China: Local Guidance in China for Employment Difficulties

Last Updated: 26 November 2014
Article by Nanda Lau and Jasmine Chen

Various problematic issues under Chinese labour law have recently been clarified by regional courts and employment arbitration institutions in some of the major cities of China. The clarifications have come as guidance issued in the form of meeting minutes or answers to common issues involved in labour disputes.

The guidance notes are not binding on future court or arbitration cases. However, the guidance relevant regional judicial and arbitral bodies are likely to find the guidance as persuasive. It is also possible that courts and arbitral bodies outside the particular regions will find the guidance to be helpful in their cases. Employers looking to reduce the possibility of future labour disputes should take heed to the guidance.

Some of the more interesting guidance has been issued in Beijing Municipality, Shenzhen Municipality, and Zhejiang Province. We also canvas some of the earlier Shanghai and Guangdong rules dealing with similar issues. The overall trend shows courts and arbitral institutions taking careful stock of problematic national rules and seeking to develop a uniform approach within their jurisdictions. Some of the guidance seeks to protect employers against unscrupulous managers, while others take a balanced approach to supporting the reasonable claims of employees.

Additional national rules will likely be needed if a uniform approach is to be taken throughout China. In the meantime, employers should be aware of how courts and arbitral institutions will approach the particular matters in their area. Employers in other areas may also wish to take note.

Beijing Municipality

Managers cannot claim against employer for failure to enter into a written labour contract

In May 2014, the Beijing High People's Court and the Beijing Labour Arbitration Commission issued meeting minutes regarding certain employment-related disputes ("Beijing Meeting Minutes").

The Beijing Meeting Minutes clarify that certain senior employees cannot claim additional compensation from his/her employer on the basis of the employer's failure to enter into a written contract. That is, an employee cannot make such a claim if:

  • he/she is the legal representative of the employer; or
  • he/she is a senior management officer, a person-in-charge, or an executive of the employer's human resource department whose scope of authority includes management of the execution of labour contracts between the employer and the employees; however, he/she may still be able to claim if he/she can prove that he/she has asked the employer to enter into a written labour contract and the request was rejected by the employer.

The Beijing Meeting Minutes reflect increased judicial scrutiny against the possible abuse of managerial powers to claim against an employer in circumstances where the individuals themselves share responsibility for the acts of the employer.

Employers are advised to rigorously maintain written employment contracts with every employee, including managers, so as to avoid unwanted claims.

Open-term Employment Contract required upon the Expiry of the Second Fixed-term Employment Contract

The Beijing Meeting Minutes also clarify what happens upon the expiry of the second consecutive fixed-term employment contract. If an employee has already completed two fixed-term labour contracts, then the employer cannot terminate the employment contract or require the employee to enter into a third fixed-term employment contract. Rather, upon the employee's request, the employer must enter into an open-term employment contract with the employee.

Regional practice regarding whether an employer has the right to terminate the employee upon the expiry of the second consecutive fixed-term employment contract varies. The practice reflected in the Beijing Meeting Minutes is an approach which is in favour of employees. For the employer, it means that the decision to grant an employee an open-term contract (which is harder to terminate) is effectively made at the expiration of the first fixed-term contract.

Employers should pay attention to the specific approach adopted by the local authorities as to whether they can terminate an employee upon expiry of the employee's second consecutive fixed-term employment contract.

Shanghai Municipality

Shanghai's judicial practice in relation to managerial employees claiming not to have written employment contracts is similar to that more recently adopted by Beijing.

The Shanghai High Court issued Responses to Certain Issues in Labour Disputes ("Shanghai Responses") in 2010. The Shanghai Responses clarify that managerial employees whose responsibilities include human resource management of the employer cannot claim additional compensation from his/her employer on the basis of the employer's failure to enter into a written contract if the employer alleges that a written employment contract was entered but the original can no longer be found. Shanghai courts have followed the approach as set out in the Shanghai Responses.

According to published judgements by Shanghai courts, in practice Shanghai courts will carefully review why an employment contract has failed to be entered into if the employee in question is a managerial employee who should understand the importance of a written employment contract.

In terms of fixed-term contracts becoming open-term contracts, Shanghai has taken a more liberal approach than Beijing. Shanghai tends to be more employer-friendly. That is, employers may terminate an employee upon the expiry of the consecutive second fixed-term employment contract. If an employer does not want to terminate an employee, and if the employee wants to continue the employment relationship, then the employer must offer an open-term contract. (Chinese regulations provide that failure to agree on the terms of an open-term contract is not a ground for failure to enter an open-term contract.)

