The development of modern enterprises cannot be separated from the investment and efforts of employees. Therefore, in order to retain talents and motivate employees, modern enterprises usually adopt equity incentives to increase employee motivation and seek common development between the company and employees.

Meanwhile, as equity incentives are a type of option, many employees may leave the company without waiting for their rights to be realized, causing significant losses to the company. So, stipulating non compete clauses for employees who implement equity incentives has become the choice of the vast majority of companies.

How can non compete clauses truly constrain employees as they are protected by the Labor Contract Law?

1、 The manifestation of non compete restrictions in relevant laws and regulations such as the Labor Contract Law and the Company Law

Article 184 of the Company Law stipulates:

Directors and senior management personnel shall not engage in the following behaviors:... (5) Without the consent of the shareholders' meeting or the shareholders' general meeting, taking advantage of their positions to seek business opportunities belonging to the company for themselves or others, or engaging in self operated or operated businesses similar to those of the company they serve for others; The income obtained by directors and senior management personnel in violation of the provisions of the preceding paragraph shall belong to the company.

Article 23 of the Labor Contract Law stipulates:

The employer and the employee may agree in the labor contract to keep the employer's trade secrets and confidential matters related to intellectual property confidential.

Employers may stipulate non compete clauses with employees who have confidentiality obligations in their labor contracts or confidentiality agreements, and agree to provide economic compensation to employees on a monthly basis during the non compete period after the termination of the labor contract. If an employee violates the non compete agreement, they shall pay a penalty to the employer in accordance with the agreement.

Article 24 of the Labor Contract Law stipulates:

The personnel subject to non compete restrictions are limited to senior management personnel, senior technical personnel, and other personnel with confidentiality obligations of the employer. The scope, territory, and duration of non compete restrictions shall be agreed upon by the employer and the employee, and the agreement on non compete restrictions shall not violate the provisions of laws and regulations.

After the termination or cancellation of the labor contract, the non compete period for the personnel specified in the preceding paragraph to go to other employers that have a competitive relationship with the production or operation of similar products or engage in similar business with this unit, or to start their own business to produce or operate similar products or engage in similar business, shall not exceed two years.

Article 6, Paragraph 1 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (IV) stipulates that if an employee voluntarily fulfills the obligation of non competition, the company may be required to pay economic compensation on a monthly basis at 30% of the average salary of the twelve months prior to the termination or termination of the labor contract.

From the above, it can be seen that the Labor Contract Law supports companies to agree on non compete clauses, but they should pay corresponding economic compensation and have clear time limits. However, the non compete clauses in the Company Law do not stipulate economic compensation.

2、 The nature and clause setting of non compete restrictions in equity incentives

Equity incentives generally reward executives and core employees, but there are also universal equity incentives for all employees. Equity incentives are non work related benefits enjoyed by employees based on their performance or company policies, different from labor contracts.

Therefore, in order to avoid confusion between equity/option grant agreements and labor contracts, non compete clauses should be clearly stipulated. Therefore, it should be clearly stipulated that the rights and benefits obtained by the awardee based on equity/option incentive plans and grant agreements shall not be counted as employees' wages or labor remuneration, and shall not be calculated as employees' overtime wages, benefits, or social insurance. Moreover, special arbitration clauses or court jurisdiction clauses should be established to exclude the possibility of labor arbitration commissions or labor courts having jurisdiction.

In summary, equity incentive clauses can stipulate non compete restrictions, but the scope and corresponding conditions of application of non compete clauses should be strictly defined.