In the increasingly fierce competition in the Internet industry, non-compete agreements have become one of the important means for enterprises to protect trade secrets and maintain competitive advantages. However, in recent years, the abuse of non-compete agreements has become more and more serious, which not only restricts the reasonable flow of talents, but also triggers many employment disputes. Xiaohongshu recently announced the cancellation of non-compete restrictions, a move that has attracted widespread attention in the industry.
When Xiaohongshu was on the hot search because of the cancellation of the big and small weeks, it was more noteworthy that it was no longer “competing”.
According to a recent letter from all employees released by Xiaohongshu, since May 1, it has no longer restricted individual movement through competition, and only requires everyone to fulfill information confidentiality and non-solicitation obligations. In the Internet industry, where non-compete disputes are frequent, this is obviously a big breakthrough.
Some employees of large factories who are troubled by competition praised this, saying that “Xiaohongshu has made a good start”. However, this statement may only stop at one wish. According to Silicon Star people, some large manufacturers have shown signs of expanding their competition. For example, the original non-compete restrictions were mainly for high-level employees, but now they have spread to the grassroots level.
A former human resources expert from a major technology company also told Silicon Star that the competition will still compete, and the industry may not change with Xiaohongshu.
Non-compete agreements are becoming more and more outrageous
In recent years, employment disputes have emerged one after another, and the Supreme People’s Court has repeatedly issued typical cases involving non-compete.
For example, the Ministry of Human Resources and Social Security and the Supreme People’s Court recently jointly issued the fourth batch of labor and personnel disputes, and non-compete has been focused on. In the “Top Ten Cases of 2024 to Promote the Rule of Law in the New Era”, the chef mixed cucumbers was also prosecuted for violating non-compete restrictions.
The original intention of non-compete is to prevent and protect the trade secrets of employers by appropriately restricting workers’ free choice of property, so as to maintain a level playing field for market entities. But more and more cases show that this restriction has changed its taste.
Chefs who are engaged in the production of cold dishes such as cucumbers have been competed. Source: CCTV
Liu Yongxiao, a lawyer concerned about labor disputes, mentioned to Silicon Star that the scope of application is unreasonable. This is also the most common question about non-compete.
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On the one hand, Article 24 of the Labor Contract Law points out that non-compete personnel are limited to senior managers, senior technical personnel and other personnel with confidentiality obligations of the employer. The situation of the previous chef is a typical example, and many grassroots employees on the Internet have similar experiences.
A former employee of a large factory told Silicon Star that the company “casually promotes competition, and people who are not suitable also send it.” He was originally engaged in the work of a product manager, without a team, without involving code, without involving core secrets, and his colleagues in the same group and level who left the year before last were not initiated with non-compete, but since last year, the company’s legal affairs suddenly mandated non-compete, and he has become a member of the non-compete.
On the other hand, the scope of restrictions on competitors in non-compete agreements is becoming wider and wider. Liu Yongxiao has seen the non-compete agreements of many leading manufacturers, and one is deeply impressed that their non-compete lists are basically very long.
“It’s like writing the whole Internet.”
The list of non-compete agreements of a factory is circulated on the Internet
The imbalance between compensation and liquidated damages also plagues people from all walks of life. According to the law, during the period of competition, the company shall pay compensation, and if the employee violates the agreement, it shall compensate for liquidated damages. But in reality, these two values are often not equivalent.
In this regard, the Internet industry has performed relatively well, and can be compensated about 30% of the monthly salary before leaving the company after the start of competition. However, in terms of liquidated damages, according to Liu Yongxiao, mainstream Internet companies are generally set at two to three times the annual salary. Although large manufacturers may set the non-compete period to one to two years, the actual start of the non-compete period is mostly 3 to 6 months.
This means that the actual non-compete compensation paid by the enterprise is about one to two months’ full salary, and the corresponding compensation is more than 24 times the monthly salary.
This is clearly unbalanced.
In addition, many companies compensate according to the local minimum wage. Therefore, there may be a situation where the company can restrict the reemployment of employees with a monthly income of 30,000 yuan with a compensation of 2,000 yuan. This imbalance is even more pronounced considering that companies often care about window periods.
In fact, the generalization of domestic non-compete has long attracted the attention of many parties, and now there is a tendency to be further abused.
Silicon Valley with no non-compete restrictions
Although the domestic scientific and technological strength is getting stronger and stronger, there is still something to learn from Silicon Valley when it comes to innovation. For example, Silicon Valley is still a big step ahead in terms of non-compete.
In most U.S. states, the court enforces this requirement if an employee signs an agreement promising not to work for a competitor for one year after leaving the job. But California, where Silicon Valley is located, was different early on.
In 1872, California adopted a legal provision: “No contract restricting any person from engaging in any lawful profession, trade, or business shall be void to that extent except as provided in this chapter.” “This ensures that talent flows freely to the most promising opportunities, and ultimately makes Silicon Valley great.
