By Pattie Walsh, Chris Lin and Ying Wang, DLA Piper
Three years after the Third Interpretation of the Supreme People’s Court on Certain Issues regarding the Law Applicable to Labour Dispute Cases Hearing was published in September, 2010, the Supreme People’s Court issued its Fourth Interpretation on the same topic (the “Interpretation”) on February 1, 2013. Taking effect on February 1, 2013, the Interpretation addresses important issues such as noncompetition and its related economic compensation, verbal amendments to an employment contract, consultation with the trade union upon termination, and foreign nationals’ employment in China.
Non-competition and economic compensation
The PRC Employment Contract Law (the“ECL”) is silent on the parties’ rights and remedies where:
• they have failed to stipulate on the compensation for non-competition obligations in the employment contract or a confidentiality agreement; or
• the employer has failed to pay noncompete compensation or intends to cancel a non-competition agreement.
The Interpretation seeks to fill this gap. Under Article 6 of the Interpretation, where an employer and its employee have reached an agreement on post-employment noncompetition restriction, but fails to mention payment of compensation for such non-competition restriction, if the employee has fulfilled the noncompetition obligation, he or she is entitled to a monthly compensation by the employer based on 30% of the average monthly salary over the 12 months preceding the termination or expiration of employment.
Where an employment contract sets forth non-competition and economic compensation, but the employer fails to pay the compensation for three months after employment ends, the employee has the right to seek a court order to terminate the non-competition agreement. The employer may also seek a court order to terminate the non-competition agreement, as long as it pays three months of economic compensation as required by the employee. In the event that an employee has violated the noncompetition agreement, the employer has the right to require the employee to fulfil the non-competition obligation even after the employee has paid stipulated damages to the employer.
These clarifications have increased the certainty of the legal consequences in various situations regarding noncompetition and made it easier for the parties to choose the solution most fitting their needs.
Verbal amendment to employment contract
Is a verbal amendment of the employment contract between the parties enforceable? The Interpretation answers yes if the amended contract has been performed for over a month, and its content does not contravene laws, regulations, policies, public order and best practice.
Trade union and unilateral termination
Article 43 of the ECL requires companies with a trade union to notify their trade unions in advance whenever they unilaterally terminate an employee. Article 43, however, does not specify what the legal consequence are for an employer and what remedies are available to an employee if such notice is not given. For instance, would such a termination be considered valid? The Interpretation outlines that the employee may seek a court order against the employer for damages for unlawful termination (currently set at two times the statutory sev erance under the ECL), however it also provides that this rule would not apply if the employer has rectified this defect of process (presumably by giving the trade union a notice) before the litigation is commenced.
Expats’ employment in China
Where foreigners, or residents of Hong Kong, Macau or Taiwan enter into a n employment contract with employers in China without first obtaining a work permit, they will not be protected under Chinese labour law.
Transfer to a new employer
Mergers and acquisitions are common in today’s global economy. They usually result in employees transferring from the acquired business to the new entity by the termination of employment with the existing former employer and the signing of a new employment contract with the new entity. One issue often arises in the event that the new entity terminates the employment of an employee so transferred, is the new entity under an obligation to include the years of the employee’s service with the acquired business? Again, the ECL is silent on the subject and the Interpretation seeks to clarify this. It provides that, where the employee is arranged to be employed with a new employer not due to his or her own reasons (for example, under a business transfer arrangement) and the original employer has not paid the severance payment, when the employment contract with the new employer is terminated by either the employee or the employer (where the new employer does not renew the contract with the employee when it expires for instance), the employee is entitled to require the service years with the acquired business to be included in his or her service years with the new employer for the purposes of calculating future termination payments.
Under the following conditions an employer shall regard that “the employee is arranged to be employed with a new employer not due to his or her personal reasons”:
• the employer works at the same work place and on the same position while the employer of the employment contract is amended to a new employer;
• the employer arranges the job adjustment for the employee in the form of internal reassignment or appointment;
• job adjustment due to the employer’s merger and split;
• the employer and its affiliate enter into employment contracts with the employee in turn; or
• some other reasonable situation.
Paul Arkwright
Publisher
