How To Effectively Implement Non-competition Agreement With Employees
Why Non-Competition Agreement shall be signed with Employees
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Non-Competition Agreement is signed with Employee who grasps the business secret of the company for the purpose of preventing him from seeking employment in the Employers competitors or engaging in competitive business by himself after the termination of the employment contract with the Employer. The purpose of such Non-Competition Agreement is to prevent the disclosure or improper use of the business secret.
Not all Employees shall be subject to Non-Competition Agreement. In accordance with relevant law, Non-Competition Agreement is usually used for senior management personnel, senior technical personnel and other employee subject to confidentiality liability. Generally speaking, Employees including senior managers, senior marketing staffs, technical developers, key information staffs etc can be party to Non-Competition Agreement. Since these Employees grasp the business secret of the Employer, a Confidentiality Agreement shall be signed with them at the same time Non-Competition Agreement is signed. For other employees, it is not necessary to sign Non-Competition Agreement.
In accordance with current labor law, Employee enjoys the freedom in choosing job at his own will. In the event no special agreement exists for job limitation (such as Service Agreement), any Employee can resign by giving 30 days prior written notice. Without any limitation to the Employee who grasps the business secret of the Employer in his job choice, unfair competition may happen and the Employers interest will be damaged. Under such circumstances, a legal binding Non-Competition Agreement is quite necessary.
Current difficulties and problems in implementing Non-Competition Agreement
Although most of Employers understand the purpose and function of Non-Competition Agreement, it is not popular phenomena that Employers sign or implement Non-Competition Agreement with the Employees. The main reasons are as follows:
I. The Employer may doubt if the Employee can actually fulfill his liability of non-competition.
The performance of Non-Competition Agreement depends on strict fulfillment of the obligation of non-competition by the Employee. Such obligations include: 1) the Employee shall not work for other companies competing with the Employer; 2) the Employee shall not engage in competitive business by himself. Without a complete supervision system, it is difficult for the Employer to appraise the Employees fulfillment of his obligations.
II. In order to ensure the validity of Non-competition Agreement, the Employer is obliged to pay compensation to the Employee.
With a Non-Competition Agreement, the Employees right in choosing job and obtaining remuneration is limited since he cannot do the job he is good at. Therefore, his income will be reduced accordingly. Thus, the law requires that the Employer must pay compensation to the Employee who is subject to the non-competition obligation. For some employers, since they are not able to trace the Employee for supervising his fulfillment of the obligations, and at the same time additional cost has to be paid, they may choose not to enter into the Non-Competition Agreement with the Employees.
III. Dispute over the existence of competition relationship
Non-Competition Agreement requires the Employees not to work for other employers competitive with the Employer within a certain period (no longer than 2 years). However, it may be controversial that which companies have competition relationship with the Employer. Thus, the dispute may arise to the existence of competition relationship.
Advice and Suggestion
According to our experience in dealing with cases involving non-competition agreement, from the perspective of the Employer, we have the following advice and suggestion for reference:
I. To avoid potential dispute, it is necessary to illustrate the current key competitors in Non-Competition Agreement.
The Employer shall be aware which companies constitute competitors in its industry. Therefore, in Non-Competition Agreement, we suggest the scope of known competitors shall be clarified. In this way, the Employer is able to reminder the Employee the list of competitors that the Employee is not allowed to work for. If the Employee is found to work for these competitors, he shall be deemed to have breached Non-Competition Agreement.
II. To clarify the condition for payment of Non-Competition compensation
Since Non-Competition Agreement shall be carried out after the Employee leaves the Employer, to some extent, the Employer is difficult to learn the activities of the Employee after he leaves the Employer. To strike a balance, the Non-Competition compensation can be paid to the Employee on a monthly basis. In the Non-Competition Agreement, it can be agreed that prior to the payment of compensation every month, the Employee shall honestly report his working and living status. If the Employee refuses to report, or the report obviously conflict with the fact investigated, the Employer shall have reasons to believe that the Employee does not fulfill his obligation of non-competition. Under such circumstances, the Employer can option to terminate the Non-Competition Agreement by giving one month notice to avoid further loss, or the Employer can investigate the evidence of violation of non-competition obligation by the Employee and pursue against him for the breach of contract.
III. High penalty shall be imposed.
In the Non-Competition Agreement, a high penalty shall be imposed, which can be a deterring measure against the Employee in case of breaching the Agreement.
IV. If the Employer wants to stop paying the non-competition compensation, it shall send a prior written notice of termination to the Employee.
Most employers believe that as long as they stop paying the compensation to the Employee, the Non-Competition Agreement will be terminated automatically. Unfortunately that is not correct. Due to the misunderstanding, some employers are pursued for compensation by the Employee through arbitration or litigation. If the Employer has no intention to continue the Non-Competition Agreement, or it doubts the Employee has breached the Agreement and therefore wants to have an early termination of the Agreement, then one month prior written notice shall be sent to the Employee, which is a necessary procedure to follow as required by the law.
by: Erex Chen
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