On July 6, 2023, the Supreme People's Court of China (“SPC”) issued the 32nd batch of seven labor dispute guiding cases ("Guiding Cases"). Among them, one case attracts special attention of foreign invested enterprises (“FIEs”) in China: under the Guiding Case No. 181, the SPC has chosen to stand on the side of the employer who has applied higher standards of workplace sexual harassment prevention and control requirements, compared to other local companies in China, in making and implementing its internal regulations and rules. In that case, Chinese courts unanimously upheld the employer's legitimate right to terminate an employment contract with a management-level employee who failed to take reasonable measures to deal with sexual harassment reports from a subordinate employee in accordance with the employer's internal regulations.

To hold employers accountable, together with other social forces in combating workplace sexual harassment, China has put a more recent regulatory framework in place since 2021 regarding employers' specific obligations and potential liabilities in handling workplace sexual harassment. In this update, we specifically touch on potential risks of employers and the compliance implications that follow to all FIEs in China.

Guiding Case No. 181 issued by SPC and its implications

The core issue being contemplated herein was whether it was deemed as a legitimate termination pursuant to the PRC Labor Contract Law, and the plaintiff (i.e., the fired employee), thus, was not entitled to compensation from the defendant (i.e., the employer who was a FIE) for the alleged employment termination on the grounds of the plaintiff's failure of acting and responding to harassment complaints, as per defendant's internal employee handbook and code of business conducts.

According to the case facts, the victim was a female subordinate to the plaintiff, a senior-level channel sales manager, to whom the victim repetitively reported inappropriate behaviors, such as harassing text messages, by a harasser in the workplace. Instead of investigating the harassment issue or taking any protective measures, the plaintiff blamed the victim for not getting along with the harasser and later requested to the HR department to fire the victim. Given that the plaintiff failed to provide a reasonable ground for termination, the HR department approached the victim for more information. Upon learning from the victim about the sexual harassment by the harasser, who turned out to be the plaintiff's supervisor, and that the plaintiff failed to take any reasonable measures to deal with the victim's complaints of harassment, the defendant launched an investigation and concluded that the plaintiff failed to perform his duties as the supervisor of the victim. The plaintiff made some corrections under the report, but he refused to sign on the record or to accept the statement that he had received any sexual harassment complaints from the victim. Later, the defendant sent a notice of the unilateral termination to the plaintiff for the reason that he failed to fulfill his managerial duties, (i.) not taking any protective measures, (ii.) retaliating against the victim, and (iii.) making a false statement during the investigation, all of which were in violation of the defendant's internal employee handbook and code of business conduct.

The plaintiff refused to accept this termination and started a labor arbitration, and the case was then brought in front of the Shanghai Pudong District Court. The court upheld the labor arbitration decision that the employment termination was legitimate. The case was subsequently selected by the SPC as one of the Guiding Cases in the recent batch and became one of the binding authorities for Chinese judicial practice, (i.) expressing the judicial position on the similar issues and (ii.) aiming to unify the judicial decisions in similar cases.

Messages from the Guiding Case No. 181

What we have learned from the recent judicial commentary and the selection of the Guiding Case is that the SPC is now encouraging employers to take responsibility to prevent and rectify any workplace sexual harassment by making and implementing a more rigorous self-discipline policy. It was in the view of the SPC that the defendant's anti-sexual harassment practice provided a good model, emphasizing the importance of the supportiveness and protection of the employers to their employees, and encouraging employers to have active awareness of sexual harassment concerns or issues, as well as to prevent potential retaliatory actions.

Another takeaway from this Guiding Case is that, when determining the gravity of the employee's conduct as to whether it is deemed to be a severe breach of any internal policy of the employer and may consequently lead to an employment termination of that employee, the court has shown a strong reliance by taking account of, (i.) the employer's rules and regulations regarding sexual harassment which are currently in place and (ii.) reasonable causes for such termination which the employer has provided the accused employee with. Therefore, it is noteworthy for employers to start building up an accountability mechanism through which relevant superior employees can be properly trained to address relevant sexual harassment complaints raised by their subordinates, and to include this in future training plans or internal policies.

Compliance implications for FIEs

As PRC Civil Code shows the potential tort liability of employers in sexual harassment related disputes and the new Women's Rights and Interests Protection Law has provided quite comprehensive requirements for preventing and addressing sexual harassment, the first thing that employers should do is to follow these new provisions by establishing the required mechanism for preventing and addressing sexual harassment in their daily operations.

