Labor: Ministry of Labor Issues New Guidance on Post-Severance Noncompetition Clauses.

[2015/11/15]

On 5 October 2015 the Ministry of Labor issued its Guidelines on Post-Severance Noncompetition Clauses between Employers and Employees (the “Guidelines”). The Guidelines, which were drafted with reference to past court judgments, are intended to protect workers’ right to work and freedom of occupation, and to balance workers’ rights and employers’ interests. The main points are as follows:

1. Any agreement limiting competitive activity after termination of employment must be made in writing, and must be signed or sealed by both the employer and the employee. Each party should retain a copy.

2. An organization may enter into a post-severance noncompetition agreement with an employee only under the following circumstances:
    2.1 The organization possesses trade secrets, intellectual property rights, etc., that are entitled to protection by law.
    2.2 The duties undertaken or the position held by the employee give the employee access to or enable the employee to use the organization’s trade secrets or leading technology, which are not merely generally known technology.

3. The duration, geographical scope, and occupational content of the agreement, and the types of potential employer, must be clearly specified, and may not exceed reasonable limits:
    3.1 The period of application of a post-severance noncompetition agreement may not exceed two years.
    3.2 The geographical scope of a noncompetition agreement must be clearly defined, and may not exceed the geographical extent of the organization’s operations.
    3.3 The occupational content and potential employers shall be limited to ones that are the same as or similar to those of the organization and are in a competitive relationship with the organization.

4. The employer must provide reasonable compensatory measures to the employee:
    4.1 For the first time, the Guidelines expressly provide that the monetary amount of the reasonable compensation to be provided by an employer during the period of application of a noncompetition agreement may not be less than 50% of the average wages of the employee at the time of severance. The compensation may be given as a single payment, or paid out monthly.
    4.2 No payments made by an employer to an employee during his or her employment, such as bonuses, etc., may be treated as or substituted for the amounts to be paid to the employee after severance in compensation for restrictions imposed by a noncompetition agreement.
    4.3 If no compensatory measures have been agreed, the noncompetition agreement shall be invalid. If the employer fails to pay monetary compensation as agreed, the employee shall not be bound by the noncompetition agreement.

5. If the employer terminates the employment contract without legitimate cause, or if the employee terminates the employment contract for any of the reasons set out in Article 14 of the Labor Standards Act which give rise to a termination right of employee without prior notice, the employee shall not be bound by the noncompetition agreement.