California then further nullified the non-compete through new regulations. One of the bills states that any non-compete agreement beyond the existing exceptions in California is invalid and that California employers must notify the bound employee and former employee of such invalidity or face fines.
This continues to strengthen Silicon Valley’s innovation advantage. Including the current active AI wave, they have benefited from these blows to non-competes.
For example, the recent DeepMind competition turmoil. According to a recent report by Business Insider, DeepMind has signed a 12-month non-compete agreement with some employees to prevent the flow of core AI talent to opponents such as OpenAI and Microsoft, during which they are forced to take paid leave. A former DeepMind employee revealed that some colleagues are considering leaving London to work in California in order to get rid of the non-compete.
In fact, Silicon Valley’s winds of freedom have had a profound impact on many aspects, not only allowing local AI talents to flow conveniently, stimulating the emergence of a large number of AI startups, but also attracting overseas giants to set up AI teams in Silicon Valley.
At present, the entire United States is learning from the experience of Silicon Valley to restrain non-compete. In 2024, the U.S. Federal Trade Commission (FTC) introduced nationwide non-compete agreements, allowing only executives with annual salaries of more than $151,000 to retain such provisions. The FTC expects this will create more than 8,500 new businesses each year, adding $524 to each worker’s annual income.
According to statistics, four states in the United States have completely banned the use of non-compete agreements, and 34 states and Washington, D.C. have restricted the use of non-compete agreements.
Who will make the second Xiaohongshu?
If we focus on the healthy development of the entire innovation ecosystem, excessive non-compete restrictions obviously need to be effectively restrained. Xiaohongshu’s adjustment this time has undoubtedly made a good start, but it is still unknown whether other major manufacturers will quickly follow up.
In the field of graphic content community, Xiaohongshu has indeed established a certain first-mover advantage and user stickiness with its unique community atmosphere and user mentality, which has won more space for its subsequent development.
But Xiaohongshu is not at ease. It is also actively exploring live broadcasting, e-commerce and other fields, trying to broaden the commercialization path. These areas are already a red sea surrounded by giants, and the competition is extremely fierce. Therefore, Xiaohongshu’s decision to cancel non-compete restrictions is more likely to be a positive strategic gesture in addition to confidence in its core community ecology:
It is first of all conducive to talent attraction and motivation. During a critical period of urgent need to innovate and expand new businesses, attract and retain top talent with a more open attitude and stimulate employee vitality. Especially for the younger generation of outstanding talents, a more free and humane employer brand is significantly attractive.
And for cost and efficiency, this decision is actually beneficial to Xiaohongshu. Maintaining a broad non-compete limit itself comes with significant compensation and management costs. Eliminating unnecessary competition can focus resources more on the protection of core confidential information.
But for other Internet giants, whether they will follow Xiaohongshu’s example is facing more complex considerations:
The competition faced by each company is different: the competition between many large manufacturers is multi-front, highly homogeneous and white-hot. Their core business, key technologies and market share often face fierce competition from each other. In this environment, non-compete may still be seen by some companies as a “necessary evil” to slow down the loss of core talent and maintain a competitive advantage.
In addition, the core competitiveness of some large companies may be more focused on cutting-edge technology research and development or highly confidential business data that is difficult to replicate in the short term. For such enterprises, the loss of key technical talents may bring more direct and significant losses. For example, today’s AI competition.
In addition, every company, especially after becoming a giant organization, has path dependence and organizational inertia: large enterprises often have complex organizational structures, and the existing legal and human resources systems have mature operating procedures for non-compete restrictions. Changing this strategy requires overcoming greater internal inertia and resistance.
As a former human resources expert at a major technology company pointed out, the monitoring and counter-monitoring methods of large companies around competition have become quite complex, which reflects that non-compete has become a tool for the game between enterprises to some extent, and employees are often in it. Xiaohongshu mentioned in the letter to all employees that competition stems from high-intensity competition in the industry, which is a game between enterprises and employees, but at a deeper level, this is a game of competition for talents and information between enterprises, and the career development of employees is therefore implicated.
Large manufacturers have invested heavily in non-compete restrictions, and unless the industry forms some kind of consensus or has stronger external constraints, it may not be realistic to expect them to “lay down their weapons” in the short term. They may continue to believe that maintaining the status quo is more in line with their current considerations of “maximizing interests” in the fierce stock game.
However, at the end of the day, talent is the core source that drives innovation and vitality in enterprises. Excessive restrictions on the reasonable flow of talents will stifle innovation vitality in the long run and ultimately harm the interests of the entire industry. Ideally, enterprises, employees and industry ecology should be mutually beneficial and symbiotic. Xiaohongshu’s exploration is worthy of recognition, but the transformation of the entire industry still has a long way to go.
