Analysis of Several Issues Concerning Non Competition Restrictions for Retired Personnel - Part 6 of the Retirement Series Articles

LABEL： Labor ,

On September 13, 2024, the Measures of the State Council on Gradually Extending the Statutory Retirement Age (hereinafter referred to as the "Measures") was officially announced. Based on the current situation of population aging and the needs of economic development and transformation, the Measures optimized the diversity and flexibility of the statutory retirement age, and gave workers certain options to flexibly postpone retirement according to their own needs and specific circumstances.

In fact, with the improvement of people's living standards and health and medical conditions, the average life expectancy continues to extend. In recent years, more and more workers who have reached or exceeded the statutory retirement age tend to continue working. Even before the promulgation of the Measures, the employment model of "re employment after retirement" was already very common, especially for many senior management and technical personnel with professional knowledge and skills who continue to "utilize their residual energy" after retirement to serve as management positions and expert consultants for employers, which is not uncommon in practice.

For the above-mentioned retired and rehired workers, on the one hand, if they have signed a non compete agreement with their original employer before reaching the statutory retirement age, they may have a non compete obligation to their original employer; On the other hand, as they may also have access to and control of the employer's trade secrets or important information after being rehired, the rehired employer may also require them to assume non compete obligations. This article will combine relevant regulations and judicial practice to study and analyze issues related to non compete restrictions for retirees.
1、 Does the original non compete agreement still have binding force if the employment relationship is terminated due to retirement?

Regarding this, some regions have clear local regulations or arbitration opinions to make provisions. Article 15 of the "Minutes of the Seminar on Several Issues Concerning the Trial of Labor Dispute Cases" by the Guangzhou Intermediate People's Court stipulates that if an employee reaches the statutory retirement age and the labor contract is terminated, the non compete clause in the labor contract shall still be binding on the retired employee. [1] The Jiangsu Province Labor Contract Regulations also have relevant provisions. [2]

In current judicial practice, judicial authorities in various regions generally recognize that if an employee signs a non compete agreement with the employer during the existence of the labor relationship, the original non compete agreement will still be binding on the employee after retirement. [3]

For example, in a case heard by the Second Intermediate People's Court of Tianjin, an employee signed a non compete agreement with Company A during the existence of the labor relationship, which stipulated that the employee shall not work or provide services in units that compete with Company A for two years after leaving the company. After retiring from Company A and receiving pension insurance benefits, the employee signed a labor contract with Company B, a third party to the case, and Company B had a competitive relationship with Company A. The court held that the employee violated the non compete obligation and should bear the liability for breach of contract in accordance with the "Non compete Agreement" signed with Company A. [4]

For example, in a case heard by the Third Intermediate People's Court of Beijing, the Supplementary Agreement to the Labor Contract signed between the company and the employee stipulated non compete clauses. After the employee retired and enjoyed retirement benefits, the labor relationship terminated. The Notice of Termination of the Labor Contract also stated that "the employee and the company have entered into an agreement to keep trade secrets and non compete. Within one year after leaving the company, the employee shall keep the company's trade secrets and shall not use the customer resources obtained from the company. In this regard, the court holds that although the employee has enjoyed retirement benefits, they still have the ability to provide labor. If the employee fulfills the non compete obligation as agreed, the company should pay them economic compensation on a monthly basis. [5]

Accordingly, the employment relationship shall terminate upon retirement, and the original non compete agreement shall remain binding. If an employee is rehired by another unit after retirement, it may constitute a violation of the non compete agreement; And if the employee fulfills the non compete obligation after retirement, the employer should pay them non compete compensation.
2、 Is the non compete agreement signed between the employer and retired rehired personnel valid?
（1） The recruitment of retired and rehired personnel by employers may constitute a labor relationship or employment relationship

When an employer hires retired personnel who have already enjoyed pension insurance benefits in accordance with the law, according to Article 44 of the Labor Contract Law and Article 32 of the Interpretation of the Supreme People's Court on the Application of Law in the Trial of Labor Dispute Cases (I), the two parties constitute a labor relationship.

However, if an employer hires retirees who have reached retirement age but have not yet enjoyed pension insurance benefits in accordance with the law, there are different judgments in judicial practice regarding the legal relationship between the two parties. There are currently three main viewpoints: judicial authorities in Beijing, Zhejiang, Guangdong and other places tend to believe that it should be handled according to labor relations, judicial authorities in Jiangsu and other places tend to believe that it should be handled according to labor relations, and judicial authorities in some areas may make a comprehensive determination based on factors such as the reason why the worker did not enjoy pension insurance benefits and the specific situation of the establishment of the employment relationship.

Therefore, in current judicial practice, when employers hire retired and rehired personnel, the employment relationship between the two parties may be recognized as a labor relationship or a labor relationship based on different facts.
（2） The non compete agreement signed between retired and rehired personnel and the employer does not necessarily have to be invalid

If retired and rehired personnel form a labor relationship with the employer, according to Article 23 and Article 24 of the Labor Contract Law, the employer may agree on non compete clauses with them in the labor contract or confidentiality agreement.

If the retired rehired personnel form a labor relationship with the employer, the agreement between the two parties under the labor relationship based on the principle of equality and voluntariness to fulfill non compete obligations after the rehire ends does not violate mandatory legal provisions and should be recognized as valid. In current judicial practice, if an employer and a retired rehired employee reach a non compete agreement based on mutual agreement and referring to the provisions under the labor relationship, the judicial authorities usually recognize the effectiveness of the agreement.

