If the Employer Fails to Pay Compensation, Is the Non-Compete Agreement I signed still valid?
In the previous article titled “Should I Sign the Non-compete Agreement upon Resignation?” I introduced the requirements of the Labor Standards Act regarding the duration and scope of non-compete agreements upon resignation. In today’s article, I will continue to analyze a crucial aspect often leading to the invalidation of non-compete agreements in practice — “payment of compensation.”
If you have signed a non-compete agreement and have successfully received compensation, congratulations! However, if you have never received compensation, the non-compete agreement you signed might just be a piece of paper…
Adequate Compensation Payment is Essential for the Validity of a Non-Compete Agreement
To compensate employees for the significant impact on their employment rights during the non-compete period, Paragraph 4, Article 9–1 of the Labor Standards Act and Article 7–3 of the Enforcement Rules of the Labor Standards Act stipulate that the employer must provide “compensation” to the departing employee during the non-compete period (up to a maximum of 2 years). There are two requirements for the compensation amount:
- It must not be less than 50% of the departing employee’s average monthly salary at the time of resignation.
- It should be sufficient to cover the living expenses of the departing employee during the non-compete period. According to judicial practice, this is determined based on the place of residence of the departing employee, considering the “average monthly per capita consumption expenditure” published by the Directorate-General of Budget, Accounting and Statistics of Exeuctive Yuan in Taiwan.
A non-compete agreement must meet both of the above conditions; otherwise, it will be invalid under Paragraph 3, Article 9–1 of the Labor Standards Act and will not bind the employee.
For example, if an employee residing in Taipei City resigned in 2021 with an average monthly salary of NT$60,000, the employer must pay them a monthly compensation of at least NT$30,000, meeting the “not less than 50% of the average monthly salary at the time of resignation” requirement. However, because the average monthly per capita consumption expenditure for Taipei City residents in 2021 was NT$32,305, the employer must increase the compensation amount to NT$32,305 to satisfy the “sufficient to cover living expenses” requirement, thereby fully complying with the Labor Standards Act and making the non-compete agreement valid.
As for the method of compensation payment, it depends on the agreement between the employer and the employee, whether it’s monthly payments or a lump sum payment.
In conclusion, whether (a) the employer has paid compensation and (b) the compensation amount is sufficient are both critical factors in determining the validity of a non-compete agreement.
If the answer to either of these questions is “No,” the non-compete agreement signed by the employee is invalid and cannot legally prohibit the employee from working or operating a business in the competitive industry. At best, it serves as a deterrent. Therefore, it is advisable for employees to:
- Before signing, pay attention to the compensation clauses, ensuring they meet the criteria of being at least 50% of the average monthly salary at the time of resignation and covering the average monthly per capita consumption expenditure in their place of residence for that year.
- After signing, monitor whether the employer is indeed providing adequate compensation.
Companies Should Consider Setting Aside a Compensation Reserve in Advance
If companies want their non-compete agreements to be more than just a deterrent but to genuinely and effectively restrict departing employees, it is advisable for employers to prepare an adequate compensation reserve before the employees’ departure. Therefore, it is recommended that companies regularly assess whether some of their executives or research and development (RD) personnel may have future non-compete requirements and proactively allocate reserves for compensation in advance.
As for how much compensation reserve to allocate, it should take into account both the potential number of individuals affected and the expected duration of the non-compete period. After all, the longer the restriction period, the higher the budget required for compensation.
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