If the employer and the employee have agreed on the non compete obligation after the employee leaves, the employer shall pay economic compensation, and the employee shall fulfill the non compete obligation when re employed. Article 8 of the Interpretation (IV) of the Supreme Court on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (hereinafter referred to as "Labor Dispute Interpretation IV") stipulates that if the parties have agreed on non competition restrictions and economic compensation in the labor contract or confidentiality agreement, and the employee requests the termination of the non competition agreement due to the employer's reasons for not paying economic compensation for three months after the termination of the labor contract, the people's court shall support it.

There are some issues worth exploring related to the above regulations, such as how to determine the time and method for the employer to pay economic compensation, whether the employee can unilaterally terminate the contract on the grounds that the employer has not paid three months of economic compensation, how to determine the reasons for the employer, and so on. This article analyzes the application of Article 8 of "Interpretation of Labor Dispute IV" based on relevant cases.

1、 Sample case

On June 22, 2011, Zou joined Changsha MM Company and signed a 5-year "Labor Contract" with a monthly salary of 10000 yuan and a payment date of the 5th day of each month. On the same day, both parties signed the "Confidentiality and Prohibition Agreement", which stipulated that Zou would leave the confidential and competitive position of Changsha MM Company for three years, and would not be allowed to work for other employers that produce similar products or operate similar businesses with competitive relationships, nor would he be allowed to produce similar products or engage in similar businesses with Party A. The first party shall pay the second party a non compete fee of 10% of the monthly salary.

On March 13, 2015, Zou submitted a resignation application to MM Company and the handover was completed on the 31st of the same month. Due to Zou's advance of a performance bonus of 30000 yuan to the company in January 2015, on May 21, 2015, Zou refunded 5000 yuan to MM company based on their calculations.

On June 19, 2015, MM Company issued a Notice of Non Competition, requiring Zou to fulfill the Confidentiality and Prohibition Agreement, which was delivered to Zou on June 23, 2015. On July 5, 2015, MM Company paid Zou a non compete economic compensation of 5000 yuan per month for the months of April, May, and June 2015. On the same day, Zou refunded the amount to MM Company.

On July 11, 2015, Zou sent a "termination letter" to MM Company, requesting the termination of the "confidentiality ban agreement" on the grounds that Changsha MM Company had failed to fulfill the non compete agreement for three months. MM Company received the "termination letter" on July 13, 2015. On August 5, 2015, MM Company discovered that Zou's bank account had been cancelled when paying the non compete compensation for July 2015 to him.

On January 6, 2016, MM Company filed an arbitration application, requesting Zou to continue to fulfill the Confidentiality Prohibition Agreement. On January 28, 2016, Zou filed a counterclaim for arbitration, requesting confirmation that the Confidentiality Ban Agreement had been lifted. After the arbitration commission's review, an award was made: both parties shall continue to fulfill the Confidentiality and Prohibition Agreement, with a period from April 1, 2015 to March 31, 2017. Zou refused to accept and filed a lawsuit.

The first instance court held that the agreed non compete period of three years exceeds the legal requirement of not exceeding two years, and the excess content is invalid and should be enforced according to two years. Although the agreement includes a non compete clause, it does not specify the time for the payment of non compete economic compensation after resignation. MM Company will follow the usual practice of paying Zou's salary on the 5th of the following month. On July 5, 2015, MM Company issued non compete economic compensation to Zou for the months of April, May, and June 2015. Although the compensation was not paid in a timely manner in April and May, it did not meet the prerequisite for a cumulative three-month delay in payment. If the prerequisite for Zou to terminate the non compete agreement is not met and the reasons for termination are insufficient, the agreement should continue to be fulfilled. Thus, a judgment was made to dismiss Zou's lawsuit request.

