China Employment Non-Compete Agreements: Enforcing and Defending Covenants for Foreign Employers

The following is general information on Chinese employment law, not legal advice for any specific covenant or claim. Article numbers and amounts are applied on the facts of each case; consult qualified counsel before acting.

The statutory frame: Articles 23 and 24

Non-competition in China rests on two articles of the Labor Contract Law (中华人民共和国劳动合同法), adopted on 29 June 2007, effective on 1 January 2008 and amended on 28 December 2012. Article 23 allows an employer to agree a non-compete clause with an employee who bears confidentiality obligations, requires the employer to pay monthly economic compensation during the post-termination period, and permits a claim for liquidated damages on breach. Article 24 limits who can be bound — senior managers, senior technical personnel, and other personnel with confidentiality obligations — and leaves scope, territory and term to the agreement, subject to a hard ceiling of two years.

The two-year ceiling and the compensation that keeps the covenant alive

The maximum post-termination term is two years; anything longer is invalid beyond that point. Compensation is the covenant's lifeblood: if the employer stops paying, the employee's restraint ends. The often-quoted "30%" figure is a fallback, not a mandatory rule. Under Article 36 of the Supreme People's Court's Interpretation I on Labor Disputes (法释〔2020〕26号, effective 1 January 2021), where the parties agreed no amount, compensation is 30% of the employee's average monthly wage over the twelve months before termination, floored at the local minimum wage; where the parties agreed an amount, the agreement controls. A covenant with no compensation and no agreed figure can be unenforceable in practice, so the drafting matters as much as the law.

How a covenant ends or survives

Interpretation I sets out the mechanics in Articles 37 to 40. If the employer fails to pay for three months, the employee may terminate the covenant (Article 38). If the employer unilaterally terminates the covenant, it owes three additional months' compensation (Article 39). And paying the penalty does not end the obligation — the employer may still demand continued performance (Article 40). The practical shape: a covenant is a running obligation kept alive by monthly payment, and an employer that wants out mid-stream buys its exit with three months' compensation.

The 2025 shift: Interpretation II

The new Interpretation II on Labor Disputes (法释〔2025〕12号), adopted on 17 February 2025, published on 31 July 2025 and effective on 1 September 2025, tightened the employee's side in Articles 13 to 15. Article 13: an employee with no access to trade secrets cannot be validly bound, and scope, territory or term that exceeds what is commensurate with the trade secrets is invalid as to the excess. Article 14: an in-service non-compete is valid, and no compensation is owed for it. Article 15: on breach, the employee returns the compensation received and pays the penalty. The headline for foreign employers: over-broad covenants — binding staff who never touched confidential information — are now more likely to be trimmed by the court.

Enforcing the penalty

On breach, Chinese courts generally enforce the agreed non-compete penalty as written, and in this specific context they typically do not reduce it under the general commercial liquidated-damages rule in Civil Code Article 585 — a practice point rather than a hard statute, so it should be verified against the facts and the court's view. There is also non-binding guidance: the Ministry of Human Resources and Social Security's compliance guideline (September 2025) suggests compensation generally not below 30% of the prior twelve-month average wage, and for terms exceeding one year preferably not below 50%. That is guidance, not law, but it signals the direction of enforcement thinking.

Practical steps for a foreign employer

• Limit the covenant to people who actually hold confidential information — after Interpretation II, a blanket clause for all staff invites trimming.
• Fix the compensation amount in the contract, and never let payment lapse for three months.
• Keep the term at or below two years and the scope and territory commensurate with the trade secrets at stake.
• Decide termination early — a unilateral exit costs three months' compensation under Interpretation I Article 39.
• On breach, pursue both the return of compensation and the penalty, and do not treat the penalty as ending the restraint.

The summary above is general information current as of the date of writing, and article numbers and amounts should be confirmed against the official texts. For the disputes behind these covenants, see employment disputes in China: a guide for foreign companies, and for the procedure if a claim is filed, see China labor arbitration: procedure, timelines and strategy.