Taiwan Employment Contracts: Probation to Non-Compete

Probation: Not a "Get Out of Jail Free" Card for Arbitrary Dismissal

"He's still on probation, so we can just let him go without severance, right?"

This is a phrase almost every HR professional has heard, and it's a common starting point for labor dispute mediations. The Labor Standards Act (LSA) does not grant special treatment to probationary periods – terminating employment requires statutory grounds, and the required notice and severance pay must still be provided.

Probationary periods, overtime pay, and non-compete agreements are three areas where employment contract terms most frequently fall below statutory standards.

Why Companies Lose Cases

The LSA contains no term for "probationary period" and carves out no exception for one. Probation is still an employment relationship, so ending it has to land on a statutory ground — and Article 11 and Article 12 are two different regimes, not one standard. Absent such a ground, the notice pay and severance pay requirements still apply in full.

A recurring pattern in labor litigation involves companies terminating contracts before the end of probation citing "inability to perform duties" but failing to produce concrete performance review records or evidence of improvement guidance. The burden of establishing that ground sits with the employer, and what gets examined is the paper trail: the evaluation criteria that were set, the assessments actually carried out, and the guidance offered before termination. Probation neither permits dismissal without a statutory ground nor exempts the employer from the procedural requirements.

How to Rectify

1. Clarify Probationary Purpose and Evaluation Standards: Employment contracts should clearly state the purpose of the probationary period, such as "to assess mutual suitability between employer and employee," and establish specific evaluation items and standards. This guides employees on what to focus on.
2. No Arbitrary Dismissal: Even during probation, dismissal must meet the requirements of Article 11 (termination with notice for reasons not attributable to the employee) or Article 12 (immediate termination for specific employee misconduct) of the LSA. If terminating the contract, employers must provide notice pay and, depending on tenure, severance pay, unless the employee committed gross misconduct.
3. Preserve Evidence: If terminating a contract due to poor probationary performance, meticulously retain concrete evidence of the employee's performance falling short of expectations, such as performance review records and supervisor feedback.

> Sample clause: The probationary period shall be three months from the commencement of employment. During the probationary period, the Company will evaluate performance based on work performance, suitability, teamwork, and adherence to company regulations. If, upon evaluation, it is determined that the employee fails to meet the Company's job standards or commits any of the acts listed in Article 12 of the Labor Standards Act, the Company may terminate this contract with notice and shall proceed in accordance with the relevant provisions of the Labor Standards Act.

Overtime Pay: Not Just When "Applied For"; Prior Consent is Key

Overtime pay is one of the most contentious issues in employment contracts. Many companies believe they can avoid paying overtime if employees haven't "applied for it in advance" or if overtime hours don't comply with company policy. However, the reality of determining overtime is far more complex.

Why Companies Lose Cases

Article 24 of the LSA stipulates that employers must pay overtime wages when they extend an employee's working hours. The crucial factor is whether the "employer caused the employee to extend working hours," not whether the employee "extended them voluntarily." Even if an employee did not "apply in advance" per company rules, if the employer knew about it, tacitly approved it, or even instructed or requested the overtime, it may be deemed that the employer caused the employee to work overtime, and overtime pay is still due.

The most common defense employers raise in overtime disputes is "the employee didn't apply in advance according to regulations." In practice, courts do not dismiss overtime claims based solely on this statement. What is truly examined are attendance records, timestamps on communications, and whether supervisors knew or tacitly approved. "Failure to apply in advance" alone is insufficient to block an overtime claim.

How to Rectify

1. Establish Clear Overtime Application and Approval Mechanisms: Require employees to submit applications before working overtime, subject to supervisor approval. This is not just for management convenience but also to clarify accountability.
2. Strict Employer Control Over Overtime Hours: Supervisors must diligently review overtime applications to prevent unnecessary overtime. If employees show a tendency for excessive overtime, review work processes or staffing levels.
3. Pay Overtime According to Regulations: Once overtime is established, regardless of prior application, if the employer caused the employee to work extended hours, overtime pay must be provided per Article 24 of the LSA – for the first two hours of extension beyond regular hours, at least 1/3 above the regular hourly wage; for the next two hours, at least 2/3 above (only in cases of extension due to natural disasters, emergencies, or unforeseen events under Article 32, Paragraph 4, is double pay applicable).
4. Retain Records: All overtime applications, approval records, attendance records, payroll details, etc., must be properly stored for inspection.

Sample clause: If an employee extends working hours with prior supervisor approval due to business needs, overtime pay shall be provided in accordance with Article 24 of the Labor Standards Act. For unauthorized extensions, unless in cases of emergency or necessity, the Company may not recognize them and may take disciplinary action according to company regulations.

Non-Compete Clauses: Not to Restrict Employees from "Finding Work," but to Protect Company Trade Secrets

The purpose of a non-compete clause is to protect a company's trade secrets, customer lists, and other critical information from being taken by former employees, thereby harming the company's interests. However, poorly designed clauses may not only be deemed invalid by courts but also lead to labor disputes.

