China: Analysis On Substantive Law Aspects Of Main Clauses In Judicial Interpretations On Labor Disputes

Last Updated: 29 May 2014
Article by Chen Yifan

The Supreme People's Court has promulgated four Interpretations on Several Issues concerning the Application of Law in the Trial of Labor Disputes ("Judicial Interpretation(s)"). The effective dates and number of clauses of each Judicial Interpretation are respectively as below:

First Judicial Interpretation Second Judicial Interpretation Third Judicial Interpretation Fourth Judicial Interpretation
Effective Date April 16, 2001 October 1, 2006 September 14, 2010 February 1, 2013
Number of Clauses (including interpretation on both substantive law and procedural law) 21 clauses (17 clauses on procedural law and 4 clauses on substantive law) 18 clauses (17 clauses on procedural law and 1 clause on substantive law) 18 clauses (17 clauses on procedural law and 1 clause on substantive law) 15 clauses (5 clauses on procedural law and 10 clauses on substantive law)

From the distribution of the number of clauses, four Judicial Interpretations promulgated by Supreme People's Court primarily emphasize on the interpretation on procedural law. Therefore, the interpretation in substantive law provided in the Judicial Interpretations should not be disregarded in respect of its importance. We hereby review and analyze the main clauses with regard to substantive law aspects provided in four Judicial Interpretations.

First Judicial Interpretation

Article 14.1 of the First Judicial Interpretation was covered by Article 28 (Payment Standard on the Work Performed after Labor Contract Is Deemed Invalid) of the Labor Contract Law; and Article 14.2 of the First Judicial Interpretation was covered by Article 86 (the Party at Fault to Assume Liabilities Arising from Invalidity of the Contract) of the Labor Contract Law. Among other things, Article 15 of the First Judicial Interpretation was covered in Article 38 (Statutory Circumstances of Constrained Termination of Labor Contracts due to the Employer's Reasons), Article 46 (Legal Situations of Economic Compensation Payment), Article 85 (Statutory Circumstances of Damages Payment) and Article 88 (Statutory Circumstances of the Employer's Assuming Administrative, Criminal and Compensation Liabilities) of the Labor Contract Law. Therefore, to be specific, Articles 14 and 15 can be ignored.

Clause Details Analysis
Article 16 If an employee is still working for the employer after his/her labor contract expires and that the employer does not raise any objection, it shall be regarded that both parties consent to continuously perform the labor contract in light of the former conditions. If either party requests to terminate the labor relationship, the people's court shall support such request.

If an employer fails to enter into an unfixed-term labor contact with an employee as required in Article 20 of the Labor Law, the people's court may consider the relationship between both parties as unfixed-term labor relationship and determine the rights and obligations of both parties according to the former labor contract.
Paragraph 1 of this Article has not been covered by the Labor Contract Law. The Labor Contract Law requires written labor contracts and does not provide legal support to factual labor relationship; therefore, in the present juridical practice, in the case that the labor contract has not been renewed but the employee is still working for the employer, it is required for the employer to conclude the labor contract with the employee or otherwise terminate the labor relationship with the employee provided that the labor contract cannot be concluded due to the employee's reasons. (Article 6 of the Guiding Opinions on Trial of Labor Disputes in Jiangsu (December 14, 2009, Su Gao Fa Shen Wei [2009] No.47); and Article 2 of the Opinions on Several Issues concerning Application of the Labor Contract Law in Shanghai (March 3, 2009, Hu Gao Fa [2009] No.73))

Given that Article 20 of the Labor Law was generally covered by Article 14 of the Labor Contract Law and that Article 16.2 remains valid as well, in the present juridical practice, the employer's obligation to conclude the labor contract has been reconfirmed.
Article 19 The regulations and bylaws formulated by an employer through a democratic process pursuant to Article 4 of the Labor Law, without any violation of laws, administrative regulations and policies, which have been announced to the employees, may be regarded as the trial basis of labor dispute cases by the people's court. Article 4 of the Labor Contract Law further stipulates the democratic process to formulate regulations and bylaws. The opinions on effectiveness and validity of an employer's regulations and bylaws formulated before the enforcement of the Labor Contract Law are consistent in the present juridical practice: although they were formulated without going through the democratic process as required in Article 4.2 of the Labor Contract Law, the regulations and bylaws, without any violation of laws, administrative regulations, policies and the collective contract or any obviously unreasonable circumstances, which have been announced to the employees, may be adopted as the trial basis of labor dispute cases.

Nonetheless, different jurisdictions hold different opinions on effectiveness and validity of the regulations and bylaws or significant matters, formulated or decided, by the employer without going through the democratic process as required in Article 4.2 of the Labor Contract Law after the enforcement thereof.

