Opinions on Several Issues Concerning the Application of Labour Contract Law of the Higher People's Court of Shanghai Municipality (Hu Gao Fa [2009] No. 73)

Translated by: G·IPRs (Michael Ni, Katherine,  Shanghai Runhe Law Firm, Version: R1.2, June 19, 2009 )

1. Handling of the disputes between organizations like law firms and their employees

Disputes between full-time employees engaged in administrative affairs or factotums in law firms, employees engaged in legal affairs and receiving fixed wages or basic wages in law firms and law firms concerning the labour remuneration are labour disputes which shall be handled in accordance with relevant provisions on labour disputes. Other disputes involving the methods of partnership profits distribution and specific profits distribution between law firms and lawyers are civil disputes which shall be handled according to relevant civil laws.

Where disputes are aroused between organizations like accounting firms, foundations, etc. and their employees and the situations are similar with that of the preceding paragraph, the preceding paragraph shall apply.

2. Handling of the situation that both parties to the labour relation fail to conclude a written contract

The conclusion and performance of a labour contract shall follow the principle of good faith. Where the employee has actually worked for the employer who fails to conclude a written contract with the employee over one month, whether or not the employer shall pay the employee the double amount of monthly wages shall take into consideration the situations on whether the employer has performed the obligation of honest consultation and whether the employee refuses to conclude a contract. In the event that the employer has performed the obligation of good faith and failed to conclude the labour contract due to force majeure, accident, the refusal of the employee to conclude the contract and other reasons irrelevant to the employer, which does not belong to the situation of the employer’s “failure to conclude a written labour contract with the employee” stipulated in Article 6 of the Implementation Regulations of Labour Contract Law of the People’s Republic of China (hereinafter referred to as the “Implementation Regulations”); the employer shall pay the employee the double amount of monthly wages according to law if the labour contract fails to be concluded for the sake of the employer; however, it shall be deemed as unilaterally termination of the labour contract by the employee if the employee refuses to conclude a written labour contract and continuously perform it.

After the expiration of the labour contract, the employee continues to provide work for the employer without the objection of the employer, provided, however, the parties concerned fail to renew the written labour contract, the parties concerned shall timely conclude a written labour contract. In case the employer has performed the obligation of good faith and the employee does not conclude a written labour contract with the employer, the employer may terminate the labour relation by written notice to the employee and make the economic compensation pursuant to Article 47 of the Labour Contract Law; in the event that the employee refuses to conclude a written labour contract and continue to perform it, it is deemed as unilateral termination of the labour contract by the employee and the employer shall pay the remuneration to the employee for his or her actual working period rather than the economic compensation.

3. Formal requirements of the modifications to the labour contract

According to Article 35 of the Labour Contract Law, the modifications to the labour contract shall be made in writing. The formal requirement, in writing, includes the payroll issued to the employee, notice of change of the post, etc. With the consecutive performance of the labour contract, the rights and obligations per se of both parties to the labour contract will inevitably change from time to time. For example, the increase of the working hours of the employee, the natural changes to his or her vacation and standard of bonuses, etc. all belong to the modifications to the labour contract. Therefore, for modification to the labour contract according to law, it may be deemed as “written modification” so far as it can be proved by literary records or in other forms.

4. Several issues involving a labour contract without a fixed term

(1) the handling of the situation that a labour contract without a fixed term shall be concluded but fails to be concluded

 Where the request raised by the employee to conclude a labour contract without a fixed term which conforms to the legal provisions and the employer fails to conclude such a contract, it may “be deemed that there is a labour contract relation without a fixed term between both parties, and determine the rights and obligations of both parties according to the former labour contract”. according to Article 16.2 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law for the Trial of Labour Dispute Cases (Judicial Interpretation No.14[2001]), in which “the rights and obligations of both parties determined according to the former labour contract” include the rights and obligations determined by a written contract and by a de facto labour relation.

