Employment 2021

Last Updated September 07, 2021

China

Law and Practice

Authors



Zhong Lun Law Firm was founded in 1993 and is one of the largest full-service law firms in China, with over 360 partners and over 2,300 professionals working in 12 domestic offices across China and six overseas office in Tokyo, London, New York, Los Angeles, San Francisco and Almaty. Zhong Lun has built a diversified and far-reaching global platform to provide clients more effectively with comprehensive and one-stop legal services. Zhong Lun’s labour and employment team handles both contentious and non-contentious matters for clients. The team deals with domestic labour and employment issues as well as cross-border employment issues. Zhong Lun’s clients include large and medium-sized multinational and domestic enterprises as well as small start-up companies.

The employment laws and regulations in China continued to evolve with technical advancements and social developments over the last 12 months. The top five changes or updates in relation to employment practice have been selected.

The Legislation on Protection of Personal Information and Data Security

China has been accelerating its legislation on protection of personal information and data security. The Standing Committee of the National People Congress voted to pass the PRC Data Security Law and the PRC Personal Information Protection Law in June and August 2021. These two new legislations will respectively take effect as of 1 September 2021 and 1 November 2021.

In addition to the PRC Civil Code, PRC Data Security Law and PRC Personal Information Protection Law as two special legislations can provide more detailed guidance on employers’ collection, storage, usage, domestic and cross border transmission and all other forms of processing of employees’ personal information. Based on this legislative development, employers in China are advised to keep close attention to the new legislations as well as correspondent regulations to ensure their daily employment management to be legally compliant from the perspectives of personal information and data security protection.

Protection of Workers under New Forms of Employment

The Ministry of Human Resources and Social Security (MOHRSS) and seven other departments jointly issued the Guiding Opinions on Protecting the Labour Rights and Interests of Workers Engaged in New Forms of Employment (the “Guiding Opinions”). The Guiding Opinions stress the protection of the labour rights and interests of workers under new forms of employment, including:

  • determining employment relationships;
  • maintaining the minimum wage standards;
  • arranging reasonable workloads and rest periods;
  • providing work safety measures;
  • contributing to social insurance; and
  • preventing occupational injury or disease.

To avoid a shifting of responsibilities, the Guiding Opinions also clarify that if the platform companies adopt labour dispatch, outsourcing or other co-operative employment methods, the platform companies and their co-operative organisations shall bear the respective employment responsibilities in accordance with the law.

New Judicial Interpretation Released to Match PRC Civil Code

The PRC Civil Code has already taken effect since the beginning of 2021 which governs almost all aspects of civil activities in China. In order to guide trail of employment dispute cases after the launch of the PRC Civil Code, the Supreme People’s Court has integrated all four pieces of judicial interpretations released throughout the history into one instrument. The Supreme People’s Court re-issued the Interpretation (I) on the Application of Law in Hearing Employment Dispute Cases with amendments made based on existing laws and regulations and judicial practice.

This new judicial interpretation further clarifies rules related to issues including:

  • employment relationships with those over retirement age;
  • employment relationships with residents from Hong Kong, Macao and Taiwan;
  • determination of rights and obligations after expiration of employment contracts
  • handling of invalid employment contracts; and
  • oral amendment of employment contracts.

Typical Cases on Overtime Disputes Released

In August 2021, the Supreme People’s Court and the MOHRSS jointly released ten typical cases concerning employment disputes involving the 996 Mode commonly used by large high-tech and internet companies in China. The 996 Mode means working every day from 9am till 9pm, six days a week. These typical cases further clarify judicial rules, including an employee’s rights to refuse overtime beyond the statutory working hour limit, the validity of employee’s advance waiver of overtime pay and employer’s unreasonable internal policy, etc. The release of the ten typical cases will inevitably have a significant impact on the working time mode of high-tech and internet companies as well as other companies in China.