Zou filed an appeal: Wages and salaries are based on the existence of the labor relationship as a prerequisite, while non compete economic compensation is the economic compensation for restricting workers' labor after the end of the labor relationship. The two belong to different legal relationships. MM Company and Zou have not agreed on the payment time for non compete economic compensation. Both parties should negotiate again or in accordance with legal provisions, as the two parties are no longer in a labor relationship. The original judgment held that paying according to the time of salary payment (the 5th of the following month) violated legal regulations. MM company must pay within three months, otherwise Zou has the right to terminate the non compete agreement. If MM Company fails to pay non compete economic compensation to Zou within three months after the termination of the labor contract due to its own reasons, Zou has the right to terminate the non compete agreement.

MM Company argues that the payment time for non compete economic compensation has not been agreed upon and should be paid according to the customary wage payment practices of both parties. The starting point for payment is after the completion of work handover by both parties. Therefore, the cumulative payment time has not reached three months, which does not meet the conditions for lifting non compete restrictions. There is no mandatory provision in laws and regulations regarding the payment time of economic compensation for non compete restrictions, and MM Company's payment of compensation complies with legal requirements. And before Zou resigned, he advanced performance bonuses to MM Company in advance. Both parties did not calculate the performance bonuses during the work handover on March 31st. On May 21st, Zou returned 5472.53 yuan according to the calculation. Therefore, the property handover procedures between the two parties should be completed on May 21st. The delay in completing the handover of work between both parties due to Zou's reasons does not fall under the category of "failure to pay economic compensation due to the employer's reasons".

The second instance court held that MM Company and Zou did not agree on the payment time of the non compete economic compensation, and the law did not specify the specific payment time of the non compete economic compensation for employees who resigned each month. There is insufficient evidence to prove that MM Company intentionally delayed the settlement procedures for salaries in this case. Although MM Company did not pay Zou's non compete economic compensation for April and May in a timely manner, it paid Zou's non compete economic compensation for June 2015 on July 6 of the same year (Sunday, the 5th), which complies with the company's salary payment system. Before the company paid Zou the economic compensation for non compete restrictions, Zou did not propose to terminate the Confidentiality Prohibition Agreement. In summary, MM Company's actions do not comply with Article 8 of the Interpretation of the Supreme Court on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (IV), and the reason for Zou to terminate the Confidentiality Ban Agreement cannot be established. The original verdict was not inappropriate. Reject the appeal and uphold the original verdict.

2、 How can workers break free from non compete restrictions

For workers, although fulfilling non compete obligations can bring some "additional income" outside of their post employment work - non compete economic compensation, there is no free lunch in the world, and this income comes at the cost of employment restrictions. For workers engaged in specific industries or businesses, such restrictions often directly affect their range of employment choices. In addition, some employers have established non compete restrictions but have not provided economic compensation for such restrictions, or have established non compete compensation but have not paid it to employees for a long time. This not only limits employees' employment choices after leaving, but also does not provide economic compensation, which inevitably harms the legitimate rights and interests of employees. In order to protect the economic compensation and employment freedom rights of workers who have non compete obligations after resignation, the "Interpretation of Labor Dispute IV" has made relatively clear provisions on this.

Firstly, according to the Fourth Interpretation on Labor Disputes, if an employer and an employee agree on a non compete obligation, regardless of whether economic compensation has been agreed upon, as long as the employee fulfills the non compete obligation, they have the right to demand that the employer pay economic compensation in accordance with the law.

Secondly, if the employer and employee agree on non compete obligations, the non compete period should not exceed 2 years. Before the effective date of the Labor Contract Law, there was no clear legal provision for the non compete period. There are many local regulations and rules that set the non compete period at 3 years. If we discuss how many years are appropriate for the non compete period, there may be no consensus. Since the Labor Contract Law stipulates that the maximum term shall not exceed two years, and subsequent judicial interpretations have not relaxed this, setting the non compete period at three years in local regulations and rules is a violation of the Legislation Law and should be deemed invalid. If the non compete period agreed upon between the employer and the employee exceeds 2 years, it shall be based on 2 years.