Why Companies Lose Cases

When reviewing non-compete clauses, courts consider several key factors:

1. Necessity of Protection: Is the clause genuinely intended to protect the company's legitimate business interests?
2. Scope of Restriction: Are the prohibited industries, regions, and duration reasonable?
3. Compensation Measures: Is reasonable compensation provided to the employee?

If a non-compete clause excessively restricts an employee's right to earn a livelihood—for example, by having an overly broad scope, an excessively long duration, or by failing to provide reasonable consideration (compensation)—a court may deem the clause invalid.

How to Rectify

1. Clearly Define "Trade Secrets": Explicitly define the scope of trade secrets the company seeks to protect in the clause, such as specific technologies, customer lists, or marketing strategies.
2. Reasonable Scope and Duration: Scope: Should be limited to specific industries or roles directly competitive with the company's business, not a blanket prohibition on all work. Region: The geographical scope of the restriction should align with the company's actual operational areas. * Duration: Generally considered reasonable from 6 months to 2 years, depending on the specific case.
3. Provide Reasonable Compensation: This is critical for the validity of a non-compete clause. Compensation equivalent to a certain percentage of the employee's average wage before departure, or other forms of economic compensation, should be provided to offset the lost income opportunities due to the non-compete. The compensation amount should be clearly stipulated in the clause.
4. Written Agreement: Non-compete clauses must be in writing and clearly stated in the employment contract.

Sample clause: Upon termination of employment, the employee shall not engage in business directly competitive with the Company's business scope (including but not limited to XXX, YYY, etc.), nor provide services to competitors, for a period of one year from the effective date of departure. In consideration thereof, the Company agrees to provide a one-time non-compete compensation equivalent to fifty percent (50%) of the employee's average monthly wage in the last month prior to departure. Should the employee violate this clause, they shall compensate the Company for all damages incurred as a result.

These Five Below Statutory Standards Mean Invalidity

• Does probationary period dismissal meet LSA requirements and have concrete evidence?
• Is overtime pay calculated correctly and paid according to regulations?
• Are the scope, duration, and compensation of non-compete clauses reasonable?
• Do all employment contract terms comply with the LSA's minimum standards?
• Are all relevant records (employment contracts, attendance, payroll) preserved?

An Employee's Signature Doesn't Mean the Agreement is Valid

"He signed it in black and white himself" doesn't hold much weight in employment contracts.

The LSA sets the minimum standard, not a default. Contract terms that are more favorable than the LSA are followed; terms below the LSA are directly invalid and revert to the statutory standard – the employee's agreement or disagreement is irrelevant, as this is not something they can waive.

The real risk in practice lies in the accumulation of discrepancies: a contract signed five years ago that underpays overtime by a few hours each month can lead to back pay claims calculated from that signed agreement. The signature, ironically, becomes the basis for calculation.

FAQ

Can an employee resign at any time before the end of probation?

Yes, employees during their probationary period, like any other employee, can terminate the contract at any time according to Article 14 or Article 15 of the LSA. If none of the conditions in those articles apply, an employee can resign with advance notice as required by Article 16 of the LSA.

Can a company refuse to provide notice pay or severance pay to a probationary employee?

If a company terminates a probationary employee's contract, and the employee has not committed any acts of gross misconduct as defined in Article 12 of the LSA, the company must still provide notice pay (if not given in lieu) and severance pay calculated based on the employee's tenure.

Can overtime pay be exchanged for compensatory time off?

The choice between overtime pay and compensatory time off rests with the employee. Unless the employee agrees, the employer cannot unilaterally convert overtime pay into compensatory time off. If the employee opts for compensatory time off, according to Article 32-1 of the LSA, the compensatory time off should be calculated at a 1:1 ratio based on the actual hours worked. The deadline for using this time off is subject to negotiation between employer and employee; any unused compensatory time off by the deadline or upon contract termination must be paid out according to the overtime pay rate applicable on the original overtime day.

Can a non-compete clause be extended indefinitely?

No. Court precedents consider excessively long non-compete periods (e.g., over two years) potentially invalid. The duration must be assessed on a case-by-case basis for reasonableness.

If a former employee goes to work for a competitor, can the company sue them?

This depends on whether the former employee violated a validly agreed-upon non-compete clause. If the non-compete clause is valid and the employee's actions constitute a breach, the company can seek damages as per the agreement. However, if the non-compete clause is invalid, or if the employee's actions do not exceed the clause's restrictions, the company may not be able to take legal action.

Is it permissible if my employment contract offers better terms than the LSA?

Absolutely. The LSA sets the minimum standard; companies can offer employment conditions superior to the LSA's requirements, such as higher overtime pay rates or longer paid time off. This can not only attract talent but also foster a positive employer-employee relationship.