SPC’s Opinion (II) Series 1

On 1 August 2025, the PRC Supreme People’s Court (“SPC”) released the Opinions (II) on Several Issues Concerning the Application of Law in the Trial of Labor Disputes (the “Judicial Opinion II”) and several typical labor dispute cases. The Judicial Opinion II has taken effect from 1 September 2025.

The Judicial Opinion II consists of 21 Articles in total. They clarified many long-standing controversies in implementing employment law and inconsistencies in judicial practice at different locations. To help companies better understand the practical implications, we will publish four newsletters to interpret the Judicial Opinion II from the following perspectives (i) implementation of non-competition obligations; (ii) conclusion and renewal of employment contracts; (iii) workforce engagement and social insurance issue; (iv) labor disputes. This newsletter focuses on the new updates on implementing non-competition obligations in China.

The Judicial Opinion II introduces some new rules on the implementation of non-competition obligations of employees in Article 13 to Article 15. We would like to summarize as follows:

1.   Employees subject to non-competition obligations shall be strictly limited to those who had access to trade secrets or other confidential information of the company.

Under PRC law, a company can agree on post-contractual non-competition obligations with senior management, senior technicians and other employees who are subject to confidentiality obligations. In practice, some companies signed non-competition agreements with all employees who have agreed on confidentiality obligations.

According to the Judicial Opinion II, the non-competition agreement will only be valid and enforceable, if the employee has had access to the company’s trade secrets or confidential information. In a typical precedent as announced by the SPC in April 2025, the court ruled that it was not appropriate to impose non-competition obligations on a security guard whose job duties did not involve access to trade secrets. As a result, the signed non-competition agreement was deemed as invalid and not enforceable.

In the future, a company can still sign non-competition agreements with such employees who are subject to confidentiality obligations. But the company shall consider, if it can prove that the employee had access to the company’s trade secrets or confidential information before claiming liabilities of the employee's breach of non-competition obligations.

2.   The scope of the non-competition obligations as to the geographical area, duration and covered competitive areas will be limited and should be consistent with the nature of the trade secrets or confidential information accessed by the employee.

In the past, the geographical area and competing activities/competitors of non-competition agreements could be agreed by the company and the employee for the statutorily prescribed period. When making an assessment on whether the employee has been working for a competitor, courts would generally assess whether the registered business scope of the competitor overlapped with that of the company.

According to the Judicial Opinion II, when a company claims liabilities of the employee in breach of non-competition obligations, courts will conduct a more thorough check on whether the scope of competitors, the limited geographical area and the statutory period as agreed in the non-competition agreement are reasonable compared with the nature and scope of trade secrets or confidential information accessed by the employee, and whether the new employer the employee works for is in substantive competition with the company.

In a typical precedent as announced by the SPC in August 2025, the court ruled that an employee, the CTO of a biotech company, shall not be deemed as breaching post-contractual non-competition obligations when he joined another biotech company which was listed as the competitor in his non-competition agreement with the former employer. The reason is that the two drugs to which the employee had access at the two companies are not interchangeable in terms of indications and treatment regimens although they all have cancer treatment functions.

In the future, a company can still agree with employees on a broad scope of competitors, a large geographical area and a long period (up to two years) in the non-competition agreement. But the non-competition agreement may not be fully valid and enforceable depending on the judgement of the court on whether the agreement is reasonable and whether the employee has substantially breached the agreement.

3.   Companies may agree on non-competition obligations during employment with senior management, senior technicians and other employees who are subject to confidentiality obligations.

The PRC Employment Contract Law is silent on provision of non-competition obligations during employment for employees and whether economic compensation shall be paid for such non-competition obligations. Relevant disputes occurred from time to time.

According to the Judicial Opinion II, it is clarified that companies may agree on non-competition obligations during employment for the senior management, senior technicians and other employees subject to confidentiality obligations, and no economic compensation shall be paid for such non-competition obligations.

In a typical precedent as announced by the SPC in August 2025, an employee who is the sales manager of a textile company signed a non-competition agreement about his non-competition obligations both during employment and for two years after termination of employment. During the employment, the employee repeatedly bypassed the company by contacting its suppliers directly and selling fabrics to the company’s clients. The company filed a labor dispute against the employee for breaching his non-competition obligations during employment. The court supported the claims of the company.

Please note that under PRC law, except for the senior management who are subject to mandatory non-competition obligations during employment, other employees will only be subject to non-competition obligations during employment based on an express agreement with the company. To protect the company’s interests, a company may wish to also provide the non-competition obligations during employment term for employees who have access to trade secrets or confidential information in the non-competition agreement. Although the Judicial Opinion II does not expressly stipulate whether liquidated damages can be provided for breach of non-competition obligations during employment, the same for post-contractual non-competition obligations, legally speaking, the same rule should apply. I.e. in case an employee breaches his or her non-competition obligations during employment, the company should be able to claim for liquidated damages as agreed in the non-competition agreement.

4.   Companies are entitled to require the employees, in addition to the agreed liquidated damages, to return the economic compensation which was already paid for the employees’ breach of post-contractual non-competition obligations based on agreement.

Under PRC law, companies are obliged to pay economic compensation according to law to employees for performance of post-contractual non-competition obligations. In case of breach, companies are entitled to ask employees to pay the agreed liquidated damages or to compensate the losses of companies incurred thereof. The law is silent on whether the economic compensation paid by the company should be returned or not in case of breach.

According to the Judicial Opinion II, it is clarified that in addition to the agreed liquidated damages, subject to agreement, a company may require an employee who breached a valid non-competition agreement to return the economic compensation which has been paid by the company for the employee’s performance of the post-contractual non-competition obligations.

This provision aligns with the prevailing judicial practice and provides clear national-level guidance on the remedies available to companies when an employee breaches post-contractual non-competition obligations.

Therefore, for remedial purposes, it is important that when concluding a non-competition agreement with employees, to provide not only for liquidated damages but also the obligation of the employee for the return of compensation in case of breach.