Thirdly, if the employer fails to pay the non compete economic compensation for more than three months due to the employer's reasons, the employee has the right to terminate the non compete agreement and no longer need to fulfill the non compete obligation, and can choose a job independently. This article analyzes the possible issues in the recognition of non compete economic compensation that an employer has not paid for more than three months, in accordance with Article 8 of the Interpretation of Labor Disputes IV.

4、 Identification of Reasons for Employers

The employer and the employee have agreed on the non compete obligation after the employee leaves the company. During the non compete period, the employer pays economic compensation and the employee fulfills the non compete obligation. This is a balanced relationship. The provision in Article 8 of the Interpretation of Labor Dispute IV is aimed at depriving employers of their right to non compete when they knowingly fail to fulfill their obligation to pay compensation, due to the employer's fault. But this kind of fault is not only an objective situation of not paying economic compensation, but also requires the employer to have subjective malice. It is not necessary for the employer to fulfill its obligation to pay economic compensation for three months before the employee can terminate the non compete agreement; But due to the reasons of the employer, if the employer fails to fulfill the obligation of paying economic compensation for three months, the employee has the right to terminate.

So, what constitutes' due to the employer's reasons'?

Firstly, the employer's failure to pay economic compensation is not due to the employee's fault. After leaving the company, employees often change their contact information, original salary card information, address and other personal information. If the employee fails to provide the employer with the changed information, resulting in the employer being unable to contact the employee and pay non compete economic compensation, it should not be considered as "due to the employer's reasons". If the employee returns the payment made by the employer, it is not considered as "due to the employer's reasons";

Secondly, if there are other disputes between the two parties and the employer has raised legal defenses or initiated arbitration or litigation. If there are other disputes between the two parties during the performance of the labor contract, such as the employee damaging the interests of the unit and causing losses before the termination of the labor relationship, the employee's relevant legal obligations being fulfilled, or the employee having other creditor debtor relationships with the employer. However, employers cannot refuse to provide economic compensation for a long time solely on the grounds of disputes.

If there is a dispute that can be settled in monetary terms, the employer should clearly inform the employee of the reasons for suspending the payment of economic compensation and the amount of money involved in the dispute, and can only suspend the payment of economic compensation within that amount. If the economic compensation standard is 3000 yuan per month, and the employer claims that the employee has borrowed 6000 yuan from the employer but has not repaid it, then the employer can only suspend the payment of economic compensation for two months. If the economic compensation is not paid after five months, it should be considered as "due to the employer's reasons".

If it is a dispute that cannot be settled with money, the employer should clearly inform the employee of the reasons for suspending the payment of economic compensation. If the employee does not actively resolve it, the employer should file for arbitration or litigation within a reasonable period of time, and cannot use the employee's failure to resolve it as an excuse to delay the payment of economic compensation for a long time. For a reasonable period, I believe it should be limited to 3 to 6 months. If the employer fails to pay economic compensation for a long time on the grounds of disputes, and fails to conduct arbitration or litigation after a reasonable period of time, it shall support the employee's request to lift the non compete restriction, and other disputes shall be resolved separately.

Thirdly, non force majeure reasons. If the employer is unable to make payment due to force majeure, there is no subjective fault on the part of the employer. Even if the employer fails to fulfill the obligation to pay economic compensation for three months, the employer will not support the employee's request for non competition. However, reasons such as poor management, economic difficulties, and inability to pay by employers are not considered force majeure. Employers who use this as a defense should not be supported;

It is the obligation of the employer to pay economic compensation to employees who fulfill their obligations during the non compete period. The employer should take the initiative to fulfill its obligations. If the employer fails to fulfill its obligations, it should prove that the reason for the failure is not "due to the employer's reasons". The burden of proof lies with the employer, which means that the employer needs to prove that the reason for the failure to pay economic compensation is due to the employee, force majeure, or reasonable disputes. Otherwise, the employer should support the employee's demands.

5、 How to determine the period standard and time for paying economic compensation

Although the "Labor Dispute Interpretation IV" uses 5 out of 15 interpretations to deal with non compete issues, there is no clear provision on the period standard and time for employers to pay non compete economic compensation to employees. After the termination of the labor relationship between the employer and the employee, the standard period and starting time for the employer to pay economic compensation will directly affect the determination of the employer's failure to pay economic compensation for three months discussed in this article. It is necessary to discuss this issue.