As the Guiding Case No. 181 has suggested, employers can explicitly define various forms of sexual harassment in their internal policies, such as employee handbooks, and emphasize to employees during training sessions about the importance of being mindful of their daily conversations and actions to create a positive and harmonious corporate culture. When handling complaints of sexual harassment, employers may also consider engaging an independent third-party to conduct investigations, to assess any alleged behavior based on investigation results and take timely actions against relevant individuals.

In response to the relevant legal requirements and risks, inspired by the messages conveyed under the Guiding Case No. 181, and to align with relevant laws and regulations as well as judicial practices, we have summarized below some compliance recommendations for FIEs to improve the construction of their workplace sexual harassment compliance system:

1. Establish and Improve Internal Regulations on Workplace Sexual Harassment

Employers should clearly define regulations relating to workplace sexual harassment in their internal rules and regulations. These regulations typically include definitions, key scenarios of sexual harassment, channels for employee complaints, and relevant disciplinary measures. Given the ambiguous nature of the boundaries of workplace sexual harassment and the purpose of providing employees with a more concrete understanding, employers may consider detailing and explaining common scenarios of workplace sexual harassment. Following the formulation of relevant regulations, employers should promptly publicize them to employees and solicit their opinions, with democratic procedures to ensure the rationality and effectiveness of the regulations.

2. Establish Internal Complaint and Investigation Procedures

In addition to regulatory requirements, employers should specify departments and procedures for handling various workplace sexual harassment incidents. Typically, the legal or human resources departments can handle workplace sexual harassment incidents. In some cases, employers may establish a dedicated investigation department or committee to handle specific complaints raised by their employees.

Employees should also be informed of internal complaint channels. The relevant department should carry out investigations promptly, objectively, and comprehensively, following the principles of fairness, in order to protect the privacy of any involved employee and prevent possible retaliation. An employer should, through the investigation, promptly set up a meeting with each affected employee, so that the employer can thoroughly understand the incident, guide the employee in preserving existing evidence properly, and avoid the possibility of losing the case in a subsequent labor arbitration or litigation due to a reason of insufficient evidence. In addition, the employer should promptly meet with the accused employee, conduct investigations, and produce investigation reports. Regardless of the rank of the employee involved in the harassment incident, the employer should not condone such behavior, and they should impose disciplinary actions impartially according to the relevant regulations. The employer may consider involving an external lawyer or investigation team to assist with the investigation and/or to provide reasonable solutions, helping the employer handle potential labor arbitration or litigation, where necessary.

Following the investigation, the relevant reports should be promptly submitted to the management team of the employer, and based on the severity of the incident and the employer's internal policies, different degrees of disciplinary actions should be taken, such as apologies, job transfers, demotions, warnings, or termination of employment contract, relating to the accused employee.

3. Provide Anti-Sexual Harassment Training for Employees

Employers should provide training for their employees on workplace sexual harassment to proactively prevent such incidents. Such training sessions can help their employees clearly understand the definition, forms, and consequences of sexual harassment, inform them of the internal procedures for addressing workplace sexual harassment, and remind them to preserve evidence when they have experienced any harassment incident.

In terms of the training, employee attendance should be recorded as evidence being a part of the employers' internal regulations for the purpose of the preparation of any potential labor arbitration or litigation. Simultaneously, if an employee files a complaint or initiates a law suit for any alleged harassment conduct, the employer can then use such information as evidence to demonstrate to the court that "reasonable preventive measures have been taken" and, in exercising their legitimate rights, seek an appropriate liability exemption.

4. Monitor the Well-being of Affected Employees and Provide Timely Psychological Counseling

Employers should adopt a caring and supportive attitude toward affected employees, listening to their demands, and providing appropriate psychological counseling to assess the employees' mental state. During the subsequent handling of harassment incidents, the possible solutions should be promptly communicated to the affected employees, along with the corresponding reasons and basis.

5. Create an Open and Transparent Work Environment

Employers should focus on creating an open and transparent work atmosphere, including adopting open and transparent office layouts, minimizing closed designs, especially in general workspaces, to reduce the likelihood of sexual harassment incidents occurring from the office environment.

These recommendations aim to assist companies in effectively managing legal issues and potential risks related to workplace sexual harassment in China, promoting compliance and safeguarding the rights and well-being of employees.

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.