Interpretation of the Compliance Guidelines for Enterprises Implementing Non-Compete Restrictions by Officials from the Ministry of Human Resources and Social Security

The General Office of the Ministry of Human Resources and Social Security (MOHRSS) recently issued the "Compliance Guidelines for Enterprises Implementing Non-Compete Restrictions" (hereinafter referred to as the "Guidelines"). A responsible official from the Labor Relations Department of the MOHRSS answered reporters' questions regarding relevant issues.

Background and Context Non-compete restrictions refer to an agreement between an enterprise and a laborer obligated to protect trade secrets. It stipulates that within a certain period after the dissolution or termination of the labor contract, the laborer must not be employed by a competing enterprise that produces or engages in the same type of products or business, nor may they start their own business to produce or engage in the same type of products or business.

The Labor Contract Law sets out principled provisions for the non-compete system. During the implementation of the law, this system has played a positive role in protecting corporate trade secrets and fostering a fair competitive environment. However, there have also been issues with some enterprises abusing the system.

Common abuses include: Including laborers who do not possess trade secrets within the non-compete scope, arbitrarily restricting post-resignation employment scopes, and demanding exorbitant liquidated damages while only paying low economic compensation.

These improper practices severely impact laborers' rights to employment, job selection, and career development, leading to numerous disputes. This not only hinders fair competition among enterprises but also causes a massive waste of human resources. Concurrently, a minority of laborers violate non-compete agreements and deliberately evade liability for breach of contract, thereby infringing on corporate interests.

To address these issues, coordinate the protection of corporate trade secrets and laborers' legitimate rights, promote fair competition, and achieve the orderly flow and efficient allocation of human resources, the MOHRSS conducted extensive research and listened to opinions from enterprises, laborers, experts, arbitration institutions, and courts. The Guidelines were formulated within the current legal framework to refine the specific requirements for compliant implementation. Enterprises can refer to the Guidelines to scientifically determine the scope of non-competes, standardize procedures, reasonably agree on rights and obligations, and protect their trade secrets while safeguarding laborers' rights, thereby fostering a fairer and more dynamic market environment.

Q1: How does the "Guidelines" guide enterprises to implement non-compete restrictions compliantly? To guide the compliant implementation of non-compete restrictions, the Guidelines primarily set forth the following requirements:

First, clarify the prerequisites for implementation. According to the Anti-Unfair Competition Law, trade secrets refer to commercial information, such as technical and operational data, that is not known to the public, has commercial value, and is subject to corresponding confidentiality measures by the enterprise. To prevent enterprises from arbitrarily defining trade secrets and improperly expanding the scope of restricted personnel, the Guidelines clarify that enterprises must first confirm the content and scope of their trade secrets. General industry common sense, industry practices, or commercial information accessible through public channels do not constitute trade secrets. Enterprises must not impose non-compete restrictions on laborers who have not known or had access to corporate trade secrets.

Second, follow the principles of necessity and reasonableness. Enterprises have various methods to protect trade secrets. While non-compete restrictions are one method, they inevitably negatively impact the laborer's employment and career development, and require the enterprise to pay economic compensation. Therefore, the Guidelines advise enterprises to prioritize other protective measures, such as controlling access to trade secrets, encrypting data, and setting reasonable declassification periods. A necessity assessment should be conducted before implementing non-compete restrictions.

Third, clarify the scope of restricted personnel. Under the Labor Contract Law, restricted personnel are limited to senior management, senior technicians, and other personnel with confidentiality obligations. Addressing the practice of some enterprises classifying regular staff, or even security guards and receptionists, as "other personnel with confidentiality obligations," the Guidelines explicitly state that laborers who only possess general industry knowledge and skills or only access general operational information are not subject to confidentiality obligations. When agreeing on non-compete obligations with "other personnel," enterprises must provide reasons in advance and specify the trade secrets to be protected.

Fourth, ensure fair and reasonable agreements on rights and obligations. To counter enterprises abusing their dominant position to enforce unequal agreements (e.g., arbitrarily expanding restricted industries, universally applying the maximum 2-year limit regardless of the timeliness of the secrets, or failing to stipulate economic compensation), the Guidelines prohibit enterprises from forcing agreements that violate laws or are manifestly unfair. Restrictions on industry scope and geography must be reasonably agreed upon based on the enterprise's business scope and the laborer's knowledge of trade secrets. The restricted scope should be specific and clear; global or nationwide restrictions are generally impermissible without sufficient justification. The duration should be reasonably based on the level of confidentiality and the timeliness of the secrets. If an enterprise requires a non-compete obligation, it must pay economic compensation.

Q2: How does the "Guidelines" guide the reasonable determination of economic compensation and liquidated damages? Economic compensation is the enterprise's payment to the laborer for fulfilling the non-compete obligation, while liquidated damages are the penalty the laborer pays the enterprise for breaching it. To address issues like excessively low compensation coupled with exorbitant penalties, or the bundling of compensation into regular salaries, the Guidelines stipulate:

Reference factors for economic compensation: Enterprises should reasonably determine compensation based on the R&D cost and commercial value of the trade secret, the scope of restricted employment, the laborer's salary level during employment, and the impact on the laborer's career development.

Standards adaptable to the restriction duration: The monthly economic compensation paid generally should not be less than 30% of the laborer's average monthly wage over the twelve months prior to contract termination, and must not be lower than the local minimum wage. If the non-compete period exceeds 1 year, the monthly compensation generally should not be less than 50% of the prior twelve months' average wage.

Form of payment: Enterprises must pay the economic compensation in a timely, monthly, monetary form during the restriction period. They cannot refuse payment under the pretext that the compensation was already included in the laborer's regular salary or bonuses.

Reasonable liquidated damages: The penalty amount should be reasonably based on the potential economic loss caused by the disclosure and the amount of economic compensation paid to the laborer. Generally, it should not exceed 5 times the total agreed-upon non-compete economic compensation.

Q3: How does the "Guidelines" guide laborers to fulfill their non-compete agreements? To ensure laborers legally adhere to their agreements, the Guidelines require:

Comprehensive fulfillment: Once initiated, both the enterprise and the laborer must fully perform their respective obligations according to the legally established agreement.

Verification of employment status: Enterprises may require laborers to report their employment status during the restriction period. Enterprises can legally verify compliance through open information, industry peer exchanges, business analysis, and receiving whistleblower reports.

Payment of liquidated damages for breach: If a laborer violates or attempts to evade the agreement, the enterprise can demand the agreed-upon liquidated damages and require the laborer to continue fulfilling the non-compete obligation.

Liability for further compensation: If the laborer's breach causes losses to the enterprise that exceed the liquidated damages, the enterprise can hold the relevant parties liable for the excess damages.

Q4: What are the dispute resolution channels for non-compete restrictions? The Guidelines provide clear pathways for resolving disputes:

Primary Channels: If a labor dispute arises over non-compete restrictions, the enterprise and the laborer can first attempt to resolve it through negotiation. If they are unwilling to negotiate or negotiations fail, the issue can be resolved through mediation, arbitration, or litigation.

Administrative Complaints: If an enterprise fails to pay the agreed-upon economic compensation during the restriction period, the laborer can file a complaint with the human resources and social security administrative department.

Role of Trade Unions: Enterprise trade unions are empowered to collect laborers' opinions regarding the enterprise's non-compete system and its implementation. If the enterprise implements non-compete restrictions improperly, the trade union can provide feedback or demand corrections.