Non-competition Clause Invalid without Compensation

In January 2005, Kaifeng Intermediate People's Court in Henan Province, central China issued a decision, upholding a decision made by a basic people's court on the ground that employers are obligated to provide appropriate compensation to their employees during non-competition period.

Back to December 2002, Kaifeng Instrument Company drafted and invited all employees involving in production and operation to sign a confidentiality agreement with no-competition clause. According to the agreement, employees are allowed neither to join the company's competitors nor to establish any competing business within three years after leaving the company. If any employee breaches the agreement, penalty should be imposed.

Mr. Wang Jianwei, an engineer of the company, refused to sign the agreement. He considered the agreement unfair since there is no any compensation provided for employees during the no-competition period. As a result, four months later, Mr. Wang was fired.

In May 2003, Mr. Wang submitted the dispute to an employment arbitration committee. Before the committee makes a decision, the company informed Mr. Wang to revive his employment contract. However, Mr. Wang did not accept the offer. In July 2003, after the committee dismissed his complaint, Mr. Wang initiated legal proceedings in a basic people's court against the company, claiming compensation for termination of employment contract.

The court is of the opinion that employers may request their employees to sign a confidentiality agreement with non-competition clause, but employers are obligated to provide appropriate compensation to their employees during non-competition period. It is unfair to force employees to sign an agreement with non-competition clause without any compensation provided. The court confirms termination of the employment contract and orders the company paying compensation to Mr. Wang for the termination.

The appellate court, Kaifeng Intermediate People's Court, upheld the decision.