Labor Standards Act: Ministry of Labor Issues New Rules and Guidance on Noncompetition Clauses.

[2016/11/15]

The amendments to the Labor Standards Act (“LSA”) enacted on 16 December 2015 introduced a new Article 9-1, regulating post-severance noncompetition agreements between employers and employees. Following this change in the law, on 5 October 2016 the Ministry of Labor issued its Guidelines on Post-Severance Noncompetition Agreements between Employers and Employees (“Guidelines”), and on 7 October it added the new Articles 7-1 to 7-3 to the Enforcement Rules of the Labor Standards Act (“LSA Enforcement Rule”). The main points are as follows:

1. In the interests of perpetuation of evidence, and to avoid future disputes, both the amended LSA Enforcement Rules and the new Guidelines require that any post-severance noncompetition agreement must be made in writing, and must specify in detail the duration and geographical scope of the agreement, and the occupational activities and types of potential employer that the agreement excludes. It must also provide for reasonable compensation for the loss suffered by the employee through refraining from competitive activity. However, in its statement of reasons for amending the Enforcement Rules, the Ministry of Labor indicated these are advisory provisions. Therefore if there is no written agreement, an employer still has the opportunity to produce evidence to prove the existence of an agreement.

2. The duties undertaken or the position held by the employee must give the employee access to or enable the employee to make use of the employer’s trade secrets or the employer’s advanced technology that is entitled to protection by law. The Guidelines state that if the technology concerned is merely generally known technology, it does not provide a basis in law for concluding a post-severance noncompetition agreement.

3. The scope of a noncompetition agreement must be specifically and clearly defined, and may not exceed reasonable limits. The geographical scope of the agreement may not exceed the geographical extent of the employer’s actual operations, and care should be taken that the agreement does not unfairly obstruct the employee’s right to work. The occupational activities barred by the agreement must be limited to activities that are the same as or similar to those performed by the employee for the original employer, and excluded potential employers must be limited to competitors of the original employer whose business activities are the same as or similar to those of the original employer.

4. With regard to compensation, both the amended LSA Enforcement Rules and the Guidelines expressly provide that the monthly amount of such compensation may not be less than 50% of the employee’s average monthly wage at the time of severance. The compensation may be given as a single payment in advance, or may be paid out monthly, but the amount must be sufficient to meet the employee’s living expenses for the duration of the noncompetition agreement, and must be commensurate with the loss suffered by the employee by adhering to the agreement.