Chinese e-commerce giant squeezes workers with noncompete agreements

That is because of noncompete agreements, a tool lawyers say is increasingly being used against rank-and-file workers in China, even as their use wanes in the U.S. Former employees and court data suggest that PDD has enforced such agreements with particular determination to thwart potential rivals.

PDD’s competitive zeal helped propel its meteoric rise—the Nasdaq-listed company has a $154 billion market cap and was briefly China’s most valuable e-commerce company last year. Its Temu app is the world’s most downloaded shopping app. It closely guards its corporate secrets, keeping its workers in silos to prevent information leaks. Some employees say they don’t know the real names of even longtime colleagues.

Some former PDD employees, including low- and midlevel workers, say PDD has gone after them to mete out hefty noncompete penalties.

One former PDD midlevel manager signed a noncompete agreement before he left the company in 2021. His next venture was a small business selling a weight-loss supplement online that brought in around $2,800 a month. Last year PDD, which had sales of $34.9 billion in 2023, sued him. The court ordered him to pay more than $1 million in compensation for competing in the same space as his former employer.

“I was a proper member of the middle class before joining PDD," he said. “Now, even if I pooled all my savings, I can’t possibly pay off what I owe."

The U.S. has in recent years moved away from the use of noncompete clauses in job contracts. The Federal Trade Commission is leading the effort to ban such clauses, citing concerns about their potential to stifle competition and hurt workers.

In China, the trend is in the opposite direction. While China’s Labor Contract Law says noncompete restrictions should apply only to senior executives and others with confidentiality obligations, it is increasingly common for tech companies to require lower-level workers to sign the agreements, lawyers say.

Some 20 mostly lower-level former PDD employees have voiced grievances on Chinese social media after the company hit them with noncompete penalties.

PDD said it uses noncompete agreements in a “limited and responsible manner" and strictly adheres to the law and best industry practices.Former employees taken to court for alleged noncompete violations in the six months to February accounted for less than 2% of workers who left the company during the period, PDD said.

PDD, which had 13,000 workers at the end of 2022, said only a small percentage of departing employees were bound by noncompete agreements, which it said are based on the relevance of their jobs to the company’s commercial secrets rather than seniority or years of work experience.

By some measures, PDD is especially active in enforcing such agreements in court. In the past five years, 110 employment-related lawsuits involving PDD’s main business entities were filed in China, according to the Chinese corporate-registry database Tianyancha. That compares with 125 lawsuits involving business entities of Alibaba, which had a head count more than 18 times that of PDD in 2022.

 

Of the PDD-related lawsuits, 15% were over noncompete agreements, compared with 5% for Alibaba. Noncompete grievances are also dealt with outside the justice system, in legally binding arbitration.

One Temu employee, who previously worked for Temu’s Chinese sibling app Pinduoduo, said PDD assigned a human-resources representative to monitor the activities and career movements of each midlevel manager who left the company. The employee said PDD sometimes hired external agencies to track where former employees went or what businesses they started.

Some former employees say PDD has cited their real-time locations and social-security payment records as evidence that they have taken jobs at competitors. PDD denied using such methods and said the company “doesn’t engage in any illegal or unethical surveillance practices of current or former employees."

Noncompete agreements in China run for up to two years, and the law requires companies to pay compensation to former workers during the period they can’t work for rivals.

Often workers feel they have no choice but to sign noncompete agreements or risk retribution such as losing their jobs, said Huang Sha, a New York-based Chinese human-rights lawyer specialized in labor disputes.

Two PDD noncompete agreements reviewed by The Wall Street Journal listed as PDD competitors more than 30 tech companies, including businesses they had stakes in or that owned stakes in them. The agreements said that rivals weren’t limited to the companies named. They also barred former workers from starting ventures that overlap with PDD’s businesses.

The scope of companies whom PDD considers rivals is “seriously affecting employees’ job prospects," said You Yunting, a senior partner of the DeBund Law Office in Shanghai.

PDD said that as the company has expanded, its list of competitors has evolved.

Employees say they are discouraged from socializing at work, and cross-department collaboration is strictly controlled.When a Temu employee asked for product information from another team to prepare budgets for a marketing campaign, she was given a spreadsheet with all product details redacted, though the two teams were collaborating on the same project. The worker, who formerly worked for Alibaba, said she hadn’t encountered that level of secrecy before.

Employees at Chinese tech companies often use pseudonyms, and PDD workers say they are actively discouraged from asking each other’s real names. They often joke that they only learn their colleagues’ names when they go on business trips together.

One former PDD employee said he was working late with a colleague one evening, and that by the time he came to work the next morning, his colleague had been let go. They had sat together for about a year, he said, and had never learned each other’s names.

PDD said that the use of pseudonyms encourages a “more open and dynamic culture" and helps break down hierarchies in China’s corporate culture. PDD said the company fosters innovation and collaboration and is committed to a positive and productive work environment. “We firmly reject any false characterizations to the contrary," it said.

PDD offers some of the most competitive compensation packages in the industry. It is also known for a demanding schedule. Duibiao, a service that offers aggregated compensation information submitted by workers at Chinese tech firms, ranks PDD No. 1 on a chart measuring work hours, at 65 hours a week.

A 25-year-old woman said she resigned from a PDD position as a purchaser in its grocery division after eight months as the long hours had left her with health issues. A document she posted online shows that an arbitrator in 2023 ordered her to pay PDD the equivalent of around $36,000—two years of her PDD salary—for taking a job with a competitor before the end of her nine-month noncompete period.

One junior worker posted arbitration documents showing that he left PDD after four months and that he is now subject to a penalty of nearly $59,000 after PDD deemed him to have violated his noncompete agreement.

Both workers confirmed the veracity of their online accounts to the Journal. PDD declined to discuss individual cases.

The Shanghai midlevel manager signed a noncompete agreement that said he would forfeit any profit from selling his PDD stock options if he violated the agreement. “I thought it was just a bluff, that such a big company wouldn’t bother to fuss over details with a small potato like me," he said.

After he left the company in 2021, he used the money from selling his PDD stock, which had soared during the two years he worked there, to buy a new apartment in Shanghai and start his weight-loss-supplement company.

Last year, about two years after his departure, PDD sued him for violating the noncompete pact and the court froze his assets, which meant he couldn’t sell his old apartment. It has since lost value in China’s property-market slump.

In late 2023, a judge ruled against him, leaving him with a noncompete penalty of all the money he had made on his PDD stock sales, more than $1 million. He has appealed.

In the past year, he says he has developed depression and contemplated suicide. He still doesn’t have the heart to tell his daughter she might not be able to stay at her international school or go to college overseas.

It isn’t clear when the court will rule on the appeal.

Write to Shen Lu at shen.lu@wsj.com and Raffaele Huang at raffaele.huang@wsj.com