Author: Erex Chen
Non-competition agreement can effectively reduce the risk of the disclosure of confidential information belonging to the employer or improper use of the confidential information by the employee due to employer’s working for competitive companies or engaging in start of business by the employee himself which is competitive with the employer’s after the employee leaves the employer. However, according to the law, the employer is liable to pay the non-competition compensation on a monthly basis after the employee leaves the employer. With regard to the amount of compensation, under current law, it can be negotiated by both the employer and the employee. However, if no specific amount is agreed, the employee is entitled to request for 30% of the average monthly salary of the previous 12 months back from the termination of the labor contract.
Many employers regard the non-competition compensation as an extra financial burden for the employer. Therefore, for saving purpose, some employer will put a clause in the non-competition agreement that the salary received by the employee has included the non-competition compensation to be paid by the employer. So after the employee leaves the employer, the employer does not need to pay additional compensation to the employee.
So is such practice legal? Or if it is not legal, what the consequence will be?
In 2013, the Songjiang Court in Shanghai made a judgment toward a labor dispute in relation to the non-competition. In this case, the employer and the employee agree that the salary paid by the employer to the employee has included the anticipated non-competition compensation for the employee. The employee claimed that the compensation shall be paid on a monthly basis after he left the employer and furthermore, no specific amount for compensation has been agreed and the employer also cannot prove how much compensation has been paid to the employee.
After the hearing, the court determined that the employee’s salary receipt does not indicate any item in relation to the non-competition compensation. Furthermore, no specific amount of such compensation and terms for paying the compensation was ever agreed. Therefore, the court is not able to recognize if the employer has actually paid the compensation. On that basis, the court supported the claim of the employee for payment of non-competition.
In above case, the employer intended to avoid its liability of payment for non-competition compensation by entering into the clause of “the salary has included the pre-paid non-competition compensation” but was not successful.
Although the court has given negative judgment towards the employer’s practice as described above, the approach of prepaying the non-compensation is not always impossible. However, if the employer intends to pre-pay the compensation, the followings shall be noted:
1.The non-competition compensation and salary of the employee shall be listed separately in employee’s receipt of remuneration. The specific amount of compensation and the time period for payment (maximum 2 years for the term of non-competition according to the law) shall be agreed in the non-competition agreement;
2.The receipt of remuneration shall include salary and non-competition compensation separately with details. The employee shall be required to sign the receipt;
3.After the pre-paid non-competition compensation has been paid off in accordance with the agreed term for non-competition, the employer shall stop paying and remove the item of non-competition compensation from the receipt of remuneration.
By doing so, we believe the practice of pre-paying compensation shall be legal and effective.
This article is published solely for the interest of friends and clients and should not be relied upon as the legal advice of any kind from us. Should you have any questions about this article, please contact the partner of Mylink Law Office.
Erex Chen, Managing Partner