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Brief Summary on Interpretation (IV) of the Supreme People’s Court of Several Issues on the Application of Law in Trial of the Labor Dispute Cases
2014-04-01Zhao Li|Wei Cui|Dingding Li

By Zhao LiWei CuiDingding Li

 

On 1st February, 2013, Interpretation (IV) of the Supreme People’s Court of Several Issues on the Application of Law in Trial of the Labor Dispute Cases (the “Interpretations (IV)”) became effective.  The provisions thereunder mainly cover the following aspects: (i) labor dispute mediation and arbitration, (ii) consolidation of the former employment term, (iii) non-compete covenant, (iv) oral modification on labor contract, (v) procedural requirement on labor contract termination, (vi) severance pay and (vii) expatriates employment, etc., among which some new changes are introduced.

 

I. The Consolidation of Former Employment Term

 

In practice, some group companies commonly assign or transfer their employees from one employing unit to another for management purpose.  Under such circumstance, (i) the employment contract between the employee and the former employer would be terminated and (ii) a new employment contract between such employee and the new employer would be signed.  For those employees assigned to another employing unit, Article 10 of the Regulations on Implementation of the Labor Contact Law of the People’s Republic of China (the “Regulation on Implementation”) has already provided for the payment of the severance pay and the method of calculating the employment term:“[w]here an employee is transferred to a new employer for the reason(s) not attributable to the employee, the number of the years the employee has worked with the former employer shall be consolidated into his/her employment period with the new employer.  If the former employer has paid the severance pay to the employee for the transfer, the new employer shall not be required to consolidate the employee’s employment period into that with the former employer when calculating the severance pay for the employee at the termination or expiration of the labor contract.”  This time, Article 5 of the Interpretations (IV) made some supplementary contents to the above-mentioned Article 10 of the Regulations on Implementation. 

 

Firstly, Article 5 of the Interpretations (IV) specifies that each of the following circumstances shall be deemed to be “an employee is transferred to a new employer for the reason(s) not attributable to the employee”:

 

(1) Where the employee continues to work in the original workplace or job position, but the hiring party is changed from the current employer to a new employer;

 

(2) Where the former employer changes the workplace or job position of the employee in the form of organizational delegation or appointment;

 

(3) Where the employee undergoes changes in his/her job due to merger or split-up of the employer or other reasons;

 

(4) Where the employer and its affiliated enterprises take turns to conclude labor contracts with the employee; or

 

(5) Where there are any other reasonable circumstances.

 

Secondly, to combine Article 5 of the Interpretations (IV) and Article 10 of the Regulations on Implementation, in the case of any circumstances which constitute “an employee transferred to a new employer for the reason(s) not attributable to the employee”, (i) if the former employer has paid the severance pay, the new employer will not be required to pay for the former employment term when the new employer is required to pay the severance pay or damages to the employee; and (ii) if the former employer has not paid the severance pay, the new employer shall consolidate the former employment term when it pays severance pay or damages to the employee.

 

II. Non-compete Covenant

 

A. The compensation standard for the non-compete covenant

 

Before promulgation of the Interpretations (IV), according to the Labor Contract Law of the People’s Republic of China (the “Labor Contract Law”), the employer shall pay certain amount of economic compensation (the “Non-compete Compensation”) to the employee if the latter performs the non-compete obligation after the termination or expiration of the labor contract.  However, the Labor Contract Law doses not provide for the compensation standard and which is then subject to the discretionary agreement between the employer and the employee.  In practice, if there is no such standard stipulated in the labor contract, the compensation standards are varied in different places, for example, 20%-60% of monthly salary in Beijing, and 20%-50% monthly salary in Shanghai.

 

This time, the Interpretations (IV) has provided for the compensation standard for non-compete covenant.  According to Article 6 of the Interpretations (IV), when there is no compensation standard agreed by the parties to the labor contract and the employee has performed the non-compete obligation, the employee is entitled a 30% monthly average salary of 12 months before the termination or expiration of the labor contract but which shall be no less than the local minimum wage standard.

 

B. The performance of the non-compete covenant

 

As to the performance of the non-compete covenant, Article 7 of the Interpretations (IV) provides that when an employer and an employee have agreed upon a non-compete covenant in the labor contract, in the event of termination of the labor contract, unless otherwise agreed upon, the employee shall perform the non-compete obligation and the employer shall compensate such employee for his/her performance.  Please note that “the termination of the labor contract” includes both legal termination by the parties and illegal termination by the employer.  Furthermore, Article 10 of the Interpretations (IV) provides that the employee shall continue to perform the non-compete obligation agreed in the labor contract even if the employee has paid penalty for his/her breach of the non-compete covenant.

