Tsar & Tsai Legal Cultural and Education Foundation Seminar –  Challenges of Termination of Employees to Companies

If an employee engages in illegal activities and has been sentenced to imprisonment by a final judgment and is not granted a suspended sentence or permitted to commute the sentence to payment of a fine, an employer can terminate the labor contract pursuant to Subparagraph 3, Paragraph 1, Article 12 of the Labor Standards Act. However, in most cases, an employer can only terminate the labor contract in accordance with Subparagraph 4, Paragraph 1, Article 12 of the Labor Standards Act. (“Where a worker is in serious breach of the labor contract or in serious violation of work rules.”)

In practice, courts’ determinations of “in serious breach of the labor contract or in serious violation of work rules” are based on the following tests: (1) substantial determination test: a court’s determination of “in serious violation of work rules” is not based on whether an employer lists the illegal conduct in work rules; (2) ultima ratio test: an employee is in serous breach of the labor contract and it is hardly to be expected that the employer would punish the employee by other means apart from dismissal; (3) proportionality test: whether the dismissal is an equivalent way to punish an employee’ violation. The criteria for determination include the types of violations, the employee as a first offender or repeat offender, intentional or negligent conduct, the risk or loss of the employer and the business caused by the employee, the relationship between the employee and the employer, and the seniority of the employee; (4) necessity of immediate dismissal test: whether the employment relationship is disturbed by the violation and it is necessary for the employer to terminate the labor contract immediately.

The following are the common cases that companies terminate labor contracts pursuant to Subparagraph 4, Paragraph 1, Article 12 of the Labor Standards Act. For example, regarding cases where an employee receives kickbacks from suppliers, there was a precedent in which the court held that the employee’s receipt of kickbacks from a supplier several times had violated his duty of loyalty to the employer. The supplier even raised the quotation caused by the kickbacks it had paid. Due to the fact that the employee did not protect the interest of the employer and did not prevent or reduce damages of the employer, the employee was in serious breach of the duty of loyalty under the labor contract, and in serious violation of work rules. Therefore, the dismissal was appropriate. For expense reimbursement fraud cases, the court held that the employee’s multiple false expenses reimbursed conducts violated the employee’s duty of loyalty, which seriously affected the company’s internal management. The employee was in serious violation of work rules, so the employment could be terminated.

In order to avoid unnecessary disputes, it is recommended that companies list the misconducts which may lead to dismissal in work rules and ensure that all employees are aware of it. Moreover, under Paragraph 2, Article 12 of Labor Standards Act, where an employer desires to terminate a labor contract pursuant to Subparagraphs 1 and 2, Subparagraphs 4 to 6 of the preceding paragraph, he/she shall do so within thirty days from the date he/she becomes aware of the particular situation. The court held that the commencement date of the thirty-day preemptive period should start from the date that the employer finishes the internal investigation process and the employer is convinced by the objective facts of the employee’s violation. Therefore, companies should be mindful of the commencement date of the said thirty days in order to protect the interests of both employers and employees.


Many companies enter into a non-compete agreement with their employees to protect the companies’ trade secrets. As for the legal effect of non-compete agreement between employer and employee, in the past, although the Ministry of Labor and courts had published many decisions in this respect, there was no express statutory stipulation and the decisions of the courts were not all that consistent with each other. In particular, there were controversies surrounding whether the validity of a non-compete agreement is conditioned on the employer’s giving compensation for the non-compete obligation, and, if so, what the amount is and when it should be given.

A stipulation on non-compete agreement was added as Paragraph 1 of Article 9-1 of the Labor Standards Act on December 16, 2015, which provides that an employer may not enter into a non-compete agreement with an employee if any of the following circumstances is not met: (i) The employer has proper business interests that should be protected; (ii) the position or duties of the employee enable him or her to gain access or use the employer’s trade secrets; (iii) the non-compete period and geographical area, and the limitations on the scope of occupational activities and prospective employers, shall not exceed a reasonable level; and (iv) the employer shall give reasonable compensation to the employee for not engaging in conducts covered by the non-compete agreement.