(2) The validity of the labour contract with a fixed term concluded by the parties concerned while the condition of concluding a labour contract without a fixed term is met

Where the employee who conforms to the condition that a labour contract without a fixed term shall be concluded enters into a labour contract with a fixed term with the employer, according to Article 14 of the Labour Contract Law and Article 11 of the Implementation Regulations, the labour contract with a fixed term shall be binding on both parties concerned. Upon the expiration of the contract, such contract will be terminated automatically.

(3) Where the statutory cause of extension makes the working period of the employee exceed ten years for the same employer, whether it can be the reason for concluding a labour contract without a fixed term

Upon the expiration of the labour contract, the contract will be terminated automatically. The extension of the contract term is only for the consideration of the special circumstances of the employee so that the time of termination of the contract is correspondingly extended, provided, however, the contract is not necessarily unable to be terminated. Article 45 of the Labour Contract Law also specifically provides, “at the expiration of a labour contract, under one of the circumstances prescribed in Article 42 of this Law, the term of the labor contract shall be extended until the corresponding conditions cease to exist.” In the absence of special provisions on the circumstances of termination, interpretations to the provisions on termination of a contract cannot be broadened by violating laws and the consequences of the conclusion of a contract without a fixed term shall not be covered therein. Therefore, upon the extinguishment of the statutory cause of extension, such contract will be terminated automatically.

(4) Where the employer and the employee have concluded the labour contract with a fixed term for several times, the renewed contract shall be a labour contract without a fixed term

According to Article 14.2(3) of the Labour Contract Law, it shall refer to the circumstance that the employee requests to conclude a labour contract without a fixed term when the employer renews the contract with the employee for the third time after they have consecutively concluded a labour contract with a fixed term twice.

5. When the employer terminates the labour contract and in the event that the employer shall pay one month’s wages to the employee which substitutes the wages during the period of notice (referred to as the “payment in lieu of notice”), how to determine the standard of the payment

Whether the employer shall make the “payment in lieu of notice” shall be decided according to the legal provisions. In the absence of legal provisions, no payment shall be required from the employer.

The standard of the “payment in lieu of notice” stipulated in the Implementation Regulations shall be determined in accordance with the wage standard of the last month which shall only be subject to one month wages. It may be higher or lower, unfavourable to the employer or to the employee, which, from the overall perspective, is adverse to the promotion and formation of a harmonious and stable labour relation. Therefore, considering the legislative spirits of the Labour Law and the Labour Contract Law, the “wage standard” of the last month shall refer to the normal wage standard of the employee. In case his or her wages of the last month cannot reflect the normal wage standard, the wage standard may be determined on the average wages of the 12 months of the employee before the termination of the labour contract.

6. Handling of the situation that the term of the labour contract has expired while the service period has not expired

Service period is the agreement that the employer, at the cost of paying a certain amount of training fees, requires the employee who accepts the consideration to provide service to the employer accordingly. After the employer pays the consideration according to the agreement, which is full performance of its obligation of the contract, whether or not to require the employee to provide service is the right of the employer. Based on the principle that all civil rights may be waived, the employer’s waiver of the rest service period shall be permitted after the labour contract expires. At this moment, the labour contract may be terminated, provided, however, the employer shall not recover the liability of compensation for the employee's service period; where the employer consecutively provides the post and requires the employee to perform the agreement on the service period, both parties concerned shall continue to perform it. During the continued performance of the contract, that the employer does not provide the post shall be deemed as the waiver of the rest service period and the labour contract is terminated.

 7. Handling of the situation that the employer requires the employee to return the special benefits when the employee terminates the contract which violating the term agreed in the contract

That the employer pays the remuneration to the employee and the employee provides corresponding labour are the basic obligations of the parties to the labour contract. The properties of comparatively high value the employer gives to the employee are of the nature of advanced payment such as vehicle, house or housing allowance, etc. and other special benefits. That the employee fails to provide service according to the agreed term is incomplete performance of the contract. According to the principle of reciprocity for performing the contract, the employer may refuse to pay for the unfulfilled part of the employee; where the payment has already been made, it may be required to be returned. Therefore, it may be supported that the employer requires the employee to return proportionally on the grounds of the incomplete performance of the labour contract of the employee.

