Business law

Reporting obligations in non-competition disputes China


Non-competitive disputes

IIn recent years, the number of non-compete disputes has risen as employers actively use non-compete agreements to protect their intellectual property and competitiveness. According to the “plaintiff bears the burden of proof” principle, the former employer is responsible for providing evidence of the departing employee’s breach of the non-compete agreement, i.e. evidence such as the departing employee doing self-employment of the same type of work as the previous employer, or working for a competitor.

Non-compete disputes present significant challenges for former employers with regard to evidence collection, as they face limited methods and the risk of infringement of individuals’ privacy and other legal rights during the evidence collection process. Under general evidence rules, departing employees required to prove compliance with non-compete obligations are not permitted.

To address these issues, former employers must look at the direction and leads to gather evidence, and explore ways to increase the burden of proof for departing employees in future legal proceedings.

One effective tactic has been to include reporting obligations in non-compete agreements to stipulate that departing employees must report their subsequent employment to their former employer, which helps mitigate the above challenges and has shown positive results in practice.

The correct agreement

Xie Yang, Zhilin Law Firm
Xie Yang
Principal partner
Zelin Law Firm

An employer can be hard-pressed to independently ascertain the departing employee’s subsequent employment status. To address this problem, employers include an obligation in non-compete agreements for employees to report regularly on their employment status.

This provision enables employers to determine whether an employee has breached non-compete obligations based on their employment status. Although employment contract law does not specifically require employees to report their employment information after leaving a job, the obligation to report becomes a valid agreement and must be adhered to by the parties involved, so long as they declare externally that the clause is in compliance with the law, and they agree To adhere to it. This requirement effectively places a certain burden of proof on employees.

Non-competitive compensation

In many non-compete agreements, companies provide that they have the right not to pay non-compete compensation if the departing employee refuses to comply with or improperly fulfills an obligation to report his subsequent employment.

Whereas in the past these clauses were considered invalid by courts as legal obligations, recent case law indicates a change of heart.

For example, in Li Yunping v. Chengdu Ximingda Electronics Co., LtdThe court recognized the non-compete agreement and the resignation agreement as true expressions of the parties’ intent, mutually agreed upon and not in violation of laws and regulations, making them legally valid.

In this case, the employee reported to me his jobs, services, and investments for the months of August and September 2017, but failed to provide any other reports. Therefore, the Company was not obligated to pay Li the third month’s non-compete compensation.

However, the obligation to report work is not provided for in the Employment Contracts Act and differs from the non-compete obligation. It is a supplementary obligation within the non-competition agreement.

Therefore, it is recommended that employers include express provisions to temporarily withhold non-compete compensation in the event of a refusal to fulfill the reporting obligation.

Furthermore, the agreed scope and criteria for reporting should be reasonable and fair. If it is excessively broad and unreasonable, it may lead to a burden on departing staff and present difficulties in fulfilling the obligation.

In such cases, the employer’s justification for withholding the non-compete compensation due to the employee’s failure to report may be sufficient, and the departing employee may seek early termination of the non-compete agreement based on the employer’s failure to pay the non-compete compensation.

Direction of investigation

Based on the leaving employee’s report, the former employer can conduct an in-depth investigation and analysis of his or her employment status. Factors such as their professional background, salary level and new employers’ business scope are taken into consideration to determine if the departing employee is suspicious, if the report is accurate, or if there is a possibility of providing false information.

The former employer gains insights to decide whether initiating an investigation and gathering evidence is necessary and worthwhile, and helps determine the primary direction of the investigation.

The employee appears before the court

In cases where departing employees provide false employment information, they may be exposed during an investigation by their former employer. Article 64 of several provisions on evidence in civil actions authorizes the court to require the parties to appear in person and answer questions about the case.

Article 66 of the provisions states that if a party refuses to appear, sign a statement or answer questions without valid reason, the court will consider the circumstances of the case and assess the credibility of the facts.

If there is no other evidence to support the facts in question, the court must rule not in favor of the party. In non-compete litigation, departing employees are increasingly required to appear in court and face cross-examination by experienced judges. In such situations, employees who provide false employment information are likely to have difficulty defending their actions effectively.

Adjust compensation

In non-compete dispute situations, departing employees often argue that non-compete compensation is unreasonably high and seek court action to lower it. The court takes into account several factors when deciding to approve a reduction, and one critical aspect is the degree of self-hatred shown by the defaulter.

Willingly providing false employment information would likely be considered a major act of malice, resulting in the court’s reluctance to reduce compensation or limit the extent of the reduction.

If employers effectively use the reporting obligation, it could help improve the traditional imbalance where a former employer faces disadvantage in non-compete disputes.

Xie Yang is a senior partner in Zelin Law Firm

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