  1. Opinions of Zhejiang and Guangdong: Generally cannot be adopted as the trial basis of the labor dispute cases of the people's court. However, in the case that the regulations and bylaws or the significant matters has no violation of any laws, administrative regulations, policies or the collective contract or has no obviously unreasonable circumstances, which have been announced or notified to the employees, and that the employees do not object, they can be adopted as the trial basis of labor dispute cases.
  2. Opinion of Jiangsu: In the case that the labor union or employee representatives have negotiated through the democratic process but failed to reach an agreement and that the regulations and bylaws has no violation of any laws or administrative regulations or has no obviously unreasonable circumstances, which have been announced or notified to the employees, such regulations and bylaws can be adopted as the trial basis of labor dispute cases.
In conclusion, although this Article has been covered in the Labor Contract Law upon enforcement, in the juridical practice, the fundamental principles of emphasizing the legality and transparency of the regulations and bylaws have not been changed, and after the implementation of the Labor Contract Law, the requirements on rationality and the democratic process are further enhanced.

Second Judicial Interpretation

Clause Details Analysis
Article 16 In case of any inconsistency between the internal regulations and bylaws and stipulated by the employer the collective contract or the labor contract , if an employee requests to apply to the contract, the people's court shall uphold such request. This Article refers to a fundamental principle of the Labor Contract Law. Although it has not been specifically covered in the Labor Law and the Labor Contract Law, its effectiveness is not doubtful.

Third Judicial Interpretation

Clause Details Analysis
Article 10 The agreement reached by and between an employee and an employer concerning the formalities for termination or expiration of the labor contract, remuneration payment, overtime payment, economic compensation or damages, without any violation of mandatory provisions of laws and administrative regulations or any fraud, coercion or taking others' advantages, shall be regarded as valid and effective. In case of any material misunderstanding or obvious unfairness in the said agreement, if any litigant requests to revoke such agreement, the people's court shall uphold such request. Although the Labor Law and the Labor Contract Law do not clarify the effectiveness of the termination or expiration agreement on a labor contract, such agreement is a type of labor contracts; therefore, the provisions on effectiveness of labor contracts in the Labor Law and the Labor Contract Law shall also apply to such agreement. However, the invalid circumstances in Article 26.1(2) of the Labor Contract Law (the employer's exempting its legal liabilities or excluding the employee's rights) do not appear in this Judicial Interpretation. Article 10.2 is stipulated based on the fundamental principles of the Contract Law.

Fourth Judicial Interpretation

Clause Details Analysis
Article 5 Where an employee is assigned from the former employer to a new employer for reasons not attributable to the employee himself/herself, and the former employer does not pay the employee any severance pay at the time of such assignment, the employee is entitled to consolidate his/her service term with the former employer into such with the new employer in the calculation of economic compensation and damages when the employee terminates his/her labor contract with the new employer in accordance with Article 38 of the Labor Contract Law or the new employer proposes the rescission or termination of the labor contract with the employee. If an employer falls into any of the following circumstances, it shall be determined that "an employee is assigned from the former employer to the new employer for reasons not attributable to the employee himself/herself":

  1. The employee's working place and position remain the same, while his/her employer has been changed from the former employer into the new employer;
  2. The employer transfers the employee to work for another entity in the form of assignment or appointment;
  3. The employee is designated to work for another entity because the employer has merged or split;
  4. The employer and its affiliated enterprises enter into labor contracts with the employee in turn;
  5. Other reasonable circumstances.
This Article clarifies the circumstances provided in Article 10 of the Implementation Rules of the Labor Contract Law, "an employee is assigned from the former employer to a new employer for reasons not attributable to the employee himself/herself", under which the employee's service term with the former employer may be consolidated into such with the new employer.
Article 6 Where a labor contract or confidentiality agreement contains a non-compete clause agreed by the parties but does not specify the amount of economic compensation payable after the rescission or termination of the labor contract, if the employee observes the non-compete obligation, each month he/she is entitled to claim against the employer for an economic compensation equal to 30% of his/her average monthly salary for the 12-month period preceding rescission or termination of the labor contract, and such claim shall be upheld by the people's court.