The Labor Standards Act also expressly provides that the post-employment non-compete period shall not exceed two years; those which are longer than two years shall be cut down to two years. In addition, the employer must give compensation to the employee, or the non-compete agreement shall be null and void. The compensation, in principle, shall not be lower than fifty percent of the average monthly wage of the employee at the time the employee leaves the job, and other factors shall be taken into consideration to evaluate whether the amount of compensation is reasonable. Also, the compensation shall not include the payments made to the employee during the term of the employment. As to when the employer shall give the compensation, the Enforcement Rules of the Labor Standards Act explicitly provides that the parties shall agree that, for the compensation, a lump-sum payment or payments will be made on a monthly basis after the termination of the employment.

In practice, the courts hold that where there is a non-compete agreement, the agreement shall apply even if the employee “leaves the job involuntarily.” However, the courts have yet to give a clear opinion on whether an employee is bound by the non-compete agreement in case where the employer “unlawfully terminates the employment” with the employee.

In the event that the employer does not execute a non-compete agreement with the employee, except in the rare cases where the courts apply the Inevitable Disclosure Doctrine of the U.S. or Article 11 of the Taiwan Trade Secret Act to enjoin the employees from working for the competing firms, it is legally quite difficult to enjoin an employee from working for a competitor. Therefore, a company should, to the extent possible, enter into a non-compete agreement with employees who may have access to the company’s trade secrets to protect the company’s trade secrets.

The firm jointly held a seminar entitled “Trends in the Latest Legislative Development in Global Antitrust and White-collar Crime” with Vinson & Elkins LLP on November 10 at the Hotel W Taipei. Matt Liu gave an opening remark and a speech titled “Vertical Restraints Regulations and Cases under the Taiwan Fair Trade Act”. Besides, Jeanne Wang gave a speech titled “Q&A on Trade Secrets”.

The firm invited Peter Crowther, Aldo Badini and Heathr Kafele from Winstron & Strawn to give a speech on “Vertical Restraints in the US and the EU Competition Laws” on November 8, 2017. Matt Liu served as the moderator of the speech.

When the Trade Secret Act (the Act) was promulgated at 1996, there was only civil liability for trade secret misappropriation but no criminal liability prescribed in the Act for trade secret misappropriation.  Therefore, the owner of trade secrets could only pursue the criminal liability based on the Criminal Code.  According to the Criminal Code, a person shall be punished only when he/she discloses trade secrets without a justifiable ground.  There was no criminal liability for wrongfully acquiring or using trade secrets.  On January 1 2013, the Legislative Yuan passed an amendment to the Act to impose criminal liabilities for trade secret misappropriation. The infringer shall be punished with a maximum of 5 years’ imprisonment and may be imposed with a maximum NT$10 million.  If the infringer commits a trade secret misappropriation for the purpose of using the trade secrets in a foreign jurisdiction, he or she will be punished with a heavier imprisonment and fine.

The term “trade secret” defied in the Act includes “technical trade secret” and “business trade secrete”.  A trade secret must also be unknown to persons generally involved in information of this type and have economic value.  In addition, the owner of a trade secret shall take reasonable precautions against misappropriation.  A technical trade secret means any method, process, formula, programing, design or other information that may be used in the course of production.  A business trade secrete means any costs, price, or customer list, etc.  However, not all above information is protected under the Act.  Only information that is unknown to persons generally involved in information of this type (i.e. secrecy), has actual or potential economic value because of its secrecy, and is taken reasonable precautions, will be seemed as a trade secret under the Act.

To determine the secrecy of a trade secret, the prosecutor or the court may consider the following facts: (1) whether information is unknown to the public, persons generally involved in information of this type, or known to other through proper ways; (2) whether the information is disclosed or published in books, articles, seminar or patent documents; (3)whether the information is the employee’s personal knowledge or the knowledge, skills or information learnt by the employee in his/her employment.

