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【Labor Standard Act】Attempting to Balance Different Interests - Post-Employment Covenants Not to Com..

2019-05-16 Yen-Chia Chen
Attempting to Balance Different Interests
- Post-Employment Covenants Not to Compete under Taiwan Law -



A post-employment covenant not to compete, restricting an employee from competing with his former employer after the employee leaves his employment, is a common practice adopted by many employers in different corners of the world, including Taiwan.[1]  A frequently-seen misconception among employers is mistakenly believing that they, as employers, may impose any restriction on any and each of their employees as long as the imposed restriction is not undue or overbroad.[2]  However, this belief would not be accurately correct for any post-employment covenants not to compete between an employer and an employee in Taiwan because there are certain requirements prescribed by law that a post-employment covenant not to compete must meet.[3]  Employers interested in doing business in Taiwan shall keep in mind that failing to meet certain requirements prescribed by law would possibly render a post-employment covenant not to compete null and void under the Labor Standards Act,[4] and other laws, if applicable,[5] in Taiwan.[6]  For instance, the Taiwan High Court has upheld the view that a post-employment covenant imposing restrictions on an employee without providing reasonable compensation to that employee is null and void under the applicable laws in Taiwan.[7]
 
I.  General Requirements
 
Under Article 9-1, amended on December 16, 2015, of the Labor Standards Act in Taiwan, a post-employment covenant not to compete between an employer and an employee must meet all following requirements: (1) the employer possesses protectable legitimate business interests; (2) the employee’s position or capacity allows the employee to have access to or use the employer’s trade secret; (3) the restriction imposed by the covenant not to compete “shall not exceed a reasonable range” in terms of its duration, geographical outreach, the scope of the restricted competing activities, and prohibited prospective employers; and (4) the employer shall provide reasonable compensation to the employee for the employee’s loss resulting from not competing.[8]  A post-employment covenant not to compete failing to meet any of these requirements is null and void.[9]  Ideally, the law and judicial evaluation of a post-employment covenant not to compete should address the balance of or attempt to balance the interests of the employers, the employees, and the public.[10]  During the discussion on the draft Article 9-1 of the Labor Standards Act, some legislators pointed out that a covenant not to compete, allowing an employer to impose restrictions on his employees to preserve the employer’s interests in protecting his legitimate business interests, should not cause undue hardship to the employee or unduly restrict the free flow of labor.[11]
 
The amendment to Article 9-1 of the Labor Standards Act in 2015 is a reflection of a well-established view held by the courts in Taiwan for years.[12]  Before Article 9-1 of the Labor Standards Act came into force, an employee challenging the validity of his post-employment covenant not to compete likely argued that the covenant at issue is unfair and shall be void[13] because the very covenant makes the employee waive his right or restrict the exercise of the employee’s right.[14]  At then the courts in Taiwan adopted a multiple-prong approach requiring the courts to look into the following factors in determining the validity of a post-employment covenant not to compete: (1) whether the employer possesses a legitimate business worthy of protection; (2) whether the employee has access to or use the employer’s critical confidential information; (3) whether the non-compete restriction imposed on the employee is reasonable; and (4) whether the employer provides reasonable compensation to the employee for the non-competition period.[15]  After Article 9-1 of the Labor Standards Act came into effect, the courts in Taiwan are more than likely to continue applying the aforementioned multiple-prong approach in determining whether a post-employment covenant not to compete is valid under the applicable laws in Taiwan.[16]
 
II.  Written Form
 
In Taiwan, a post-employment covenant not to compete between an employer and an employee must be in written form, and each party shall respectively keep a copy of the covenant between them.[17]  This requirement applies to a post-employment covenant not to compete in the form of either a stand-alone agreement or a clause inserted in a principal contract between an employer and an employee.  In addition, a post-employment covenant not to compete must contain the terms of its duration, geographical outreach, the scope of the restricted competing activities, prohibited prospective employers, and also the compensation that the employer shall pay to the employee for the employee’s loss resulting from not competing.[18]
 
III.  Reasonable Restrictions
 
A post-employment non-compete restriction imposed on an employee should be reasonable (i.e., “shall not exceed a reasonable range”) in its restricted period, restricted geographic area, the scope of the restricted competing activities, and prohibited prospective employers.[19]  Speaking specifically, a post-employment non-compete restriction would be considered reasonable (i.e., not exceeding a reasonable range) if meeting all following requirements: (1) the restricted period shall not be longer than the life cycle of the employer’s trade secret or technological information and is limited up to a maximum of two years; (2) the restricted geographic area shall be limited to the area where the former employer actually conducts business; (3) the scope of the restricted competing activities shall be specified and also shall be identical or similar to the scope of the employee’s activities during his employment; and (4) the prohibited prospective employers shall be specified and are limited to the employer’s competitors whose business is identical or similar to the employer’s business.[20]  The restraint period of a post-employment non-compete restriction may be up to two years starting from the time of the employee’s departure.[21]  Nevertheless, any excess period will be shortened to two years.[22]  Moreover, some commentators note that courts in Taiwan are not likely to consider a non-compete covenant with a “worldwide” geographic restriction reasonable since this kind of restriction will be deemed to be overbroad.[23]
 