8. The application scope under the situation that the employer shall pay compensation to the employee due to “illegal rescission or termination of the contract”

According to premise of application of Article 48 of the Labour Contract Law, it is that the labour contract shall be performed while it is actually no longer performed, which does not include the circumstance under which the labour contract at first can be rescinded and terminated, i.e. the employer terminates the contract when it is unqualified with the requirements to legally rescind or terminate the contract. Therefore, in case the employer is qualified with the requirements to rescind or terminate the contract according to law, that there is deffectio in handling the formalities of rescission and termination of the contract is beyond of the scope stipulated in this article. Where the employer has been qualified with the requirements to terminate the contract and there’s procedural deffectio of failure to notice the employee 30 days in advance, the employer shall make the rectification by making the “payment in lieu of notice”, etc. rather than paying compensation.

9. Mastering on “prompt and sufficient” payment and “failure to pay” when the employee terminates the contract on the grounds that the employer does not make “prompt and sufficient” payment of labour remuneration and its “failure to pay” the social insurance fees

Paying labour remuneration to the employee and the social insurance fees are the basic obligation of the employer. However, the calculation standard of labour remuneration and social insurance fees are sometimes complicated in practical operation. The purpose of legal provisions is to spur on the honest performance by the parties concerned to the labour contract. The exercising rights and performing obligations should not violate the principle of good faith no matter for the employer or the employee. Where the employer is contrary to the principle of good faith and thus delays or refuses to pay, it is the subject which the law regulates. Therefore, that the employer does not make “prompt and sufficient” payment of labour remuneration to the employee or “failure to pay” social insurance fees intentionally and maliciously can be taken as the grounds of rescinding the contract of the employee. Provided, however, that the employer does not make “prompt and sufficient” payment of labour remuneration to the employee or “fails to pay” the social insurance fees due to the ambiguous and disputable calculation standard resulting from objective reasons cannot be the grounds of rescinding the contract of the employee.

Where the employee claims to rescind the labour contract on the grounds of other circumstances prescribed in Article 38 of the Labour Contract Law, it shall be in compliance with the principle of lawfulness, reasonableness and fair and the preceding paragraph shall apply.

10. Understanding on the “continue to be performed” under Article 97.1 of the Labour Contract law

According to Article 97.1 of the Labour Contract Law, “a labor contract which is concluded in accordance with law prior to implementation of this Law and remains valid as of the date this Law comes into effect shall continue to be performed.” Therefore, in the event that the labour contract is concluded before the implementation of the Labour Contract Law and the cause of termination which is agreed in the original contract occurs after the implementation of the Labour Contract Law, provided, however, the employee has worked in the employer for at least 10 consecutive years, a labour contract without a fixed term shall be concluded according to the Labour Contract Law, and such labour contract shall be concluded if the employee makes corresponding request.

11. Handling the situation that the employer requires the employee to bear the liability under the contract

The performance of the labour contract shall abide by the principle of lawfulness and good faith. Besides the rules and regulations which are binding to the parties concerned to the labour contract, in fact, there are various agreed obligations and contractual obligations due to the principle of good faith between them. For example, the provision of Article 3.2 of the Labour Law that “the employee shall observe labour discipline and professional ethics” and other provisions are the legal basis of such obligations. Therefore, in case of the invalidity of the rules and regulations, the employer may require the employee to bear the liability if the employee violates the contract obligations which he or she must abide by. It shall not be supported where the employee takes the absence of provision in the employer’s rules and regulations as a defense. However, when regulating such activities, only significant events which may affect the labour relation shall be examined so as to avoid too much interference into the self-management of the employer.