For example, in a case heard by the First Intermediate People's Court of Beijing, an employee who reached the statutory retirement age was rehired by the original company to work as a deputy general manager. The two parties established a labor relationship and signed a non compete agreement. The court believes that although retired rehired employees are not workers in the sense of the Labor Contract Law, the law does not prohibit the confidentiality and non compete obligations agreed upon by both parties in the labor relationship. Therefore, the non compete agreement also has legal effect, and both the company and retired rehired employees should fulfill their respective obligations in accordance with the provisions of the "Competition Avoidance Agreement". [6]

In addition, if the employer and retired rehired personnel have not clearly agreed on non compete compensation and breach of contract liability, the court may also refer to the Labor Contract Law and judicial interpretations to determine the standards for non compete compensation and breach of contract under the labor relationship when adjudicating relevant cases. For example, in a case heard by the People's Court of Bao'an District, Shenzhen, the court held that although the plaintiff and defendant were in a labor relationship, if both parties agreed on a non compete clause in the labor contract, the employing unit should also pay economic compensation to the laborers in accordance with the provisions of the Labor Contract Law after the contract is terminated or rescinded. [7]

But in practice, there are indeed a few cases where the court considers that the two parties constitute a labor relationship and the non compete agreement is invalid. For example, in a case heard by the People's Court of Shijingshan District, Beijing, an employee was rehired to another employer after completing retirement and receiving pension insurance benefits. The employee signed a "Labor Contract" with the employer and entered into a confidentiality agreement, which stipulated the employee's confidentiality obligations and post employment non compete obligations. The court holds that there is a labor relationship between retired and rehired employees and the employer, and the labor contract signed by both parties is invalid. Therefore, the confidentiality agreement that is a part of the labor contract is also invalid. [8]

In the above case, the employer signed a labor contract with a retired and rehired employee instead of a labor contract. We understand that this fact may to some extent affect the final judgment of the court. Therefore, it is recommended that companies should re sign labor contracts and sign confidentiality agreements or non compete agreements with personnel who have confidentiality obligations when recruiting retired and rehired personnel, in order to avoid the effectiveness of confidentiality agreements or non compete agreements being affected by the nature of the employment relationship.
3、 When does the non compete period start if the labor relationship is terminated due to retirement and the employee is rehired back to their original employer after retirement?

If an employee signs a non compete agreement with the employer during the existence of the labor relationship and is rehired after retirement, and the two parties do not sign a new non compete agreement, then when should the non compete period start? There are different views in judicial practice.

Viewpoint 1: If the labor relationship terminates due to retirement, the non compete period starts from the time the employee retires

According to Article 23 of the Labor Contract Law, employees have a non compete obligation after the termination of their labor relationship. Therefore, some courts tend to believe that if an employee signs a non compete agreement with the employer during the existence of the employment relationship and the employment relationship terminates due to retirement, the non compete period should be calculated from the time the employee retires.

We understand that the court's adoption of the above viewpoint is mainly due to the fact that when a retired rehired employee establishes a labor relationship with an employer, the rights and obligations of both parties under the labor relationship are subject to civil law adjustment, rather than labor law adjustment. Therefore, if the two parties have not made a new agreement on non compete restrictions under the labor relationship, the agreement between the two parties should prevail. For non compete agreements signed between employees and employers based on labor relations before reaching the statutory retirement age, the competition restriction period should be calculated from the time of their retirement. [9]

Viewpoint 2: The non compete period should be calculated from the actual date when the retired and rehired personnel leave the employer

However, some argue that it is necessary to initiate non compete obligations after the employee leaves the company because the employee is no longer under the control of the original employer and needs to be subject to constraints. If an employee signs a non compete agreement with the employer and is rehired to their original employer after retirement, even though the labor relationship has been terminated and the two parties have established a labor relationship, the employee has not yet left the control of the employer and the employer does not face the risk of trade secret leakage. Therefore, for the purpose of non compete, the non compete period should be calculated from the actual time the employee leaves the employer.

For example, in a case heard by the Jiangsu Provincial High People's Court, the court held that although the employee had completed retirement procedures in 2011 and was not considered a worker under the Labor Contract Law, in fact, the employee continued to work in the company until 2014 after retirement. Therefore, the non compete clause signed by both parties during the performance of the labor contract is still binding on both parties, and the non compete period should be calculated from the actual departure of the employee in 2014. [10]
4、 Employment Suggestions

Based on the above analysis, from a compliance perspective, it is recommended that employers, when recruiting retired and rehired personnel with specific positions and confidentiality obligations:

1. For retired personnel who are intended to be employed, relevant background checks and evaluations should be conducted to confirm whether the intended employee has any non compete agreements with the original employer, and to require the employee to provide a written agreement or notice that the non compete agreements of the original employer have been lifted or terminated, in order to avoid joint liability for the employee's non compete obligations under relevant regulations.

2. For employees who have already signed a non compete agreement and whose employment relationship is terminated due to retirement, if the employer does not require the retired employee to fulfill the non compete obligation after resignation, it is recommended to make it clear when notifying the employee to terminate the labor contract, in order to avoid the risk of the employee claiming non compete compensation from the employer on the grounds of fulfilling the non compete obligation after retirement.

3. For employees who have already signed a non compete agreement and are re employed after retirement in this unit, it should be clearly stated at the time of termination of the labor relationship or when signing the retirement and re employment agreement that the retirement and re employment period does not belong to the non compete period after resignation; For those who no longer need to fulfill their non compete obligations after retirement and re employment, they can be notified at the termination of their employment relationship that they do not need to fulfill their non compete obligations after the termination of their employment relationship. However, during the retirement and re employment period, they should fulfill the non compete obligations agreed upon in the re employment agreement.

4. For employees who still need to fulfill their non compete obligations after retirement and re employment (after termination of re employment), it is recommended to clarify through an agreement that the non compete period starts from the termination of re employment, that is, retired employees essentially start counting from the time they leave the company.