Firstly, the employer shall provide economic compensation based on the period standard. According to Article 7 of the Interim Provisions on Wage Payment issued by the Ministry of Labor, wages must be paid on the date agreed upon between the employer and the employee. In case of holidays or rest days, payment should be made in advance on the nearest working day. Salary shall be paid at least once a month. Economic compensation for non compete restrictions occurs after the termination of the labor relationship between the employer and the employee, and naturally does not fall within the scope of wages. Should it be paid on a monthly basis? If the employer and the employee agree in a non compete agreement to pay once every three months or once a year, does it violate legal provisions?

Firstly, Article 23 (2) of the Labor Contract Law stipulates that for employees who have confidentiality obligations, the employer may stipulate non compete clauses in the labor contract or confidentiality agreement with the employee, and agree to provide economic compensation to the employee on a monthly basis during the non compete period after the termination of the labor contract; Secondly, Article 8 of the Fourth Interpretation on Labor Dispute stipulates a "three-month" limit. If both parties agree to a six-month or yearly limit, it is difficult to achieve the legislative purpose of helping workers "relieve themselves"; Finally, economic compensation is a form of compensation for employment restrictions imposed on workers, aimed at ensuring the stability and continuity of their lives after fulfilling non compete obligations. Therefore, it is specifically stipulated that the minimum wage standard shall not be lower than this requirement. If both parties are allowed to agree to pay economic compensation every six months or a year, it is difficult to achieve the corresponding legislative purpose. Therefore, non compete compensation should be paid monthly.

Of course, if both parties have agreed to pay economic compensation once every three months or a year, the employee may request the employer to pay in advance. However, given that the employer has no subjective intention of not paying economic compensation, the employee shall not use this as an excuse to request the termination of the non compete clause in accordance with Article 8 of the Labor Dispute Interpretation IV.

Secondly, when will the employer pay economic compensation. If discussed according to the monthly payment period standard, there may be the following possibilities: advance payment of the next month's economic compensation on the date of termination; Economic compensation shall be paid on the day one month after the termination date; According to the salary payment system of the employer, economic compensation is paid monthly based on actual time; Both parties agree to provide economic compensation at a specific time each month.

As for the specific time point for paying economic compensation, due to the lack of legal provisions, the author believes that the non compete system is a system choice made after balancing the interests of employers and workers. On the one hand, it protects the interests of workers, and on the other hand, it also protects the interests of employers. If the employer agrees to pay economic compensation after a dispute arises, but there is only a dispute over the payment time, it is not appropriate to terminate the non compete agreement on this basis. Therefore, for the payment time of economic compensation, relatively relaxed regulations should be adopted, and if the employer can provide a reasonable explanation for determining the payment time, it should be accepted. However, the determination of payment time should be limited to the time of the first payment. If the employer has already paid economic compensation after the employee leaves, and there is no other agreement between the two parties regarding the payment time of economic compensation thereafter, the employer should use the first payment time as the basis for calculating the three-month period stipulated in Article 8 of the Labor Dispute Interpretation 4.

6、 Do workers need to first terminate the economic compensation clause

Article 8 of the Interpretation of Labor Dispute IV stipulates that if the employer fails to pay economic compensation for three months due to its own reasons, and the employee requests the termination of the non compete agreement, the people's court shall support it. So if the employer fails to pay economic compensation for three months, does the employee have to first terminate the non compete agreement to find a job, or can they directly violate the non compete agreement to find a job?

At present, there is no legal regulation on this issue. If we only look at the provisions of Article 8 of the Interpretation of Labor Disputes IV, it seems that the employee should first terminate the non compete agreement before seeking another job. If an employee fails to pay economic compensation to the employer for three months, they have the right to request the termination of the non compete agreement. If the non compete agreement is not terminated, it is valid. If the employee seeks a new job before the non compete agreement is terminated, it is a violation of the non compete agreement. Even if the employer fails to pay economic compensation in violation of legal provisions, but the employee violates the non compete agreement, they should also bear the liability for breach of contract. However, this viewpoint has not been adopted in judicial practice.