12. The validity of the guaranty agreed by the employer and the employee when the employee possesses property of a comparatively high value of the employer

According to Article 9 of the Labour Contract Law, when recruiting an employee, the employer may not detain the employee’s resident identity card, nor may it require him or her to provide guaranty or collect money or things of value from him or her. During the performance of the labour contract, as to the situation that the employee possesses property of a comparatively high value of the employer who has set reasonable guaranty with the employee upon agreement to avoid the loss or easy destruction of the property, if no law prohibits, it may be determined valid. Provided, however, such agreement is null and void if it is miscarriage of mortgage, miscarriage of pledge or actually requiring the employee to purchase the property while it is namely “guaranty” for the property.

13. Handling the situation that the non-competition clause agreed by both parties is unclear

Where the parties concerned to the labour contract only agree that the employee bears the obligation of non-competition without providing whether the employee shall be compensated or in the absence of specific standard of payment although the parties agree that the compensation shall be paid, it shall be deemed that the non-competition clause is still binding on both parties considering the manifestation of common intention of the parties concerned. If the amount of the compensation is not defined, both parties may continue the negotiation on the standard of compensation; if no agreement is reached upon negotiation, the employer shall compensate the employee for 20-50% of his or her previous normal wages. If no agreement is reached upon negotiation, the non-competition period shall not exceed two years.

14. How to understand the standard of equal pay for equal work

Equal pay for equal work is a basic rule established by the Labour Law which the employer shall strictly abide by. Provided, however, due to individual differences of employees, the standard of “equal work” shall not be simply defined in accordance with whether different employees work at the same post. The special factors such as the personal working experience, working skills, working initiatives, etc. of an employee shall be comprehensively taken into consideration. The employer is allowed to differently treat the employees at the same post regarding the labour remuneration.

15. Payment of relevant treatments after the employer terminates the labour relation with an employee injured at work according to law

When the employer terminates the labour contract with an employee injured at work, it shall, apart from making economic compensations, pay medical subsidies for the work-related injury and employment subsidies to the disabled once and for all according to the provisions on work-related injury insurance, which mainly refers to the following circumstances: 

(1) The term of a labour contract expires; 
(2) The employer is declared bankrupt in accordance with law; 
(3) The business license of the employer is revoked, the employer is ordered to close down to dissolve, or it decides to dissolve prematurely; or 
(4) The employee refuses to conclude a written labour contract after one year has lapsed since the date of employment.

16. How to consider the relation that the “age for retirement” and “exercising basic pension insurance benefits in accordance with law” are taken as the grounds for terminating a labour contract

Article 44 of the Labour Contract Law stipulates that when the employee concerned starts to exercise basic pension insurance benefits in accordance with law, the labour contract shall be terminated, provided, however, according to Article 21 of the Implementation Regulations, a labour contract shall be terminated when an employee reaches the mandatory age for retirement. The employer may terminate the labour contract according the preceding provisions.

17. Handling the disputes which are aroused between the parties concerned due to Article 85 of the Labour Contract Law

The subjects who may perform the rights stipulated in this article are all “labour administrative departments”, and the corresponding law enforcement measures are “order” including the provision of the payment of an extra compensation at a rate of 50%-100%, which is also the grounds of the labour administrative departments to makes administrative punishments on the employer. Therefore, the contents involved in this article are not the scope of handling the labour disputes, and this article shall not be taken as the ground to adjudicate labour disputes as well.

18. How to understand the calculation of the consecutive working period where the employee is transferred to a new employer by the original employer for reasons not attributable to himself or herself prescribed in Article 10 of the Implementation Regulations

After September 18, 2008, that the employee is transferred by the original employer to another employer to work by reorganization, assignment, etc. rather than the request of the employee per se and the employer does not pay the economic compensation to the employee for the rescission or termination of the contract, is the circumstance that the employee is transferred to a new employer by the original employer for reasons not attributable to himself or herself. For example, the employee is transferred among the affiliates or the specific employer of the employee is adjusted within the group enterprises, etc. due to the employer’s requirements of work. Issues alike which aroused before September 18, 2008 shall be handled according to the provisions at that time.

