New Compliance Guideline for Noncompete Agreements

The Ministry of Human Resources and Social Security of China (the “Ministry”) has released a compliance guideline for noncompete agreements between employers and employees (the “Compliance Guideline”), aiming to better balance employers' need for trade secret protection and employees' legitimate rights to free flow in the human resources market. The Compliance Guideline is not mandatory but offers employers good practices for concluding, performing, and enforcing noncompete agreements.  

1. Overview of Noncompete Agreements

1.1 The Labor Contract Law provides in a general way that:

(1) Employers may enter into noncompete agreements in labor contracts with senior management personnel, senior technical personnel and other personnel who have confidentiality obligation;

(2) Employers and employees may agree on the scope, geographical region and period of noncompete; however, the noncompete period shall not exceed two years after expiration or termination of their labor contracts;

(3) Employees are entitled to compensation payable by employers on a monthly basis during the noncompete period;

(4) Employees shall pay mutually agreed liquidated damages for their breach of noncompete obligations; if liquidated damages are insufficient to offset actual losses, employees shall continue to bear corresponding compensation liability.

1.2 The Supreme Court’s judicial interpretations released in 2020 and 2025 clarify the following in relation to noncompete agreements:

(1) Unless agreed otherwise by employers and employees, employees are entitled to compensation for noncompete equivalent to the higher of (a) 30% of average monthly salary over the last 12 months and (b) the applicable local minimum monthly salary, for each month of their performance of the noncompete obligations;

(2) Unless agreed otherwise by employers and employees, agreed noncompete compensation is payable if (a) employers require performance of noncompete obligations upon labor contract termination, or (b) employees request compensation after they have performed noncompete obligations;

(3) If employers, due to their own fault, fail to pay noncompete compensation for 3 months, employees are entitled to terminate the noncompete agreements;

(4) Employers may terminate noncompete agreements by paying additional 3-months’ noncompete compensation;

(5) Employees eligible to noncompete agreements are limited to those who have access to trade secrets and IP related confidential matters;

(6) The scope, geographical region and period of noncompete shall be reasonably compatible with trade secrets and IP related confidential matters that employees have access to;

(7) Employees are bound by noncompete restrictions during their employment without entitlement to separate noncompete compensation;

(8) If employees breach their noncompete obligations, they are obligated to (i) pay liquidated damages as per agreement; (ii) refund compensation they have received; and (iii) continue performing noncompete obligations, upon request by employers.

2.Background of Guideline Release

According to the Ministry, enterprises are abusing the noncompete agreements: some include employee who have no access to trade secrets in the scope of noncompete restrictions; some arbitrarily restrict the employment scope of employees after they leave their jobs; some only pay low noncompete compensation but request employees to bear excessively high liquidated damages, etc., which have seriously affected employees' right to employment and career development, resulting in a large number of disputes. At the same time, as the Ministry points out, there are also employees who breach non-compete agreements, deliberately evade liability for breach of contract, and infringe on the interests of enterprises.

Therefore, the Ministry has formulated the Compliance Guideline to provide more specific requirements for concluding, performing and enforcing noncompete agreements in a compliant way.

3. Highlights of the Compliance Guideline

3.1 Employee eligibility

Noncompete agreements should only apply to senior management personnel and senior technical personnel who have access to trade secrets and other employees who have confidentiality obligation as to trade secrets. For employees who arenot senior management personnel or senior technical personnel, employers should inform such employees of the reasons together with specific contents of trade secrets to be protected in advance.  

For this purpose, employers shall proceed with noncompete agreements on the basis of necessity and reasonableness:

(i) firstly, identify contents and scope of trade secrets;

(ii) preferentially, adopt effective measures to protect trade secrets, including, control access to trade secrets, encrypt trade secrets data and set up reasonable period for separating access to trade secrets;

(iii) not arbitrarily expand scope of noncompete, including employees, restricted enterprises or territory.

3.2 Noncompete Territory and Restricted Employment Scope

In general, employers should define their noncompete territory and restricted employment scope based on their business scope, business competition and access of employees to trade secrets.

Specifically:

(1) noncompete territory should be compatible with employers’ business operation. It should not be nationwide or worldwide unless employers have provided sufficient reasons in the noncompete agreements;

(2) restricted employment scope under noncompete should be limited to those enterprises that produce or operate the same type of products or engage in the same type of business and have a competitive relationship.3.3 Noncompete Period

Noncompete period can be determined based on involvement of employees in the trade secrets and statute of the trade secrets. The maximum period for noncompete obligations is 2 years.

3.4 Noncompete Compensation

Employers should reasonably determine noncompete compensation based on development costs and commercial value of trade secrets, scope of restricted employment, remunerations of target employees and potential impact on employees’ employment choices and career development.

The amount of noncompete compensation can be mutually agreed upon by employers and employees. However, the Ministry suggests the amount of the noncompete compensation as follows:

(1) In general, monthly noncompete compensation should be equivalent to the higher of (a) 30% of employee’s average monthly salary over the last 12 months and (b) the applicable local minimum monthly salary;

(2) In particular, if noncompete period is more than 1 year, monthly noncompete compensation should not be lower than 50% of employee’s average monthly salary over the 12 months.Noncompete compensation is separate from and in addition to employees’ salaries and bonuses.

3.5 Notification of Enforcement

Employers may assess and decide if they want to enforce noncompete agreements after employment termination or not. Employers should notify employees of their decisions in writing at the time of employment termination or expiration even if they decide not to enforce noncompete agreements.

3.6 Employees’ Reporting

Employers may request employees to report their employment status during noncompete period. In addition, employers may check employees’ performance of noncompete obligations through public information, information exchange with competitors, business analysis and receiving complaints.

Please note that the Compliance Guideline keeps silent on whether employers remain obligated to continue making compensation payments if employees fail to fulfill such reporting requirement.

3.7 Liability for Breach

Liquidated damages for breach may be determined based on possible losses that unauthorized disclosure of trade secrets by employee may cause and noncompete compensation that employers have paid. It is recommended that liquidated damages should not be higher than 5 times the mutually agreed noncompete compensation.

In the event of breach of noncompete obligations by employees, employers may request employees to (a) pay liquidated damages as per agreement; (b) continue to perform noncompete obligations; and (c) pay compensation if agreed liquidated damages are insufficient to cover losses.

3.8 Termination of Noncompete Agreements

Termination for cause

Noncompete agreements terminate, and employees are no longer bound by noncompete obligations when (i) employers have been failing to pay noncompete compensation for more than 1 month and such failure has not been corrected even after employees’ notice; or (ii) employers’ failure to pay noncompete compensation have been more than 3 months.

Termination without cause

Employers are free to inform employees to terminate noncompete agreements at any time prior to implementation. Employers may early terminate noncompete agreements by paying certain amount of compensation to be mutually agreed by employers and employees or, if mutual consultation fails, by paying compensation of no less than 3-month noncompete compensation.

3.9 Must-have Clauses in Noncompete Agreements

Noncompete agreements usually should have the following clauses:

• restricted employment scope

• noncompete territorynoncompete period

• noncompete compensation standard and payment

• liabilities for breach of noncompete obligations