 

C. The termination of the non-compete covenant

 

As to the termination of the non-compete covenant, Article 8 of the Interpretations (IV) provides that when the non-compete covenant becomes effective, the employee could terminate the non-compete covenant if the employer has not paid any Non-compete Compensation for three months due to its own reasons.  Meanwhile, Article 9 of the Interpretations (IV) provides that the employer could also terminate the non-compete covenant with extra 3-month Non-compete Compensation paid to the employee.

 

III. Oral Modifications of an Existing Labor Contract

 

In practice, some modifications of an existing labor contract, such as changes in position, salary or work place, are commonly made by oral agreement between the employer and the employee.  However, according to the Labor Contract Law, modifications of labor contract shall be made in writing[Endnote 1]. As a result, there is a risk that some of the oral modifications might be invalid, especially when there is a dispute between the parties to the labor contract. 

 

However, Article 11 of the Interpretations (IV) allows such oral modifications and accordingly provides that if such oral modifications have been performed as a matter of fact for more than one month and such modifications do not violate the laws, regulations, state policies or public interests, then the parties shall not claim the modified labor contract to be invalid.  Please note that the pre-condition to validate the modified labor contract, as stipulated in the Article 35 of the Labor Contract Law, is both parties’ consensus and without which such oral modifications are still deemed to be invalid.

 

IV. Notification to the Labor Union upon Termination of Labor Contract

 

According to Article 43 of the Labor Contract Law, the employer shall notify the labor union before it unilaterally terminates a labor contract.  However, in the past judicial practice (even after the implementation of the Labor Contract Law), the consequences of a failure to deliver such notification were varied in different places[Endnote 2].

 

Article 12 of the Interpretations (IV) specifically provides that “[t]he people’s court shall uphold the employee’s request for payment of damages on the ground of illegal termination of the labor contract by the employer, unless the employer has rectified the relevant procedures before the employee files the lawsuit.”  Therefore, after implementation of the Interpretations (IV), a unilateral termination of the labor contract by the employer without an advanced notification (to the labor union) will be deemed to be an illegal termination and thus entitles the employee a payment of damages.  But for the above procedural flaw of law, the employer could rectify it with an “after notification” to the labor union before the employee files a lawsuit.  Please note that, in Article 12 of the Interpretations (IV), the time condition (for the employer to rectify) is “before the employee files the lawsuit” by which means such rectification can be made before either the labor arbitration or the lawsuit.

 

V. The Employment Process for Expatriates

 

According to Article 14 of the Interpretations (IV), it is required for a foreign national, a stateless person, a Taiwan resident or a resident of the Hong Kong Special Administrative Region (“Hong Kong”) or Macau Special Administrative Region (“Macau”) (collectively, the “Expatriate Employees”) to acquire related employment certificate before their labor relations with the mainland employer are established.[Endnote 3] According to the Provisions on the Administration of Employment of the Foreigners in China and the Administrative Regulations on the Employment of Taiwan, Hong Kong and Macau Residents in Mainland, the mainland employer shall apply employment permission for the Expatriate Employees to be employed.  However, in practice, some mainland employers hired the Expatriate Employees but did not obtain the required certificates.  For such circumstance, according to Article 14 of the Interpretations (IV), it will be deemed that there is no labor relationship between the employer and the Expatriate Employee.

 

Mr. Li Zhao is a Beijing-based partner with Global Law Office who specializes in corporation, intellectual property rights, labor law and dispute resolution, etc.

 

Mr. Wei Cui is a Beijing-based legal assistant with Global Law Office who specializes in corporation, intellectual property rights, labor law and dispute resolution, etc. (E-mail: cuiwei@glo.com.cn)

 

Mr. Dingding Li is a Beijing-based legal assistant with Global Law Office who specializes in corporation, intellectual property rights, labor law and dispute resolution, etc. (E-mail: lidingding@glo.com.cn)

 

Endnote 1: The Labor Contract Law of the People’s Republic of China, Article 35.1.

 

Endnote 2: In the event of a unilateral labor contract revocation by the employer without an advanced notification to the labor union, in Beijing, there is a difference of salary standard during the dispute period. For procedural flaw of law, the employer shall pay the salary in accordance with the minimum wage standard; in Shanghai, a revocation with procedural flaw of law is not deemed as an illegal one in practice; in Shenzhen, there is a specific provision by which such revocation is not illegal.

 

Endnote 3: The Administration of Employment of the Foreigners in China, Article 5 and The Administrative Regulations on the Employment of Taiwan, Hong Kong and Macau Residents in Mainland.