In judicial practice, this issue is generally raised when an employer sues an employee to pay a penalty for violating non compete restrictions, and the employee raises a defense on the grounds that the employer has not paid economic compensation for three months. If the job sought by the employee belongs to the competitive work restricted in the non compete clause, but the employee can prove that the time of seeking a new job occurred after the employer failed to pay economic compensation for three months due to the employer's reasons, that is, the employer failed to pay economic compensation in accordance with the law for more than three months, and the employee violated the non compete clause, the people's court generally does not support the employer's claim for breach of contract based on the employer's reasons for three months, which is in line with Article 8 of the Interpretation of Labor Disputes. This actually contains a situation that is not reflected in Article 8 of the "Labor Dispute Interpretation IV", that is, due to the employer's reasons for not paying economic compensation for three months, the effectiveness of the non compete agreement between the two parties is in an uncertain state. This uncertain state is manifested in:

If the employer fails to pay economic compensation for three months due to their own reasons, and the employee is willing to continue fulfilling the non compete obligation, they may request the employer to continue paying economic compensation in accordance with the non compete agreement until the non compete period expires. In this case, the effectiveness of the non compete agreement is valid and does not terminate due to the employer's failure to pay economic compensation for three months;

If the employer fails to pay economic compensation for three months due to their own reasons, and the employee is unwilling to continue fulfilling the non compete obligation, they can find a new job on their own. In this case, the effectiveness of the non compete agreement shall terminate due to the employer's failure to pay economic compensation for three months, and the employer shall not use the non compete agreement to bind the employee anymore.

The logic behind this is that if the employer fails to pay economic compensation for three months due to their own reasons, the effectiveness of the non compete agreement depends on the employee. If the employee considers it invalid and then seeks employment, the non compete agreement will become invalid at the end of the three-month period and will no longer restrict the employee; If the employee believes that the non compete agreement will continue to be effective, delaying payment for three or six months will not affect the validity of the agreement. If the employer does not advocate for termination, the employee can claim that the non compete agreement will remain valid during the non compete period.

Employers who violate the law by not paying economic compensation for non compete agreements and demand that employees continue to fulfill their non compete obligations not only affect their employment choices, but may also affect their normal living conditions. In the event of three months of non payment of economic compensation, it is not appropriate to require employees to resort to arbitration or judicial authorities to terminate the non compete agreement before seeking employment. It is not inappropriate to leave the decision-making power of the effectiveness of the non compete agreement to the employees. However, this state of uncertain effectiveness will inevitably affect the determination of economic compensation for workers' non compete restrictions. For employers, there may be unfair phenomena. How to determine a relatively fair economic compensation calculation standard in this situation is another issue that needs to be discussed in this article.

7、 Economic compensation under Article 8 of the Interpretation of Labor Dispute IV

As discussed earlier, if the employer fails to pay economic compensation for three months due to their own reasons, the employee has the right to decide on the effectiveness of the non compete agreement at the end of the three-month period. However, the Labor Contract Law and related judicial interpretations do not provide for the issue of unpaid economic compensation for three months by the employer, as well as economic compensation for the period from the expiration of the three-month period until the employee finds a new job. How should these economic compensations be handled?

Firstly, if the employer fails to pay economic compensation for three months due to their own reasons and the employee does not request the termination of the non compete agreement and continues to fulfill the non compete obligation, the employer shall continue to pay economic compensation until the non compete period expires or the employer proposes to terminate the non compete agreement. If the employer fails to pay economic compensation for three months due to their own reasons, the right to terminate the non compete agreement lies with the employee. If the non compete agreement is not terminated, the employer shall pay the economic compensation as agreed until the non compete period expires or the employer lawfully terminates it.

