Recent Disputes Over Non-Compete Agreements Highlight the Need for Improved Regulations

Experts recommend narrowing the scope of non-compete agreements to better balance the rights of both employers and employees, ultimately reducing disputes.

Non-compete agreements are intended as preventive measures for protecting an employer’s trade secrets. However, in recent years, the number of disputes arising from these agreements has surged. How to refine the rules and conditions surrounding non-compete clauses is becoming an urgent issue within the judicial system.

Take the case of Li Fangji, a software programmer who was sued for over $152,000 by his former employer after allegedly violating a non-compete agreement. The stress of the situation has taken a toll on his personal life, leading to his mother being hospitalized with heart issues and his wife threatening divorce due to worries about their children’s well-being.

“I signed a one-year non-compete, but only received compensation for the first three months. Despite my emails seeking clarity, I thought the agreement had automatically lapsed, only to find myself facing a lawsuit,” Li shared in an interview with Workers’ Daily. As a 38-year-old programmer, he has encountered numerous challenges in the job market due to this agreement, leaving him uncertain about his chances in court.

Originally designed as a measure to protect sensitive commercial information, non-compete agreements are increasingly becoming a source of contention. The crux of the issue is finding a balance that preserves both corporate interests and workers’ rights, making this a pressing challenge within labor law.

Li’s employment journey reflects the struggle of many affected by non-compete clauses. In March 2019, he started working at an internet company in Hangzhou, but due to the demands of his new job and the need to care for his ailing family members back home in Shanghai, he decided to resign in May 2023.

With the job market looking promising at the time, Li interviews with several large companies. However, just a week before his resignation, HR unexpectedly asked him to sign a one-year non-compete agreement. Although he believed his work didn’t involve trade secrets, he was informed that a supplementary agreement he signed at onboarding made the non-compete binding regardless.

The potential employers he had lined up all fell within the scope of his non-compete, forcing him to accept a position at a smaller tech firm where he ended up working on chat software. After just three months, Li left due to overwhelming stress and extended hours, but the non-compete still limited his job prospects.

Three months into his job search, he faced difficulties securing a suitable position. Eventually, he joined a decorative materials company as a partner, but a lack of connections and sales skills hindered his progress. When he reported his employment to his former employer, skepticism arose regarding the legitimacy of his role, leading to the suspension of his non-compete compensation.

After not receiving compensation for three months and finding communication ineffective, Li felt justified in assuming he no longer needed to adhere to the non-compete. He began searching for jobs in March, hoping to return to his programming career, but this has also been challenging. An interview in May with an e-commerce company looked promising, but surveillance footage led his old employer to claim he was breaching the non-compete.

Experts are expressing increasing concern about the misuse of non-compete clauses. Under China’s Labor Contract Law, employers can impose non-compete restrictions on certain workers, typically high-level managers and technical personnel, along with agreed financial compensation during the non-compete period. However, many companies are requiring more employees to sign non-compete agreements under the guise of confidentiality, effectively extending these terms to a broader workforce.

Professor Shen Jianfeng from Central University of Finance and Economics notes a trend of non-compete stipulations being applied excessively. Data from various courts show a dramatic mismatch between the intended targets of non-compete clauses and their actual application. For instance, in data gathered from 2018-2023, only 7 non-compete disputes involved senior management, while 178 involved ordinary workers bound by confidentiality.

One worker at a materials company shared, “Our company requires all employees to sign non-compete agreements. Whether they’re enforced is up to the company, but there’s no harm for them in doing so.”

The path to curbing this misuse remains daunting. A notable case in December 2022 saw a rare victory for an employee embroiled in a non-compete dispute—but such outcomes are exceptions rather than the rule. Workers are being left with little choice but to comply with these agreements as they risk facing substantial penalties for breaches.

Professor Shen recommends refining the non-compete frameworks to limit their application and minimize their economic impact on workers. Recent developments indicate that there are ongoing efforts to improve legislation regarding non-compete agreements, with courts now recognizing that the scope and duration of such clauses should align with actual exposure to confidential information and its associated business value.

As policymakers continue to review and refine these regulations, the focus remains on protecting workers’ rights while still addressing valid business interests.