Noncompetes in China: Recent Developments Provide Guidance to Strengthen Enforceability

Noncompete agreements are important tools that employers can use to protect proprietary assets, such as goodwill, customer relationships, employee relationships, trade secrets, and other confidential information. In general, noncompetes must satisfy certain scope and other requirements to be enforceable. Recent judicial and other administrative developments in China provide welcome guidance to strengthen the enforceability of noncompetition obligations both during and after the employment relationship.

As we reported in our earlier LawFlash, China’s Supreme People's Court issued on August 1, 2025 its Interpretations of Some Issues concerning the Application of Laws for the Trial of Labor Dispute Cases (II) (Interpretation II), which took effect on September 1, 2025.

One of the most significant changes under Interpretation II concerns how employers may impose noncompetition obligations on employees.

First, Interpretation II affirms that the scope of noncompete clauses should be limited to a reasonable and proportionate extent, ensuring that such clauses do not unduly restrict the employees’ professional mobility or expose them to disproportionate liabilities.

Second, Interpretation II confirms the employer’s ability to require and enforce noncompete obligations during the employment term without requiring the employer to provide separate financial consideration. (In contrast, it is well-settled that separate financial consideration is required during the post-termination period of restraint.)

Third, Interpretation II provides employers the option to seek liquidated damages if an employee breaches a valid noncompete obligation during the employment term.

Enforceability depends on the employee’s actual access to trade secrets and proprietary information and the proportionality and reasonableness of the restrictions.

Article 24 of the Labor Contract Law of the People’s Republic of China, effective as of January 1, 2008 and as amended (LCL), provides that employers may impose competition restrictions only on senior managers, senior technicians and other employees who have confidentiality obligations or access to trade secrets. The enforcement of a valid noncompete obligation hinges in large part on whether the employee had access to the employer’s trade secrets or confidential information related to intellectual property rights (IPR) during the employment relationship.

Article 13 of Interpretation II makes clear that if an employee did not have access to the employer’s trade secrets or confidential information related to IPR, and the employee challenges the noncompete as inapplicable on this basis in a legal proceeding, the court is strongly encouraged to support the challenge and render the noncompetition requirement unenforceable.

In addition, where the scope, geographical area, duration, and other restrictions set out in the noncompete clauses are not commensurate with the trade secrets and confidential matters related to IPR that the employee knows or has accessed, and the employee requests a court to confirm that some portions of the noncompete clauses are disproportionate and therefore should be invalidated, the court should uphold the employee’s request.

Article 13 not only reinforces the principle set forth in the LCL—that noncompete obligations should apply only to employees who know or have accessed the employer’s trade secrets or confidential information—but also affirms and aligns with the judiciary’s evolving stance on proportionality and reasonableness in enforcing noncompetition restrictions.

In 2022, the Supreme People’s Court expressed in Guiding Case No. 190 that a noncompete obligation should not be unreasonably broad and that the courts should examine the substance of the competitive relationship between the employee’s new role and the former employer to ensure that the scope of the noncompete obligation is proportionate and reasonable. Accordingly, noncompete restrictions should be tailored to the specific employee and the specific role at issue.

Noncompetes during the employment term do not require separate consideration and breaches can result in valid liquidated damages claims by employers.

Article 23 of the LCL requires the payment of financial consideration to enforce the competition restrictions. Article 14 of Interpretation II confirms that employers may enter into the competition restrictions with the relevant personnel during the employment relationship and makes clear that employers do not need to support the noncompete restrictions during the employment term with separate or additional compensation.

Accordingly, it is now settled law that employers can require employees not to compete throughout the employment relationship without the need to pay additional noncompete compensation.

Moreover, Article 15 of Interpretation II provides that when an employee breaches a valid noncompete provision, the employer is entitled to (1) recover noncompete compensation that was already paid and (2) claim for liquidated damages as stipulated in the noncompete agreement.