Guangdong Province

Guangdong has for many years paid close attention to managerial staff alleging that they do not have an employment contract. The relevant judicial guidance relied upon is the Guiding Opinions regarding Certain Issues on the Application of the Law of Labour Dispute Mediation and Arbitration and the Labour Contract Law ("Guangdong Opinions") issued by Guangdong High Court and Guangdong Provincial Labour Dispute Arbitration Commission on 23 June 2008.

According to Guangdong Opinions, an employee cannot claim additional compensation from his/her employer on the basis of the employer's failure to enter into a written contract if the employer could prove that such failure is completely attributable to the employee. Although this rule is not expressly directed at senior managerial employees, Guangdong courts in practice tend to consider that senior managerial employees should be attributable to such failure given their responsibilities and duties as the senior management employees.

Guangzhou authorities take a similar approach to Shanghai when it comes to the expiry of the second fixed-term contract and the obligation to enter an open-term contract.

Shenzhen Municipality

Change of Foreign Employee's Employment Relationship May Not be Recognized If Not Properly Reflected in the Employee's Work Permit

The Shenzhen Labour Arbitral Commission, in March 2014, issued meeting minutes regarding certain complex employment issues ("Shenzhen Meeting Minutes").

The Shenzhen Meeting Minutes provide that if a foreign employee changes employer, then the employer information in the employee's work permit must also be changed. Failure to update the employee's work permit will mean that the employment relationship between the foreign employee and the new employer will not be recognized.

Employers should assist newly-recruited foreign employees to promptly update their work permits to reflect the change of employment to the current employer. Failure to do so will mean that the employer is illegally employing foreign nationals, which can result in significant fines and business disruption if the foreign employee is deported.

Specific Rules on Compensation for Unused Additional Annual Leave

National labour regulations provide that an employer must compensate an employee if the employee is unable to take their full annual leave due to work-related reasons. Penalty rates of 300% are provided in the national regulations.

The Shenzhen Meeting Minutes provide that, for any unused annual leave that is in addition to the statutory annual leave, the compensation to the employees must follow the below rules:

  1. if the compensation standards have been agreed in the employment contract, collective contract or the employer's internal rules and regulations, then regardless of whether such standards are lower than the compensation standards for statutory annual leave, such standards should be recognized as valid; or
  2. if no compensation standards have been agreed between the employer and the employee, the competent court or arbitral body may award compensation to the relevant employee following the compensation standards for statutory annual leave.

Employers may wish to set out specific compensation standards for unused additional annual leave in the employment contract, collective contract or its rules and regulations, especially if employer wishes to compensate with penalty rates of less than 300%.

Zhejiang Province

Termination for Breach of Employer's Rules and Regulations Should Be within Five Months

The Zhejiang High Court and the Zhejiang Labour Arbitration Tribunal jointly issued answers to various employment disputes issues in April 2014 ("Zhejiang Answers").

Among other things, the Zhejiang Answers state that an employer can only terminate an employee on the ground of breach of the employer's internal rules and regulations within five months of the breach. The five-month period starts from the date the employer becomes or ought to have become aware of the breach of its internal rules and regulations entitling the employer to terminate the relevant employee.

PRC law does not provide any clear-cut time period for an employer to exercise its right to termination on the basis of a breach of the employer's internal rules and regulations. Nevertheless, in practice, courts and arbitral tribunals generally tend to consider that the termination should be within a reasonable time frame.

The Zhejiang Answers set out a clear time within which employers in the region may terminate an employee for breach of the employer's rules and regulations.

Termination of Worst Performer May be Challenged

The Zhejiang Answers provide that an employer may not terminate an employee on the ground that the employee's ranking is the lowest in a round of performance reviews. Such termination may not be justified even if coming last in a performance review is clearly stated in the employer's rules and regulations as a ground for termination.

The Zhejiang Answers clarify that the fact that an employee comes last in a performance review does not mean that the employee is incompetent for his/her work, which is a valid statutory ground for unilateral termination by the employer. Therefore an employer is not permitted to terminate the employment of the "worst performer" merely because they received the lowest performance rating.

Although the Zhejiang Answers are only persuasive in Zhejiang Province, it would be prudent for employers throughout China to avoid terminating an employee solely on the ground that he/she has the lowest performance ranking. Instead, the employers should collect other objective evidence to support its claim that the employee is not competent for his/her work. Written warnings and opportunities for improvement within a reasonable timeframe should also be given.

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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