IV.  Reasonable Compensation
 
A post-employment non-compete restriction without reasonable compensation to the restricted employee is null and void under the applicable laws in Taiwan.[24]  The said reasonable compensation is the compensation for the restricted employee’s loss resulted from not competing during the time of restraint[25] and shall not include any remuneration received by the restricted employee during his employment.[26]  In determining whether the compensation for the restricted employee is reasonable, the law requires taking into consideration of all following factors: (1) the monthly compensation amount shall not be less than fifty percent (50%) of the restricted employee’s monthly average wage upon his departure; (2) the amount of the compensation shall be sufficient to maintain the restricted employee’s living during the post-employment restraint period; (3) the amount of the compensation shall be comparable to the restricted employee’s loss incurred as a result of the restricted employee’s compliance with his non-compete covenants during the non-competition period; and (4) any other matters relating to the determination of the reasonableness of the compensation.[27]  Furthermore, the restricting employer may pay reasonable compensation to the restricted employee either in a lump sum or on a monthly basis.[28]
 
 
This Article, including the information contained herein, has been prepared only for educational and general information purposes to contribute to the understanding of some general requirements of a post-employment covenant not to compete under the applicable laws in Taiwan.  This Article does not and is not intended to constitute, offer or convey individual legal advice, legal opinion or any other professional advice on any subject matters covered herein.  Please obtain specific legal advice before acting on any matters discussed herein.  While the author makes every attempt to ensure that the information covered herein is accurate, the author disclaims any liability for any omissions or errors that may be contained in this Article.
 
 
 
[1] Jacqueline Fu & Cecilia Lee, Non-Competition Clauses Under Taiwan Law, K&L Gates LLP (Nov. 9, 2017), http://www.klgates.com/non-competition-clauses-under-taiwan-law-11-09-2017/.
[2] Ross E. Shanberg, Employee Covenants Not to Compete: The Myth of Enforceability and Alternative Protective Measures Available to California Employers, Shanberg, Stafford & Bartz LLP, https://www.ssfirm.com/Articles/Employee-Covenants-Not-to-Compete-The-Myth-of-Enforceability-and-Alternative-Protective-Measures-Available-to-California-Employers.shtml (last visited Mar. 18, 2019).
[3] Fu & Lee, supra note 1.
[4] Lao Dong Ji Jhun Fa [The Labor Standards Act] (promulgated on July 30, 1984; last amended on November 21, 2018) [hereinafter the “Labor Standards Act”].
[5] E.g., Civil Code art. 247-1.
[6] E.g., Labor Standards Act art. 9-1, ¶3.  See also Jamie Shih-Mei Lin, Chapter 44: Taiwan, in The Employment Law Review 608 (Erika C. Collins ed. 2018).
[7] E.g., Taiwan Gaodeng Fayuan 107 Lao Shang No. 68 Civil Judgment (Mar. 13, 2019) (臺灣高等法院107年度勞上字第68號民事判決) [Taiwan High Court 2018 Lao Shang No. 68 Judgment]; Taiwan Gaodeng Fayuan 106 Lao Shang No. 38 Civil Judgment (July 11, 2017) (臺灣高等法院106年度勞上字第38號民事判決) [Taiwan High Court 2017 Lao Shang No. 38 Judgment].
[8] Labor Standards Act art. 9-1, ¶1.
[9] Id. at ¶3.
[10] See Cathy Packer & Johanna Cleary, Rediscovering the Public Interest: An Analysis of the Common Law Governing Post-Employment Non-Compete Contracts for Media Employees, 24 Cardozo Arts & Ent. L.J. 1073, 1076 (2007); Michael J. Garrison & John T. Wendt, The Evolving Law of Employee Noncompete Agreements: Recent Trends and an Alternative Policy Approach, 45 Am. Bus. L.J. 107, 114-15 (2008); Melissa Ilyse Rassas, Explaining the Outlier: Oregon’s New Non-Compete Agreement Law & the Broadcasting Industry, 11 U. Pa. J. Bus. L. 447, 450-51 (2009).
[11] 104:89 Lifayuan Gongbao (立法院公報) [Legis. Yuan Gaz.], no. 4288, Dec. 8, 2015, at 351-353, 356.
[12] Taiwan Xinbei Difang Fayuan 107 Lao Su No. 72 Civil Judgment (Nov. 28, 2018) (臺灣新北地方法院107年度勞訴字第72號民事判決) [Taiwan New Taipei District Court 2018 Lao Su No. 72 Civil Judgment].
[13] Civil Code art. 247-1.
[14] Taiwan Gaodeng Fayuan 102 Lao Shang Yi No. 104 Civil Judgment (Mar. 31, 2014) (臺灣高等法院102年度勞上易字第104號民事判決) [Taiwan High Court 2013 Lao Shang Yi No. 104 Civil Judgment].
[15] Id.
[16] E.g., Taiwan Gaodeng Fayuan 104 Zhong Lao Shang No. 50 Civil Judgment (June 6, 2017) (臺灣高等法院104年度重勞上字第50號民事判決) [Taiwan High Court 2017 Zhong-Lao-Shang No. 50 Civil Judgment].
[17] Enforcement Rules of the Labor Standards Act art. 7-1.
[18] Id.
[21] Labor Standards Act art. 9-1, ¶4.
[22] Id.
[23] Fu & Lee, supra note 1.
[25] Id. at ¶1.
[26] Id. at ¶2.
[27] Enforcement Rules of the Labor Standards Act art. 7-3, ¶1.
[28] Id. at, ¶2.