Answer: Above all, an employee who bears obligation of non-competition but violated the obligation ought to assume the liability of breach of contract. Secondly, if the employee’s non-competition agreement stipulates a high amount of liquidated damages, whether the liquidated damages are binding depends on the following factors: the amount of the employee’s non-competition allowance, the income before the termination, the employee’s length of service for the employer, the degree of the employee’s fault, the loss caused by the breach of contract to the employer, and the record of past payments of non-competition allowance by the employer.
In the judicial practice, it is a common phenomenon that the courts alter the excessive non-competition liquidated damages. The courts change the liquidated damages not only by considering individual factors, but also by considering comprehensive factors. For example, in the case of Yu Shoukai before the Xinjiang High Court in 2019 and the case of Ge Jinhua before the Sichuan High Court in 2015, the liquidated damages were altered according to the multiple of the total amount of non-competition allowance.1Sichuan Xichan Plastic and Cosmetic Hospital Co., Ltd. v. Ge Jinhua Labor Dispute Case Sichuan Provincial People’s High Court Civil Judgment (2015) C.M.T.Z. No.408. In the case, the non-competition allowance is the minimum wage standard, but the liquidated damages are set at RMB 5 million, and the court adjusted the standard to 12-month non-competition allowance as liquidated damages. Civil Ruling on Labor Dispute Retrial Review and Trial Supervision between Yu Shoukai and Xinte Energy Co., Ltd. Civil Ruling of the High Court of Xinjiang Uygur Autonomous Region (2019) Xin Min Shen No.1719. In the case, the liquidated damages agreed to was 30 times the wages from the 12 months before resignation, and the court changed it to 3 times the total amount of non-competition allowance.
In the case of He Xianli before Kunshan City Court of Jiangsu Province in 2017, the court calculated the damages according to a certain proportion of the total wages paid by the employer to the employees. 2Kunshan Qingyan Ziguang Testing Technology Co., Ltd. and He Xianli Labor Dispute First Instance Civil Judgment Jiangsu Kunshan People’s Court Civil Judgment (2017) Su 0583 Minchu No.19267. In the case, the parties agreed on a liquidated damages of RMB 100,000, and the court adjusted the liquidated damages to 50% of the total wages received by the defendant during his tenure at the plaintiff’s office. In the case of Zhang Jiamei before Beijing Haidian District Courtin 2021, the court decided the damages according to the comprehensive consideration of income, length of service, degree of fault, agreed liquidated damages, and payment history. 3Zhang Jiamei and Tencent Technology (Beijing) Co., Ltd. Labor Dispute First Instance Civil Judgment Beijing Haidian District People’s Court Civil Judgment (2021) Jing 0108 Minchu No.15930. In the case, the employee worked in Tencent for nearly three years, the last year’s salary was RMB 504,000 with a year-end bonus RMB 144,000, and the agreed liquidated damages were twice the last year’s salary income. Two months after her resignation, she joined a competitor. Therefore, the Court comprehensively considered Zhang Jiamei’s length of service in Tencent, salary level, degree of fault, non-competition period, payment of non-competition allowance and other factors, and determined the liquidated damages of RMB 600,000 (equivalent to half of the total salary or agreed liquidated damages of the year before her resignation). The most common practice by courts is to consider all kinds of factors to decide the liquidated damages in discretion.
Therefore, whether the 5 million of liquidated damages stipulated in your non-competition agreement are binding depends on whether the defendant (the employee) requests for adjustment of excessive liquidated damages in the dispute and how the court considers the aforementioned factors.4 Under the contract law in China, a party to a contract who asserts excessive liquidated damages must raise the claim of adjustment of the damages to the court.
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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.
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- 1Sichuan Xichan Plastic and Cosmetic Hospital Co., Ltd. v. Ge Jinhua Labor Dispute Case Sichuan Provincial People’s High Court Civil Judgment (2015) C.M.T.Z. No.408. In the case, the non-competition allowance is the minimum wage standard, but the liquidated damages are set at RMB 5 million, and the court adjusted the standard to 12-month non-competition allowance as liquidated damages. Civil Ruling on Labor Dispute Retrial Review and Trial Supervision between Yu Shoukai and Xinte Energy Co., Ltd. Civil Ruling of the High Court of Xinjiang Uygur Autonomous Region (2019) Xin Min Shen No.1719. In the case, the liquidated damages agreed to was 30 times the wages from the 12 months before resignation, and the court changed it to 3 times the total amount of non-competition allowance.
- 2Kunshan Qingyan Ziguang Testing Technology Co., Ltd. and He Xianli Labor Dispute First Instance Civil Judgment Jiangsu Kunshan People’s Court Civil Judgment (2017) Su 0583 Minchu No.19267. In the case, the parties agreed on a liquidated damages of RMB 100,000, and the court adjusted the liquidated damages to 50% of the total wages received by the defendant during his tenure at the plaintiff’s office.
- 3Zhang Jiamei and Tencent Technology (Beijing) Co., Ltd. Labor Dispute First Instance Civil Judgment Beijing Haidian District People’s Court Civil Judgment (2021) Jing 0108 Minchu No.15930. In the case, the employee worked in Tencent for nearly three years, the last year’s salary was RMB 504,000 with a year-end bonus RMB 144,000, and the agreed liquidated damages were twice the last year’s salary income. Two months after her resignation, she joined a competitor. Therefore, the Court comprehensively considered Zhang Jiamei’s length of service in Tencent, salary level, degree of fault, non-competition period, payment of non-competition allowance and other factors, and determined the liquidated damages of RMB 600,000 (equivalent to half of the total salary or agreed liquidated damages of the year before her resignation).
- 4Under the contract law in China, a party to a contract who asserts excessive liquidated damages must raise the claim of adjustment of the damages to the court.