Secondly, if the employer fails to pay economic compensation for three months due to their own reasons, and the employee requests to terminate the non compete agreement and no longer fulfill the non compete obligation, how should the economic compensation be calculated? I believe that different situations should be distinguished:

1 . The employer shall pay the three months of economic compensation owed by the employee. If the employer fails to pay economic compensation for three months, the employee has the right to terminate the non compete agreement, but it does not mean that the employer is exempt from the obligation to pay economic compensation for these three months; When an employee initiates the termination of a non compete agreement and claims payment of the overdue three-month economic compensation when the employer has not paid the economic compensation for three months, it should be supported;

2 . The employer shall pay economic compensation until the date of termination of the non compete agreement. If the employer fails to pay economic compensation for three months and the employee continues to fulfill the non compete obligation without filing arbitration or litigation, but the employer still fails to pay afterwards, and the employee files arbitration or litigation to terminate the non compete agreement and request the employer to pay economic compensation during this period, since the non compete agreement between the two parties has not been terminated during this period, it is still binding on both parties. Therefore, the employer should pay the non compete economic compensation from the date of arrears to the date of termination;

3 . If the worker does not advocate for the termination of the agreement and directly seeks employment, they shall not request economic compensation after the three-month period expires. If the employer fails to pay economic compensation for three months and the employee does not initiate arbitration or litigation but directly seeks a new job, it shall be deemed that the employee has exercised the right of termination confirmation on their own. The non compete agreement between the two parties shall be terminated on the date when the employer has not paid economic compensation for three months. After that, both parties shall no longer be bound by the non compete agreement, and the employer shall not be required to pay any further economic compensation. Of course, in this situation, if an employee claims economic compensation or termination of a non compete agreement from the employer three months after the employer has not paid the economic compensation, and then seeks a new job, the employee can request the employer to pay the economic compensation from the date of arrears to the date of claiming the right, because during this period, the employee has not exercised the right to terminate, the agreement remains valid, and the employer should pay the economic compensation in accordance with the law.

8、 Case analysis

For the case cited earlier, the first instance court first pointed out that the non compete period stipulated in the non compete confidentiality agreement between the two parties is 3 years, which exceeds the legal limit of no more than 2 years. The excess content is invalid, and both parties should enforce it for 2 years. Regarding Zou's claim that Changsha MM Company should terminate the non compete agreement if it fails to pay the non compete economic compensation for more than three months, the first instance court held that the two parties did not agree on the payment time of the non compete economic compensation after resignation. Changsha MM Company followed the practice of paying the monthly salary on the 5th of the following month. Although there were cases of delayed payment, it did not meet the prerequisite for a cumulative delay of three months. Therefore, the conditions for Zou to terminate the non compete agreement were not met, and Zou should continue to fulfill the non compete agreement.

The first instance court adopted a more lenient approach in terms of the timing of economic compensation payments to employers. Zou resigned on March 31, 2015, and Changsha MM Company issued economic compensation for the first time on July 6, 2015. Objectively speaking, it has been more than three months since then. However, there is a reasonable explanation for the time when the employer issued the economic compensation (according to the original salary payment time), and the company subsequently paid three months of economic compensation in one lump sum. The first instance did not support the employee's request to terminate the agreement.

The second instance court focuses more on the perspective of other disputes between the two parties. Zou resigned on March 31, 2015, but both parties did not complete the relevant salary settlement procedures until May 21, 2015. It is unfair for the employer to start counting from March 31, 2015. Changsha MM Company did not pay the non compete economic compensation in a timely manner, but later fully paid the fee on July 6, 2015. Before the company reissued the fee, the employee did not request to terminate the non compete agreement, and the judgment not to terminate it is more reasonable. Of course, if Zou returns the economic compensation and cancels the bank account in the future, resulting in the employer being unable to issue the economic compensation, the reason for the employer's failure to issue the economic compensation lies with the employee rather than the employer. If the employee proposes to terminate the non compete agreement, it should not be supported.

Source: Trial Research