejiang High Court (2013) Zhe Min Shen Zi No.658. Judgment of Second Instance of Labor Dispute between Mo Jianzhe and Guohong Liquefied Gas Machinery Engineering (Dalian) Co., Ltd. Civil Judgment of Intermediate People’s Court of Dalian City, Liaoning Province (2023) Liao 02 Min Zhong No.1360.
Exceptionally, in the case of Li Guangming in 2014, the Guangzhou Intermediate Court held that the non-competition agreement for the employee, a university lecturer, was not binding due to lack of non-competition allowance provision. However, the real reason might be that the employee was not a person with confidentiality obligations.5Guangzhou University and Li Guangming Labor Dispute Appeal Case Guangzhou Intermediate People’s Court of Guangdong Province Civil Judgment (2014) Sui Zhong Fa Min Yi Zhong Zi No.5498. In the case, the employee, a university lecturer who did not involve trade secrets, signed a non-competition agreement without agreed allowance. When the employee resigned his job, he paid RMB 50,000 as the non-competition liqudidated damages to the employer. The employee later sued for refund of the RMB 50,000. The court found that the employee was not obligated to pay the liquidated damages and ordered the repayment. Another special case is that if there is neither non-competition allowance nor non-competition liquidated damages in the non-competition agreement, the court may find that there is no non-competition agreement between the two parties, so the employee is not bound by the non-competition obligation.6Xi’an Qiyuan Consulting and Design Co., Ltd. of China Machinery Engineering and Xiao yuanwen’s Labor Dispute Appeal and Application for Retrial Civil Ruling No.1829 of Shaanxi Provincial People’s High Court (2019). In the case, both parities’ non-competition provision was only a clause of the confidentiality agreement, and there was no provision about non-competition liquidated damages. The court found that there was no non-competition agreement.
Therefore, although your non-competition agreement does not stipulates non-competition allowance, if you fulfill the obligation of non-competition, the employer cannot refuse to pay you the non-competition allowance under the pretext of a lack of provision in the agreement. And in general, even if you are not willing to fulfill the obligation of non-competition, the agreement is still binding on you. If you violate the obligation of non-competition, the employer may require you to bear the liquidated damages and continue to perform the obligation of non-competition.
Of course, if you want to get rid of the restriction of the non-competition agreement, you can also cancel the agreement through legal procedures. Please see “Can I cancel the non-competition agreement?”
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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
- 1Article 36 of the Interpretation of the Supreme People’s Court on the Application of Law in the Trial of Labor Dispute Cases (I) (Fashi (2020) No.26). “If both parties have agreed on non-competition in the employment contract or confidentiality agreement, but have not agreed to provide non-competition allowance to the employee after the termination or dissolution of the employment contract, the employee has fulfilled the non-competition obligation, and now requires the employer to pay monthly economic compensation at 30% of the average wage of the worker from the 12 months before the termination or dissolution of the employment contract, the people’s court shall support it. If 30% of the average monthly wage stipulated in the preceding paragraph is lower than the minimum wage standard at the place where the employment contract is performed, it shall be paid according to the minimum wage standard.”
- 2Beijing Lepu Diagnostics Co., Ltd. Civil Judgment of Second Instance of Labor Dispute Civil Judgment of Beijing First Intermediate People’s Court (2022) Jing 01 Min Zhong No.4663.
- 3Wu Zhisheng and Shenzhen Kangdaxin Real Estate Management Consulting Co., Ltd., Labor Dispute Retrial Civil Judgment No.177 of Guangdong Provincial People’s High Court (2016). The court held that if the parties did not stipulate non-competition allowance, but the employee fulfilled the non-competition obligation, the average wage standard shall apply 50% wages from the 12 months before their termination in Shenzhen Special Economic Zone (rather than 30% according to the judicial interpretation of the Supreme Court).
- 4Civil Ruling on Labor Dispute Retrial Review and Trial Supervision of Zhang Xinjun and Chengde Pute Intelligent Electronics Co., Ltd. Civil Ruling of Hebei High Court (2018) Ji Min Shen No.2681. Application for Labor Dispute between Chen Xiaotuan and Zhejiang Crystal Photoelectric Technology Co., Ltd. Civil Ruling of Zhejiang High Court (2013) Zhe Min Shen Zi No.658. Judgment of Second Instance of Labor Dispute between Mo Jianzhe and Guohong Liquefied Gas Machinery Engineering (Dalian) Co., Ltd. Civil Judgment of Intermediate People’s Court of Dalian City, Liaoning Province (2023) Liao 02 Min Zhong No.1360.
- 5Guangzhou University and Li Guangming Labor Dispute Appeal Case Guangzhou Intermediate People’s Court of Guangdong Province Civil Judgment (2014) Sui Zhong Fa Min Yi Zhong Zi No.5498. In the case, the employee, a university lecturer who did not involve trade secrets, signed a non-competition agreement without agreed allowance. When the employee resigned his job, he paid RMB 50,000 as the non-competition liqudidated damages to the employer. The employee later sued for refund of the RMB 50,000. The court found that the employee was not obligated to pay the liquidated damages and ordered the repayment.
- 6Xi’an Qiyuan Consulting and Design Co., Ltd. of China Machinery Engineering and Xiao yuanwen’s Labor Dispute Appeal and Application for Retrial Civil Ruling No.1829 of Shaanxi Provincial People’s High Court (2019). In the case, both parities’ non-competition provision was only a clause of the confidentiality agreement, and there was no provision about non-competition liquidated damages. The court found that there was no non-competition agreement.