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Ten Typical Cases of Labor Disputes With Senior Executives (Ⅶ)

2021-03-22

On December 4, 2020, the Beijing Intermediate People’s Court No. 1 held a press conference to inform of labor disputes involving senior executives in recent years and issued the "Beijing’s Ten typical labor dispute cases." River Delta Law Firm conducted a comprehensive interpretation of the ten major cases and put forward corresponding management suggestions for employers.

Case 7: Senior Executives Violating Non-Compete Agreement Shall Pay Liquidated Damages
 
Introduction
On August 11, 2014, Du joined a financial company and successively served as assistant to the general manager and secretary of the board of directors. During onboarding, both parties signed a labor contract which includes non-competition clauses. On March 21, 2016, the two parties signed an "Agreement on Dissolution of the Labor Contract", which stipulated that the agreement on competition restriction and other agreements signed by both parties remain valid. Later, the company sued Du for establishing a competing company while being employed by them, and request the reimbursement of the non-competition compensation. After the trial, the court held that Du did not fulfill the obligation of non-competition during his tenure and after he resigned, and company does not need to pay corresponding compensation. Du shall reimburse the non-competition compensation and pay liquidated damages.
 
Judge Interpretation
For employees who are obliged to keep confidentiality, the employer may agree on non-competition clauses with the employee in the labor contract, or confidentiality agreement. For Senior Executives, it is even more important to abide by the principle of good faith and fulfill the obligation of loyalty. Even if the company and the Senior Executive do not make a special agreement on the restriction of competition during their employment, the Senior Executive cannot violate the principle of good faith and engage in competitive behaviors that harm the company's interests. If the Senior Executive violates the non-competition agreement, liquidated damages shall be paid to the company in accordance with the agreement.
 
Lawyer's suggestions
Regarding the question of whether the non-competition agreement can be applied to workers during their employment. The Labor Contract Law clarifies that employers can agree on non-competition clauses with employees in labor contracts or confidentiality agreements. It is not clear if non-competition clauses can only take effect after the employee departs, and it does not specify if employees need to perform the non-competition during employment. The Company Law stipulates the statutory obligation of company executives to prohibit competition, and there is no clear legal provision for whether ordinary workers other than Senior Executives must perform non-competition obligations during employment. In judicial practice, the main view tends to believe that workers also have obligations to restrict competition during employment, and these obligations stem from the principle of good faith and the obligation of loyalty.
In order to maximize the protection of the company’s business secrets and competitive advantages, it is recommended to:
1. According to the principle of autonomy, stipulate that employees who bear the obligation of confidentiality shall bear the obligation of non-competition during and after resignation, and specify liquidated damages;
2. When an employee is found to have violated non-competition obligations, take appropriate actions to protect rights by actively obtaining evidence of the employee's breach of contract, fully evaluate the risk, litigation value, etc.;
3. From the perspective of the burden of proof, for disputes over the restriction of competition after employees resign, the court usually requires the employee to provide social security payment and personal tax payment records after resignation from the original company. As for obtaining evidence of laborers’ violation of the obligation to restrict competition during their employment, inquire the industry and commerce department for evidence of the private establishment of enterprises competing with the company. Additionally, the company may consider other items such as emails, surveillance videos, telephone recordings, vehicle parking information, and especially the transfer of funds obtained by judicial organs, etc. All these aspects may partly or fully prove that the laborer has violated the obligation to restrict competition.


 

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