Post-employment covenants not to compete (CNC) are lawful in Taiwan if the following four requirements set in the Labor Standards Act (LSA) are met:
- The employer has legitimate business interests that need be protected with a CNC;
- The employee, due to his/her position or nature of work, can access or use the employer’s trade secrets during the employment relationship;
- The CNC does not contain unreasonable restrictions on the employee’s future works in terms of time period, area, occupation scope and choice of new employers; and
- The employer provides reasonable compensation to the employee for his/her losses due to the CNC, and the payment the employee receives during employment shall not be deemed as part of the compensation.
Noncompliance with any of the four requirements will result in the nullity of the CNC.
As the above LSA rules came into force only since December 16, 2015 (even though they had been strongly encouraged by the government for a few years), many a CNC signed before that date was not accompanied with a compensation program, one reason being that consideration is basically not required of a contract under Taiwan’s Civil Code, another reason being that employers as well as many employees believe that one’s pay package is supposed to cover any CNC compensation.
There are divided views over the absence of compensation in these “old CNCs”. Commentators all agree that an old CNC, if prepared by an employer and applied indiscriminately to the bulk of its employees (as most CNCs are), should be deemed void if the restrictions it imposes are “obviously unfair” so as to violate the Civil Code rules on standard form contracts. Article 247-1 of Taiwan’s Civil Code. However, whether the sheer absence of a separate compensation program is itself a good cause to label an old CNC as “obviously unfair” has been a matter of continuing debate.
In July 2020, the Supreme Court, within a single week, rendered two decisions on the issues around old CNCs, an act never seen before, and both decisions suggested that for an old CNC to be valid and enforceable compensation is required. Auspistek Corp. v. Huang et al., 109 Tai Shang 4 (Taiwan’s Supreme Court, July 2020). A-Lumen Machine Co., Ltd. v. Willsun Int’l Co., Ltd., 108 Tai Shang 2125 (Taiwan’s Supreme Court, July 2020).
In the first decision, the Supreme Court indicated:
Six days later, in the second decision, the Supreme Court went further:
|Article 15 of the Constitution provides, “[t]he right of existence, the right of work, and the right of property shall be guaranteed to the people.” Therefore, for a covenant not to compete to avoid from being null and void, it needs to … include a compensation arrangement that reasonably remunerates the party subject to the covenant for his/her losses so as to ensure that his/her economic and existence interests are not harmed. The disputed Undertaking, however, does not seem to contain a compensation clause …, which is no different from creating a unilateral gratuitous legal relationship. In this scenario, can we still say that the Undertaking did not impose restrictions on the defendant’s right and did not amount to an “obviously unfair” contract? This issue is not unworthy of further deliberation by the lower court (italics added by the writer).
The lower court here refers to the IP Court whose decision is now revoked and remanded. In this dispute over an old CNC asserted to have been breached by an employer’s ex-manager (who left the company before the LSA rules on CNCs were implemented), the IP Court sided with the employer’s argument that “whether the employee has been substantially compensated is not a requirement of the legality of an old CNC, although the absence of compensation can be considered by the court in decreasing the amount of penalties for breaching the CNC.”1 This view has now been negated by the Supreme Court.
1. The LSA rules on CNCs are so-called “mandatory regulations” not susceptible to choice of law agreement, meaning they are applicable even in a CNC where a Taiwanese employee working only in Taiwan agrees that the CNC shall be construed and enforced under non-Taiwanese laws.
2. The Supreme Court’s decision in the first reported case seems to suggest that the LSA rules on CNC shall apply anyway in a case where the employee leaves the employer after December 16, 2015 (the date on which these rules came into effect.) In this context, it is advisable for an employer to offer a compensation program to an employee who is about to leave and who has only signed a compensation-free old CNC the continuing validity of which is critical to the employer’s business.
3. The LSA is silent on how an employer may design a remedy clause in a CNC. Nevertheless, court decisions show that injunctive orders are possible even if the CNC lacks an explicit injunctive remedy clause. As for penalties, the Civil Code grants courts the authority to reduce penalty amount upon a party’s motion, and seldom is a penalty amount left unreduced in a Taiwanese court (see our report on a related case here).
4. The Ministry of Labor rendered explanatory rules on the LSA’s four requirements in the Enforcement Rules of the LSA amended in 2019. These explanatory rules are:
► The non-compete time period shall not exceed the lifetime of the employer’s trade secrets or technological information of concern and shall in no circumstance exceed two years (a longer term shall be automatically cut down to two years);
► The non-compete geographical area shall be no wider than the employer’s actual business area;
► The non-compete occupation scope shall be clearly defined and shall be identical or similar to the employee’s present work scope;
► Where there is a restriction on the employee’s choice of new employers, the employers to be precluded shall be clearly defined and limited to those competing with the current employer in identical or similar business sectors;
► The CNC compensation shall be paid after the employment relationship ends, either in a lump sum or on a monthly basis; and
► Whether the compensation is reasonable should be determined upon considering at least the following factors:
- The compensation per month shall be no less than 50% of the employee’s average monthly wage at the time he/she leaves the employer; and
- The compensation shall be sufficient to support the employee’s living during the non-compete period.
1 The penalties stipulated in the disputed CNC are “24 times of the employee’s entire monthly pay package when he leaves the company” while the agreed non-compete period is 12 months.