Should I Sign the Non-compete Agreement upon Resignation?
Imagine that you’ve dedicated years of hard work to a company, completing numerous projects. Today, you’ve finally made the decision to resign. As you step into the meeting room, the HR representative hands you a “Non-Compete Agreement” that needs to be signed before you leave. Would you sign it?
It’s likely that those who have worked for many years, especially in executive or technology roles, may have faced a scenario described above. Whether you’ve signed such an agreement or not, do you understand what a “Non-Compete Agreement” is? And how it might affect you?
In this article, I will introduce the limitations set by Labor Standards Act in Taiwan on the “non-compete” period and scope in such agreements. Whether you are an employee or an employer, this article will help you determine if the non-compete agreement you are drafting or signing is legally sound.
Non-compete Agreements Are Not Boundless
The Labor Standards Act sets clear limitations on the “period” and “scope” of non-compete agreements in relation to employees’ “right to work.” If these requirements are not met, the agreement could be rendered invalid, and the employee would not be bound by it.
The Scope of Non-compete Is Limited to the Industry and Role of the Employee
According to Subparagraph 2, Paragraph 1, Article 9–1 of the Labor Standards Act, the scope of a non-compete agreement must consider the position or duties the employee held before leaving. Additionally, it should involve access to and usage of the company’s trade secrets to justify the necessity of a non-compete agreement after resignation.
As a result, high-ranking executives in departments such as technology development, finance, sales, and marketing, or personnel involved in critical research and quality assurance roles, might be asked by companies to sign non-compete agreements. Employees handling administrative tasks, on the other hand, might be less likely to encounter such agreements, as they might not have access to the company’s trade secrets.
Subparagraph 3, Paragraph 1, Article 9–1 of the Labor Standards Act also specifies that the restricted industry and area should be appropriately limited.
Firstly, during the agreement, it is necessary to specifically indicate the exact industry. For instance, if the company is engaged in the trade of food raw materials, the scope of the non-compete agreement can be limited directly to “importer and exporter of food raw materials,” rather than just stating “food industry.” Otherwise, within the food industry, there are further subdivisions such as “food manufacturing and processing,” “food machinery industry,” and “food sales channels industry.” In case of disputes, the court might challenge the agreement if the restricted scope is unclear or overly broad.
Furthermore, it is not advisable to include clauses in the resignation non-compete agreement that resemble statements like “shall not engage in the same industry as the company and its current or future domestic or foreign subsidiaries, branches, factories, affiliated enterprises, and/or other business organizations.” Court opinions have indicated that such broad and ambiguous clauses can be challenged as they seem to encompass not just the company itself but also its affiliated enterprises and potential future entities, including companies in which the company invests or acquires. In simple terms, it’s unwise for companies to include industries related to affiliated enterprises or subsidiaries in the scope of the non-compete agreement, as this could lead to challenges in court for being unclear or overly expansive.
The Non-compete Period is Limited at Two Years
Paragraph 4, Article 9–1 of the Labor Standards Act states that the maximum duration for a non-compete period is two years. Even if a longer duration is specified, it will be shortened to two years.
Is the Non-compete Agreement You Draft or Sign Valid?
To conclude, when drafting or signing a non-compete agreement, both employers and employees must pay attention to three key points to ensure the legality and effectiveness of the agreement:
- The employee signing the agreement must have had access to and used the company’s trade secrets.
- The non-compete period cannot exceed two years.
- The agreement should specify the restricted industry and role, and should be relevant to competitors. It shouldn’t be too general or vague, as this could be challenged in case of disputes.
Employers and employees should be well-versed in these points. If any of them are violated, the non-compete agreement could become invalid. Employees should carefully read the agreement and clarify any discrepancies with the employer before signing to avoid inadvertently limiting their job rights.
In the next article of this series (to be published on August 30, 2023), I will continue to discuss the important topic of “compensation” in non-compete agreements. Stay tuned!
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