The core asset of an AI company is its people — algorithm engineers, model trainers and architects. Yet many AI start-ups carry three blind spots in their employment arrangements: non-compete restrictions are signed but not lawfully framed, equity incentives are granted without tax planning, and cross-border remote working is arranged without a lawful employing entity.
Non-compete restrictions: the core protection for an AI company
Legal basis
Article 24 of the Labour Contract Law, together with the Compliance Guidelines for the Implementation of Non-Compete Restrictions by Enterprises issued by the Ministry of Human Resources and Social Security (MOHRSS General Office Document [2025] No. 40, September 2025).
Persons to whom the restriction may apply
A non-compete restriction may be imposed only on the following three categories:
- Senior management
- Senior technical personnel
- Other personnel who bear a confidentiality obligation
Particular note for AI companies: algorithm engineers, model trainers and architects may be brought within the restriction, but it must be shown that they have access to trade secrets — information not known to the public, commercially valuable, and protected by the company’s confidentiality measures. Personnel who possess only general industry knowledge and skills should not be included.
Core terms
| Term | Legal requirement | Recommended for an AI company |
|---|---|---|
| Duration | Not more than two years | Two years for core technical personnel, one year for others |
| Compensation | Not less than 30% of average monthly wage in the 12 months before departure | 50%–60% is recommended to strengthen enforceability |
| Liquidated damages | No statutory cap | Three to five times the total compensation |
| Geographical scope | Determined by the actual business | The principal areas of competition; not excessively broad |
| Exception | Personnel with general skills only | Not to be included |
Representative case
Hangzhou AI non-compete case: Mr Zhao left a robotics company and incorporated a technology company in the following month to carry on a competing business. The court held that he had breached his non-compete obligation.
Equity incentives: tax planning for unlisted companies
Conditions for deferred taxation
Under Caishui [2016] No. 101, equity incentives granted by an unlisted company that satisfy the following conditions may be taxed on transfer rather than on grant, at the 20% rate applicable to income from the transfer of property:
| Type | Holding requirement | Exercise restriction |
|---|---|---|
| Share option | Held for three years from the grant date and for one year after exercise | Not more than ten years from grant to exercise |
| Restricted stock | Held for three years from the grant date | Held for one year after vesting |
| Equity award | Held for three years from the date of acquisition | — |
Further conditions
- The subject of the incentive is equity in the company itself, a resident enterprise of China
- The company does not fall within a restricted industry catalogue
- The grant has been approved by the board and the shareholders’ meeting
- The grant has been filed with the competent tax authority
Where the conditions are not met
The incentive is taxed as wages and salaries under the comprehensive income rate schedule, and the effective burden may be substantially higher than 20%.
Equity incentives in listed companies
Under the extension policy of the Ministry of Finance and the State Taxation Administration (in force until 31 December 2027):
- Equity incentive income is not aggregated with other comprehensive income and is taxed separately under the comprehensive income schedule
- Payment may be deferred for up to 36 months from exercise, subject to filing
- All tax must be settled before departure
Cross-border remote working: legal risks
Core legal questions
| Question | Rule |
|---|---|
| Employing entity | An overseas company without a registered entity in mainland China lacks the legal capacity to employ directly |
| Employment relationship | A worker in China may establish an employment relationship only with an enterprise established in China |
| Social insurance | Contributions must be made through a Chinese entity or an employer-of-record arrangement |
| Work injury | Where there is no lawful employing entity, a work injury determination is difficult |
Solutions
- Establish a Chinese entity — the overseas company incorporates a subsidiary or representative office in China.
- Employer-of-record services — a licensed EOR provider acts as the nominal employer.
- Contracting and outbound investment — employees with an existing labour contract may be assigned to an overseas project.
Risk case
Beijing Haidian Court: an unlicensed company that arranged overseas work on an intermediary basis was held liable to the worker as the employer.
AI-driven role replacement: labour law risk
Representative cases
Case one: replacement by AI held to be unlawful termination (Beijing, 2025 typical case) A technology company terminated an employee in a manual data-collection role on the ground that “the objective circumstances had materially changed”. The arbitration commission held that the introduction of AI was an ordinary business decision and did not amount to a material change in objective circumstances; the termination was unlawful.
Case two: RMB 260,000 awarded for replacement by AI A company notified an employee of termination on the ground that “AI can replace quality inspection”. The arbitration tribunal, the court of first instance and the court of appeal all found for the employee, and the company paid more than RMB 260,000.
Compliance points
| Situation | Lawful handling |
|---|---|
| Replacement by AI | Termination on the ground of “replacement by AI” is not permitted; redeployment must be discussed |
| Redeployment | Where no agreement is reached, 30 days’ notice or one month’s pay in lieu |
| Statutory compensation | Payable by length of service |
| Unlawful termination | Twice the statutory compensation |
Employment compliance checklist for an AI company
| Item | Requirement |
|---|---|
| Scope of non-compete | Senior management, senior technical personnel and personnel under a confidentiality obligation only |
| Non-compete compensation | Not less than 30% of average monthly wage in the 12 months before departure |
| Equity incentive filing | File with the competent tax authority |
| Holding period | Three years from the grant date |
| Cross-border employing entity | A registered entity in China or an EOR arrangement |
| Replacement by AI | Redeployment must be discussed; direct termination is not permitted |
| Employment contract | Core technical personnel should sign confidentiality, non-compete and IP assignment clauses |
Frequently asked questions
Q: Should every employee of an AI company sign a non-compete restriction? A: No, and it should not be attempted. The restriction is confined to senior management, senior technical personnel and others under a confidentiality obligation. Where an ordinary employee signs, the restriction may be held invalid.
Q: What happens if an employee’s options have vested but are not exercised when they leave? A: The equity incentive agreement should provide for the treatment of options on departure. It is usual to allow exercise within a fixed period after departure, such as 90 days, failing which the options lapse. Unvested equity is repurchased by the company.
Q: We are a US AI company and wish to employ remote engineers in China. How should we proceed? A: There are three routes: (1) incorporate a subsidiary or representative office in China; (2) engage a licensed employer-of-record provider; (3) enter into a civil services agreement, taking care that it does not create a de facto employment relationship.
This article is prepared on the basis of the Labour Contract Law, the Compliance Guidelines for the Implementation of Non-Compete Restrictions by Enterprises (MOHRSS General Office Document [2025] No. 40) and Caishui [2016] No. 101. For assistance with employment compliance for an AI company, please contact Geason Law Offices.