Company signed a non-compete agreement and then changed their mind? Taizhou Medical High-tech Zone Court: Violating the principle of good faith, not supported

This article is reprinted from Jiangsu Economic Daily

After an enterprise and employee sign a non-compete agreement, can the employer still unilaterally deny the obligation on the grounds that the employee “does not contact trade secrets”? Recently, a court in Taizhou Medical High-tech Zone provided a clear answer in a labor dispute case: since the employer actively signed the agreement, it indicates recognition that the employee needs to keep confidentiality. Backtracking afterward is considered a breach of integrity, and the court ruled that the company must bear breach of contract liability.

Gu Mou was originally an employee of a company. During his employment, he signed a “Non-Compete Agreement,” which stipulated that he would not engage in competing businesses with the company within two years after leaving; if the company needed him to comply, it should issue a written notice and pay economic compensation quarterly. The agreement also stated that if the company delayed compensation without just cause for more than one month, it would pay a penalty of 50,000 yuan, and the agreement would automatically terminate.

In February 2024, Gu Mou terminated his employment with the company. Afterwards, the company neither notified him to start the non-compete obligation nor informed him of the agreement’s termination, nor did it provide any compensation. After leaving, Gu Mou did not join a competing enterprise. Although he did not report his new employment to the original company, he still adhered to the core obligation of “not engaging in competitive business.”

Because the company continuously refused to pay compensation, Gu Mou filed a lawsuit to confirm the termination of the agreement and demanded the company pay the 50,000 yuan penalty. The company argued that Gu Mou was not a confidentiality personnel, so the agreement was invalid.

The court held that enterprises cannot arbitrarily deny the validity of signed non-compete agreements. First, the validity of the agreement is based on good faith. According to relevant regulations, only when the employee has truly not contacted trade secrets can they claim the non-compete clause is invalid; the law does not grant the employer the right to unilaterally deny the agreement’s validity. In this case, as the initiator of the agreement, the company should have judged whether the employee’s position involved confidentiality at the time of signing. Signing voluntarily indicates acknowledgment of Gu Mou’s confidentiality status. Allowing the employer to back out at will afterward not only violates the principle of good faith but also undermines the stability and trust in labor relations.

Second, the employee has fulfilled the core obligation. The company cannot refuse to pay compensation on the grounds that the employee did not report his work situation. The core of non-compete is that the employee does not engage in competitive activities; reporting work is auxiliary and cannot be used as a reason to refuse economic compensation. Gu Mou has actually complied with the non-compete agreement. The company’s claim of “report first, then decide whether to perform” essentially puts the agreement in an uncertain state and increases the employee’s responsibilities.

Finally, the agreed termination conditions are legal and valid. The clause that “the company’s overdue payment of compensation for more than one month will terminate the agreement” is more favorable to the employee than the three-month period stipulated in judicial interpretations and is lawful and should be respected. Since the company failed to pay compensation on time, the termination condition has been met, and the court recognized that the agreement ended on the agreed date. The first-instance court ruled that the agreement terminated on April 30, 2024, and the company should pay Gu Mou 50,000 yuan in breach of contract damages. The company appealed, but the second-instance court dismissed the appeal and upheld the original judgment.

The judge stated that employers should be cautious when signing agreements. Before signing a non-compete agreement, companies should reasonably assess whether the employee is a confidentiality personnel to avoid blind signing; once signed, the agreement should be binding, and the employer cannot later regret it under the excuse of “insufficient assessment.”

Enterprises should actively fulfill notification and compensation obligations. If the employee is not required to perform the non-compete, the employer should promptly notify in writing of the termination; if performance is required, the employer must pay the economic compensation as agreed. This is a core obligation of the enterprise and cannot be shirked.

Employees can legally safeguard their rights. Employees should comply with the core obligations of the non-compete. If the employer delays or withholds compensation, they can assert their rights based on the agreement or law, demanding breach penalties and compensation to protect their legitimate rights and interests. Wang Xuelian