When read together with Article 14, which affirms the validity of noncompete obligations imposed during the employment period without requiring separate compensation, Article 15 suggests the following: if the employer and employee reach an agreement that restricts the employee from competing during the employment term and does not provide for the payment of separate noncompete compensation, the employer still has the right to claim for liquidated damages for the employee’s breach of the noncompete obligation during the employment term.

Accordingly, employers may start changing the commencement date of noncompete obligations in order to avail themselves of these additional rights and protections.

Further guidance from the Ministry of Human Resources and Social Security stresses the reasonableness and fairness of noncompetition agreements and addresses the levels of post-termination consideration for enforceability of the noncompete provision.

Following the issuance of Interpretation II, on September 12, 2025, the Ministry of Human Resources and Social Security issued Compliance Guidelines for Implementing Non-Competition Restrictions in Enterprises, effective from the date of issuance (Guidelines). [1] The Guidelines reflect the underlying rationale of Interpretation II concerning noncompete practices, emphasizing the importance of defining noncompete obligations with a reasonable scope.

For instance, Article 6 stipulates that employers should adhere to the principles of necessity and reasonableness when imposing noncompete restrictions. Article 6 encourages that employers prioritize effective measures to safeguard trade secrets, such as restricting access and encrypting sensitive data, rather than indiscriminately broadening the categories of personnel subject to noncompete clauses or expanding the definitions of competing enterprises and regions.

Additionally, Article 9 explicitly prohibits employers from leveraging a dominant market position to impose noncompete agreements against the will of employees that contravene legal standards or are manifestly unfair to employees. Article 10 further introduces a set of factors to guide the determination of what constitutes a reasonable scope for noncompete obligations.

The Guidelines also set out general principles for determining noncompete compensation. Article 12 stipulates that noncompete consideration should be reasonably determined based on factors such as the research and development costs and commercial value of trade secrets, the scope of employment restrictions, the employee’s wage level during their tenure, and the impact on their future employment and career development.

Article 13 address the monthly consideration paid to an employee to enforce a noncompete agreement and provides that the payment should generally be no less than 30% of the employee’s average salary for the 12 months preceding the termination of the employment relationship and no less than the local minimum wage. If the noncompete period exceeds one year, the monthly noncompete consideration should generally be no less than 50% of the employee’s average salary over the 12 months preceding the termination of the employment relationship.

Notably, the Guidelines are not legally binding and do not clearly define “average salary.” That said, any income categorized as bonuses or benefits will likely need to be included in the calculation of the employee’s average monthly salary.

With respect to liquidated damages for breaches of a noncompete, Article 14 of the Guidelines provides that the amount of liquidated damages agreed between the company and the employee should be reasonably calculated based on the potential economic losses resulting from the employee’s disclosure of trade secrets, as well as the noncompete compensation paid by the company. As a general rule, the liquidated damages should not exceed five times the total agreed amount of noncompete compensation.

Although the Guidelines set forth detailed provisions on noncompete compensation and liquidated damages for breaches of noncompete obligations, as guidelines, they do not constitute “law” or “regulation.” While Article 21 states that employees may file a complaint with the labor bureau if an enterprise fails to provide the agreed noncompete compensation during the restricted period, the Guidelines are unlikely to override existing local regulations in future judicial practice. Nevertheless, they offer clear guidance for employers on best practices for implementing noncompete restrictions—particularly in jurisdictions like Shanghai and Beijing, where statutory standards of compensation and liquidated damages do not exist.

Accordingly, employers in Beijing and Shanghai in particular should review the amounts set out in existing agreements and ensure the actual payments meet the thresholds set in these Guidelines when enforcing post-termination restrictions.

In sum, based on the guidance regarding when and how noncompetition agreements may be enforced in Interpretation II and the Guidelines, companies doing business in China should revisit their existing noncompete clauses and consider whether to prepare customized noncompete clauses based on the employees’ actual work duties, whether to impose the noncompete obligation during the employment term, and whether to include a liquidated damages provision for breach during the employment term.