A non-compete agreement under China's Labor Contract Law restricts certain employees — senior management, senior technical staff and others with confidentiality obligations — from working for competitors or starting competing businesses after leaving. The restriction may last at most two years, and it is only binding if the employer pays monthly compensation throughout the restricted period, customarily 30% to 50% of the employee's pre-departure average salary depending on local rules (courts imply 30% where the contract is silent).
Why it matters
The Chinese non-compete inverts the Western default: it is the employer who must keep paying. Sign broad non-competes with everyone and you either fund a payroll of departed staff or, by not paying, watch the restriction lapse — after roughly three months of non-payment the employee can have it terminated. Used selectively, though, it is one of the few effective tools against the most common China IP leak: an engineer or sales head walking your designs, pricing and customer relationships to a competitor or a new venture. It works best as part of a stack — confidentiality clauses, well-papered trade secret controls, and an NNN agreement on the supplier side — rather than as a standalone form. Employers can release the obligation at exit to stop the payment clock, with up to three months' extra compensation owed if released mid-term.
Example
A robotics WFOE in Dongguan signs two-year non-competes with its four R&D leads at 40% monthly compensation, with liquidated damages of 24 months' pay for breach. When one lead joins a direct competitor five months after leaving, the company arbitrates with payment records in hand and recovers the agreed damages, plus an order ending the new employment.
Common mistakes
- Signing non-competes company-wide instead of with genuinely sensitive roles
- Forgetting to pay monthly compensation, which lets the employee escape the restriction
- Failing to release departing staff you do not need restricted, leaving payments running
- Setting liquidated damages so high or scope so broad that arbitrators cut them down
- Confusing the employee non-compete with supplier-side protections like an NNN agreement