China: Interpretation III on Application of Law in Trial of Labour Dispute Cases

Last Updated: 3 November 2010
Article by Duncan A.W. Abate, Susan Deng and Hong Tran

Originally published 3 November 2010

Keywords: Interpretation III, trial, labour dispute cases, PRC, employment contract

Summary

The Supreme People's Court of the PRC recently issued the Interpretation III on Several Issues Concerning Application of Law In Trial of Labour Dispute Cases (Interpretation III). The Interpretation III, containing a total of 18 clauses and coming into effect on 14 September 2010, draws on the PRC courts' experience in dealing with labour dispute cases and seeks to clarify a number of issues concerning the judicial application of the law further to the promulgation of the PRC Employment Contract Law and PRC Labour Dispute Mediation and Arbitration Law on 1 January and 1 May 2008 respectively. The highlights of the Interpretation III include:

  • clarifying what types of disputes will fall within the scope of the court's jurisdiction
  • clarifying who can be sued in a labour dispute case (potentially a company's capital contributor can be liable!)
  • clarifying who bears the onus of proof in a claim for overtime pay
  • clarifying the enforceability of termination agreements that an employer may enter into with a departing employee
  • clarifying new rules for rehiring retired workers and four types of special personnel

This article looks at these highlights of the Interpretation III.

Highlights of the Interpretation III

Further Defining the Scope of Labour Dispute Cases Accepted by Courts

In addressing the previous uncertainties as to whether some disputes should be accepted by the court, the Interpretation III makes it clear that the following three types of labour dispute cases fall into the scope of hearing by the court:

  • an employee's claim for compensation from his/her employer on the ground that he/she cannot enjoy social insurance benefits as a result of the employer's failure to undertake the social insurance formalities for him/her and the social insurance agency cannot make up such formalities;
  • any labour dispute arising from the restructuring of an enterprise at its own volition (as opposed to restructuring initiated and led by the government); and
  • an employee's claim for additional compensation from his/her employer due to its failure to pay wages in full and on time, failure to pay overtime wages or severance pay or pay wages below the minimum wage standard.

Clarifying the Parties to the Labour Dispute Case

The Interpretation III provides that in the event of any labour dispute arising between an employee and a company which does not have a valid business license (e.g. failing to obtain a business license, or business license has been cancelled or has expired), the court can name either the company or the company's capital contributor (e.g. shareholder) as the party to the labour dispute. If such company "borrows" (or uses) another entity's business license for its business operation in the form of affiliation etc., then the lender of the business license must be listed as one of the parties together with such company.

Allocation of the Burden of Proof in Overtime Claims

The Interpretation III gives guidance on the allocation of burden of proof in overtime claims. It makes clear that where an employee claims overtime wage, he/she must assume the burden of proof as to the fact that he/she performed overtime work. If the employee has evidence to prove that the employer actually maintains and manages the records relating to the overtime work but the employer fails to provide such records to the court upon request, the employer shall face the adverse consequences, which means the court could uphold the employee's claim for overtime wages. Based on this provision, the employee is obliged to provide prima facie evidence in relation to the claimed facts of overtime work. This changed some local court's previous practice that put the burden of proof mainly on the employer's side in an overtime claim (particularly claims of overtime wage within two years of the employee's separation with the employer) to prove the employee had not undertaken any overtime work, and failure to do so meant that the employer would possibly lose the case.

The Interpretation III does not mention what types of evidences the employee is required to produce, but evidence including attendance record, overtime work notice, payroll slip etc may suffice. If the employee has evidence to prove that the employer maintains the evidences relating to his/her overtime work, then the burden of production shifts to the employer. If the employer fails to provide any evidence, it could face adverse consequence such as losing the case. Accordingly, it is still important for an employer to ensure that good records are kept of overtime performed by its employees.

Criteria for Recognising the Validity of a "Disposition Agreement"

In practice, some companies would enter into agreements with their leaving employees in regards to formalities for terminating or ending the employment contract, remuneration, overtime wages, severance pay, compensation etc. for the purpose of settling the relevant rights and obligations. The Interpretation III makes it clear that an agreement reached between an employee and employer on such matters is deemed valid as long as (a) it does not violate the mandatory provisions of laws and administrative regulations and (b) it is not reached by fraud or duress or by taking advantage of the other party's hardship. If there is any major misunderstanding in the agreement or its provisions are obviously unfair, any party has the right to request revocation of such agreement which will be upheld by the court.

New Rules for Rehiring Retired Workers and Four Types of Special Personnel

The Interpretation III clarifies that for employers rehiring workers who have started to enjoy pension benefits, the service relationship between them will not be deemed as an employment relationship, and any dispute arising thereto will not be deemed as a labour dispute. Such dispute will be treated as a civil dispute based on a service relationship. Whereas, any dispute arising from an employer hiring any of the four types of "special personnel" (i.e. individual who is on leave with pay suspension, has not reached the statutory retirement age and retired internally, is removed from post in his/her original enterprise or waiting for a post or is on a long leave as a result of production cessation of original enterprise) will be accepted as labour dispute. This provision suggests that employers who hire any of the four types of personnel must also sign employment contracts with them and perform other obligations under the labour law of an employer towards these types of employees who are subject to protections and entitlements under the labour law. However, it is not clear how the new employer can perform some obligations for them, e.g. whether the new employer must contribute social insurances for and on behalf of them, since these types of personnel would still have employment relationships with their original employer who may still be contributing the social insurances for them.

Others

The Interpretation III also sheds light on what constitutes final arbitral award and confirms that the standard for deciding whether or not an arbitral award made on claims brought according to subparagraph (1) of Article 47 of the Mediation and Arbitration Law is final will be based on the "awarded sum of each item" instead of the "claimed sums". This provision means that in practice if an employee is claiming labour remuneration, medical fee, severance pay etc. with each or total claimed sums exceeding 12 months of the local minimum wage standard, whether the arbitral award made by the labour arbitration commission is final or not would depend on whether or not each awarded sum exceeds 12 months of the local minimum wage standard. If not, then the arbitral award is final and binding on both parties.

The Interpretation III also makes it clear that any action brought against an effective mediation record made by the labour arbitration committee will not be accepted by the people's court. This indicates that for any dispute in a labour arbitration stage, if both parties would like to settle the dispute, then an effective approach is to submit the settlement agreement to the labour arbitration commission for it to make a mediation record. The mediation record will be final and conclusive after entering into effect.

Comments

The Interpretation III takes a practical approach in dealing with some unclear issues, and should help to unify the judicial practice on trial of labour disputes on a number of issues. It represents an ongoing effort to protect employees' rights but also seems to seek to strike a balance between protection of the interests of employers and employees. Companies operating in the PRC should pay attention to the relevant clauses under the Interpretation III and other labour regulations to ensure compliance and prevent potential employment legal risks.

Learn more about our Hong Kong office and Employment and Benefits practice.

Visit us at www.mayerbrownjsm.com

Copyright 2010. JSM, Mayer Brown International LLP and/or Mayer Brown LLP. All rights reserved. Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: JSM, a Hong Kong partnership, and its associated entities in Asia; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and Mayer Brown LLP, a limited liability partnership established in the United States. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

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