If the above mentioned 30% of the average monthly salary is lower than the standard minimum salary in the location where the labor contract is performed, the economic compensation shall be paid as per such standard minimum salary.
As to a non-compete clause without specifying the amount of economic compensation, there are different opinions in the judicial practice of different provinces. For instance, in Jiangsu Province, such non-compete clause may be deemed invalid (Article 13 of the Guiding Opinions on Trial of Labor Disputes in Jiangsu (December 14, 2009, Su Gao Fa Shen Wei [2009] No.47), while in Shanghai, such clause may be deemed valid and both parties may further negotiate on the amount of compensation (Opinions on Several Issues Concerning Application of the Labor Contract Law in Shanghai (March 3, 2009, Hu Gao Fa [2009] No.73)). This Article uniforms the above different opinions and clarifies the base judicial remedy for employees for their observation of non-compete obligation, that is each month the employee may obtain an economic compensation equal to 30% of his/her average monthly salary for the 12-month period preceding rescission or termination of the labor contract and such compensation shall not be lower than the standard minimum salary.
Article 7 Where the parties agree on non-competition and the amount of economic compensation in the labor contract or confidentiality agreement, unless otherwise agreed on, the employer is entitled to request the employee to observe the non-compete obligation, or the employee is entitled to claim against the employer for economic compensation after observing the non-compete obligation, and such claim shall be upheld by the people's court. This Article is consistent with the provision of Article 23 of the Labor Contract Law.
Article 8 Where the parties agree on non-competition and the amount of economic compensation in the labor contract or confidentiality agreement, if the economic compensation is not paid for three months for reasons attributable to the employer after the rescission or termination of the labor contract, the employee is entitled to request that he/she be released from the non-compete agreement, and such claim shall be upheld by the people's court. This Article explicitly provides that, as long as the employer fails to pay the non-compete compensation for three months, the employee is entitled to terminate the non-compete agreement.
Article 9 During the non-compete term, the employer may request to terminate a non-compete agreement, and such request shall be upheld by the people's court. When the employer requests to terminate the non-compete agreement, the employee is entitled to claim for an additional amount equal to the economic compensation payable for three months, and such claim shall be upheld by the people's court. This Article explicitly provides that an employer may terminate a non-compete agreement provided that it has paid the employee a three-month additional non-compete compensation.
Article 10 Where the employee breaches the non-compete agreement and pays the liquidated damages to the employer, if the employer requests the employee to continuously perform the non-competition agreement, such request shall be upheld by the people's court. This Article specifies that, where the employee breaches the non-compete agreement, payment of liquidated damages to the employer shall not subsequently release the employee's non-compete obligation.
Article 11 Where the employer and the employee fail to amend the labor contract in writing and that the orallyamended labor contract has been performed for more than one month, the content of which has no violation of any laws, administrative regulations, state policies and social conventions, if either party claims that the amendment to the labor contract is invalid due to its non-written form, such claim shall not be upheld by the people's court. In accordance with Article 35 of the Labor Contract Law, the employer and the employee may amend the labor contract through negotiation and such amendment shall be made in written form. In practice, as to the modification and amendment regarding demotion or reduction in salary, it is generally difficult for the employer to obtain the written consent from the employee, which brings obstacles to the enterprise human resources management. This Article clarifies that the actual performance of the orally-amended labor contract may obtain judicial support as well. However, this Article is conflicted with certain local regulations; therefore, the application of this Article remains to be ascertained by local courts in judicial practice. For instance, in accordance with Article 29 of the Jiangsu Labor Contract Regulations, implemented on May 1, 2013, any amendment to the labor contract shall be in written form except for those amendments in favor of the employee such as increase of remuneration.
Article 12 Where an employer with a labor union established terminates a labor contract in compliance with Articles 39 and 40 of the Labor Contract Law but fails to notify the labor union the foregoing termination in advance as required in Article 43 of the Labor Contract Law, if the employee claims against the employer for damages on the ground that the employer illegally terminates the labor contract, such claim shall be upheld by the people's court, unless otherwise the employer has undergone the required relevant procedures before the lawsuit. This Article solves several issues which have plagued the practice field for many years.

  1. The obligation of notifying the labor union in advance provided in Article 43 of the Labor Contract Law refers to the obligation of an employer who has established a labor union.
  2. Termination violating the notification obligation to the labor union in advance may cause defects in the statutory procedure; if the employer fails to rectify such formalities before the lawsuit, the employer will lose the lawsuit.
Article 13 Where, after the implementation of the Labor Contract Law, an employer is unable to continue to perform the labor contract due to discontinuation of business operation upon expiration of its term of operation, if the employee claims economic compensation from the employer, such claim shall be upheld by the people's court. This Article fills the legislative gaps of Article 44 of the Labor Contract Law, as Article 44 does not explicitly stipulate the circumstance in which a labor contract cannot be continuously performed when the employer discontinues the business operation upon expiration of its term of operation.
Article 14 Where an expatriate or a stateless person enters into a labor contract with an employer within the territory of China but fails to legally obtain work permit, or a resident in the Hong Kong Special Administrative Region, the Macao Special Administrative Region or the Taiwan region enters into a labor contract with an employer in the mainland but fails to legally obtain work permit, if either party requests to confirm the validity of the labor relationship, such request shall not be upheld by the people's court.

Where an expatriate person with a Foreign Expert Certificate and a Permit for Foreign Experts to Work in China establishes a working relationship with an employer within the territory of China, such relationship may be determined as a labor relationship.
Before the promulgation of Paragraph 1 of this Article, certain local judicial documents have clarified that the labor contract entered into by and between a domestic PRC entity and an expatriate person or a resident in Hong Kong, Macao or Taiwan without a work permit is invalid. Paragraph 2 of this Article provides legal protection, in the labor contract law perspective, to an expatriate person who works in China with a Foreign Expert Certificate and a Permit for Foreign Experts to Work in China.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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