China: Case Study Of The Employee's Behavior Of Establishing Private Company During Employment

Last Updated: 6 January 2018
Article by Zhong Xinxia

Case 1

A is a South Korean trading company engaged in the import and export of scientific instruments. As an employee of A, B invested in and established company C with other colleagues during his employment, which is engaged in the scientific instruments business in China. According to investigation on the industrial and commercial registration material of company C, B is one of the investors of C without holding any position within.

After the investigation on B's breach of disciplines, A terminated the labor contract with B based on the Employee Handbook stipulation "establishing an enterprise or institution engaged the same or similar business of the company in the name of himself/herself or his/her relative without the permission of the company".

Author's Comments:

Company C is engaged in the import and export of scientific instruments, which coincides with Company A's business scope and meets the condition "engaged in the same or similar business" stipulated in the Employee Handbook of company A. An employee establishing a company during employment and its business scope coincides with the employer can be divided into three groups: completely coinciding with, partly coinciding with, or totally irrelevant. To protect the legal rights and interests of the company, to ensure that the employee performs his duty of fidelity as well as prohibit and forbid conflict of interests, the employer always identify the establishment of a company establishing as serious disciplinary violation; hence there are clear stipulations to follow once the employee breaks the rules.

There are two different situations the position of the employee in the new company: first, invested, established and actually run the new company; second, invested in the new company without any operating behavior. Generally, whether B hold a position in C will not influence the identification of the severe violation of rules. The behavior that "establishing an enterprise or institution engaged the same or similar business of the company in the name of himself/herself or his/her relative without the permission of the company" stipulated in the Employee Handbook, is one of the reflections of that the employee shall not conduct conflict of interests and perform his duty of fidelity during the employment, which is legal as well as reasonable. Since there are not such stipulations, A could also make a unilateral termination decision discreetly based on the principles that the employee who conducted the conflict of interests shall perform his duty of fidelity, however the legal risk would dramatically increase.

During the first instance of case 1, B suggested that the company C did not actually operate and, if it did, its operation would not cause any damage to A. In this regard, the author believes whether the company C is in operation or whether the actual operation may cause actual damage to A, it will not constitute the factor identifying whether B's establishment of a company should be viewed as severe violation of rules. Since it has been clearly stated that the employee's establishing a company should be viewed as severe violation of rules; thus, it will be unfair if B or the judicial department increase the company A's obligation and burden of proof by considering only the actual operation or the actual damage as the element for severe violation of the rules.

In practice, some employers require the employee to disclose his/her conflict of interests, additionally to identifying as severe violation of rules "establishing an enterprise or institution engaged the same or similar business of the company in the name of himself/herself or his/her relative without the permission of the company". Essentially, "the behavior that operates the same or similar business" falls into the range of conflict of interests. However, the scope of the conflict of interests far outweighs the former one; and will be identified as severe violation of rules without disclosure. The scope includes: self-dealing, hiring the relative, charging the customer commission, bribery, offering commercial opportunities belonging to the employer to its competitor or institutions operating by his/her relative and working full-time or part-time or providing other service under any guise for the company's competitor. Hence, the employer may protect its legal rights and interests within a greater scope, acknowledging the possible conflict of interests with precaution. Once the employee violates the disclosure of the conflict of interests, the employment is more likely to be supported by the judicial department if he terminates the contract unilaterally.

Case 2

Mr. He entered the Network of Excellence (Beijing) Technology Co., Ltd. and worked as industry manager in charge of employees management in the department. He established the website named "Slow Taiichi" during working hour, which influenced the complement of his own work.

On December 3, 2013, the employer sent He the notice of termination of labor contract stating that:

"Mr. He, you engaged in your own private business using the equipment and resources of the company during working hour, which severely influenced the completion of your own work, and you refused to rectify after the demonstration from the company. Based on this, the company now terminates the labor contract relationship with you according to the Labor Contract Law, the Regulation on the Implementation of the Employment Contract Law and the relevant stipulations made by the company. Please process the leaving procedures before December 3, 2013."

After trail, the People's Court of Haidian district of Beijing held that:

As the industry manager, He shall perform the duty of due diligence and promote the relevant business development. Since He spent his working time browsing websites irrelevant to his work and setting up a private website, it affected his work performance and the employer's termination is legal considering there are no inappropriate points and that the written decision has been sent to the employee.


1.Although the business scope of the website set up by He during his work hour is totally different from the business scope of the company, the behavior that He used the company's equipment and resources to establish a website during working hour which influenced his own work, it meets the requirement in the Employee Handbook stipulating that:

"The employee who engage in part-time job, in similar or interest conflict business using the computer, network and other equipment or resource of company, who browse website irrelevant to the work or handle personal affairs for a long time during work hour, will be viewed as severe violation of rules. And the company may terminate the labor contract directly according to articles 39 of the Labor Contract Law."

Essentially, the rules aforesaid also based on the principles of conflict of interests, assumed that the employee shall only engage in the work assigned by the employer and not handle personal affairs for a long time during work hour.

2. Under the circumstances that the mentioned stipulations in the Employee Handbook is legal and reasonable, and implemented with the democratic and public procedures, the employee claim to not be informed of the rules or that it caused no actual damages is difficult to be supported by the judicial department.

3.Noteworthy, several points can be used as reference when the employer proved that the employee violated the rules. First, the employer notarized the recent web browsing records to prove that the employee frequently browsed the websites irrelevant to the job and searched key words about setting up websites. Second, the employer notarized the model and number of the computer to prove that it belongs to the employee. Third, the employer submitted the recent working report to prove that the employee's malpractice leads him to not finish his own work. The notarized papers aforesaid proved the violation behavior effectively and supported the legality of the termination.

Supposed that the employee set up a private website irrelevant to the employer's business scope during his free time without using the equipment or resources of the employer, could the employer terminate the labor contract directly and unilaterally according to the following section of Employee Handbook: "anyone engages in part-time job during employment, the company may terminate the labor contract directly according to the article 39 of the Labor Contract Law"? Would the termination be supported by the judicial department? The author will analyze this situation by combining his legal expertise with practical experience hereof:

1.Did the behavior violates the principle stipulation, like the duty of fidelity and constitutes a conflict of interests? Under the aforesaid circumstance, it is hard to identify the behavior that the employee set up the website irrelevant to the employer's business scope during free time as conflict of interests.

2.Setting up the website was done during free time, which is not subjected to working hour. Thus, the company's unilateral termination based on his conduct outside working hour may be deemed as going beyond company's management right, which is also hard to be supported by the judicial department.

Overall, as a warning, the employer shall set the possible violation behaviors as completely as possible in the Employee Handbook. Meanwhile, the employer shall never inattentively think that the termination is unassailable after going through the syllogistic reasoning procedure, and should comprehensively evaluate the legal risk in respect of the legality, reasonableness and coherence of the rules.

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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