Regarding the economic value of a trade secret, the information derives economic value because of its secrecy.  Economic value includes “positive vault” and “negative value” .  Positive value means that the owner of information may take advantage over his/her competitors as his/her competitors does not know or use such information.  Negative value means that the competitor acquires such information to reduce investment cost.  Even if such information is failed or out-of-date, it may still be of economic value because competitors may reduce their research and development costs.

Regarding the reasonable precautions to protect a trade secret, it does not require an impenetrable fortress.  A reasonable precaution requires the owner of a trade secret to classify the trade secret and limit which employees may have access to it, and take measures such as controlling or examining the entrance, setting password on electronic files, limiting access authority, or setting firewall or controlling systems.  In addition, the owner may provide the regulations of trade secret precautionary measures, indicate confidential or similar mark on papers or arrange regular employee training.  The more precautionary measures the owner of a trade secret adopts, the greater chance that the prosecutor or the court may consider the information a trade secret protected under the Act.

For now, there is no unified code against bribery in Taiwan. To prevent public servants from bribery, activities such as gratuities or banquets, are regulated by the Ethics Guidelines for Civil Servants (“the Guidelines”). Bribery with civil servants is punishable under the Criminal Code and the Anti-Corruption Act. Commercial bribery not involving civil servants may constitute the offense of breach of trust provided in the Criminal Code or the Securities and Exchange Act.

According to the Guideline, civil servants shall not demand, solicit, or accept gratuities from, and not take part in banquets or other entertainment activities of, those who have vested interests in their official duties. Such activities is acceptable under certain circumstances, e.g. unsolicited occurrence not influencing civil servants’ exercise of official duties, and activities in accordance with standard limit on normal courtesy gratuities, such as providing gratuities below 3,000 NTD for the wedding. However, the Guide is only an administrative regulation, and the violation of which would not necessarily incur bribery under the Criminal Code or the Securities and Exchange Act. In order to establish bribery, there shall be a quid pro quo relation between the vested money or interests and the official duties of the civil servant. In determining a quid pro quo relation, numerous objective criteria shall be taken into considerations, e.g. details of the official duties, relationship between offeror and offeree, category and value of the bribe, the timing of the offer of bribe. In particular, while giving gratuities to civil servants, it is not allowed to give gratuities or entertainment activities that would make civil servants breach her official duties, or jeopardize her official judgment. Gratuities and entertainment activities cost too much shall also be avoided. Therefore, it is obliged to obey the Civil Servant Services Act and relevant regulations promulgated by competent authorities, especially regulations regarding gratuities and entertainment activities.

In addition, in order to constitute bribery under the Criminal Code, one shall offer, promises, or give bribes or other improper benefits to a civil servant for a breach of her “official duties”. In determining “official duties”, two interpretations can be found from the jurisprudence: the theory of “legal duty”, and the theory of “substantial influence”. According to the theory of legal duty, official duties shall refer to acts of civil servant’s duties provided in the laws, while the theory of substantial influence deems such duties as acts related to and substantially affected by civil servant’s duties. In a case concerning a former legislator taking bribes for interceding and “settling” problems, the Court in the first-instance judgment adopted the theory of legal duty, ruling that intercession and settling problems were not within the legal duties of a legislator, and thus out of the scope of official duties. However, the Court in the second-instance adopted the theory of substantial influence, sentencing the former legislator guilty, because he had substantial influence with the interceded matters regarding personnel, financial and operational affairs. Therefore there was close connection between bribery and official duties, and thus constitutes the offense of bribery. This case is currently pending in the Supreme Court. How the Court adopts one of the theories would determine the standard for the meaning of “official duties”. It would be a case worth keeping an eye on.

Last but not least, there is no unified code for commercial bribery not involving civil servants. It may constitute the offense of breach of trust provided in the Criminal Code or the Securities and Exchange Act for a non-civil servant individual to accept bribes or other improper benefits, causing loss to her corporation. For example, a procurement manager of a public company took commission from the supplier, and purchased commodities with a price far above the market average, causing loss to her company. In addition, it also constitutes the offense of breach of trust when a company member bribes a third party, and caused loss to her company (such as reputation loss, e.g. bribery reported by the press, or monetary loss, e.g. money unauthorized taken from the company as the bribe).