19. Calculation of the working period of the employee in the enterprises in case of reformation and transformation

The working period shall not be computed consecutively where the employer finishes the formalities of terminating the labour contract and pays the economic compensation according to the national and local provisions on transformation, separation of the main and accessory industries, reformation of accessory industries, the closing down and withdrawal of the inferior enterprises and the arrangement of the excess or spare employees, etc.

20. Handling the reduction of workforce by the employer for economic reasons which does not conform to statutory procedures

According to Article 41 of the Labour Contract Law, certain premises shall be met when the enterprises reduce their workforce for economic reasons. It may be supported if the employee who is retrenched requires resuming the labour relation in the event that the employer reduces its workforce failing to meet the premises.

 21. The issue concerning “segmented calculation” of the economic compensation

According Article 97 of the Labour Contract Law, where a labour contract which remains valid as of the date the Labour Contract Law goes into effect, is rescinded or terminated after the implementation of the Labour Contract Law, the specific methods of calculating the economic compensation are as follows: 

(1) In the event that the Labour Contract Law and relevant laws and regulations implemented before January 1, 2008 (hereinafter referred to as the “Previous Provisions”) all stipulate that the circumstances under which the economic compensation shall be paid and the employee's average monthly wages shall be no higher than three times last year’s average monthly wages of an employee of this municipality, the base number for calculating the economic compensation shall be determined by the employee's average monthly wages for the 12 months prior to the rescission or termination of the labour contract.
(2) In the event that under the circumstance prescribed in the Labour Contract Law that the economic compensation shall be paid and which does not belong to the circumstance stipulated in the Previous Provisions that “the total amount of the economic compensation shall not exceed 12 months' wages of the employee”, the period for the economic compensation shall be calculated from the date of employment. Under the circumstances prescribed in the Labour Contract Law that the economic compensation shall be paid, provided, however, which belongs to the circumstances stipulated in the Previous Provisions that “the total amount of the economic compensation shall not exceed 12 months' wages of the employee”, the period for the economic compensation of the employee before the Labour Contract Law is implemented shall be calculated according to the Previous Provisions; the working period of the employee after the implementation of the Labour Contract Law shall be incorporated into the calculation of the period for the economic compensation.
(3) When it conforms to the situation of a cap of three times prescribed in the Labour Contract Law, the capped calculation of the period for the economic compensation shall be started from the date of the implementation of the Labour Contract Law, while the economic compensation for the working period before the implementation of the Labour Contract Law shall still be calculated pursuant to the standard stipulated in Previous Provisions.
(4) According to Article 25 of the Implementation Regulations, where the employer rescinds or terminates the labour contract in violation of the Labour Contract Law, it shall pay compensation to the employee according to law and the period for the compensation shall be calculated from the date of employment. If the average wages of the employee’s 12 months’ wages before the illegal rescission or termination of the labour contract is three times higher than last year’s average monthly wages of an employee of this municipality, according to Article 87 of the Labour Contract Law, the compensation shall be calculated pursuant to the calculation standard of the economic compensation prescribed in Article 47.2.

22. The status of the subject of an action of the representative office established in Shanghai by overseas company

Where the representative office is established in Shanghai by overseas company whose registration formalities have been fulfilled lawfully and it recruits employees through foreign service agency according to legal provisions, the representative office may be taken as a party to the labour dispute which is between the employee and it concerning the labour rights and obligations; where the representative office fails to recruit employees through foreign service agency according to relevant legal provisions, the representative office may be a party to the civil case where the disputes are between the employee and the representative office concerning the payment of labour remuneration, etc. which are handled as civil disputes.

NOTE: In the official translation of the Labour Law of the People’s Republic of China, the parties concerned to this Law are literally translated as the “labourer” and the “employing unit” of  which the free translation in the above Opinions are the “employee” and the “employer”. In addition, “employee”, “worker” and “personnel”, etc. are collectively regarded as the “employee” hereof.

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