The Delay of Employee Retirement

China’s central government has set forth in its five-year plan and long-term objectives, through to 2035, that the statutory retirement ages shall be gradually raised by following the principles of “taking small steps for adjustment, implementing with flexibility, launching different policies for different groups and making overall plan with consideration of all relevant factors”. The delay of employees’ retirement will directly impact employers’ termination of employment contract, employees’ pension benefits, protection of elderly employees in mass redundancy and other relating matters in daily employment management.

In early 2020, China implemented a series of restrictive measures to prevent the COVID-19, including entire city lockdowns and the suspension of public transport. With these measures in place, the number of daily cases generally dropped to a controllable level by the middle 2020 and restrictions on a nationwide scale have been gradually lifted since then.

At present, when certain amount of new infected cases surface inside China, restrictive measures such as compulsory testing will still be imposed, but only within limited geographical area depending on actual severity of the situation. In general, China now adopts normalised procedures and measures to prevent COVID-19, including separated clinics for patients with a fever at medical institutions, requiring citizens to display health code and wear facial masks upon entry into public places. These measures are not expected to be abolished within a short time.

China's Policies on COVID-19 Vaccination

In addition to preventative measures, China is rolling out the COVID-19 vaccine to its citizens as well as foreign nationals currently living in China. The basic principles for COVID-19 vaccination are that individuals shall be fully informed, agree and volunteer for the vaccination. Specifically, China offers the COVID-19 vaccination free of charge to its citizens, encourages all physically eligible individuals to take the vaccine, and expects to have vaccinated 80% of the whole population by the end of 2021.

In general, employers in China may encourage or incentivise employees to take the vaccination but shall not force employees to take the vaccination. As such, employers may not discipline employees who refuse to be vaccinated or discriminate against such employees.

The Travel Ban

China has imposed very strict travel ban since March 2020. Being highly cautious with its pandemic prevention, China has only taken a very small step to relieve the travel ban. In September 2020, the Ministry of Foreign Affairs and the National Immigration Administration jointly announced that, beginning on 28 September 2020, foreigners who hold valid Chinese residence permits in categories of work, private affairs and reunion are allowed to enter China and not required to re-apply for new visa.

In practice, taking the USA as an example, US citizens who hold the valid residence permits also need to take a COVID-19 test, submit negative results and other required certificates to the competent Chinese Consulate, and apply for the health code. The Chinese Consulates retain the sole discretion to grant the health code and US citizens are currently unable to board the flight to China without it. After the foreign nationals enter China, they will have to quarantine at designated hotels for at least 14 days. The Chinese Consulates in the USA have been reminding the public to avoid cross-border travel unless for essential or emergency purposes.

China's employment laws do not distinguish between blue collar and white-collar workers.  Whether they are employed as senior managers (such as general manager) or workshop machine operators, they are uniformly subject to China's employment laws in terms of wage, working hours, holidays and leave, employment contract terms, conditions of termination, etc. In China, there are three types of employees:

  • full-time employees;
  • part-time employees; and
  • dispatched employees.

Among the three categories of employees, material difference can be found with respect to statutory entitlements, working standards, termination conditions, etc.

Full-time employment is the standard form of employment applicable for most regular positions. For temporary, auxiliary and replaceable positions, individuals can be hired by labour service agencies and dispatched to work where they are needed as dispatched employees. Part-time employment is supplementary to other forms of employment and widely used for positions that require a high degree of flexible labour and can be compensated on an hourly basis, such as housekeepers or cleaners.

From the angle of contract terms, contracts for full-time employees can be divided into three types:

  • contracts with a definite term;
  • contracts with an indefinite term; and
  • contracts termination upon completion of agreed work tasks.

Employers shall sign written employment contracts (either in hard copy or in electronic form) with full-time employees within one month from the date of commencement. Failure to do so may cause double salary penalty imposed on the employers. Termination of a full-time employment contract is strictly regulated by law.

In contrast, part-time employment contracts can be established orally and termination is generally at-will, therefore, contract term, either definite or indefinite, is not the main concern when establishing part-time employment.

Pursuant to statutory requirements, full-time employment contracts in China shall include the following terms:

  • name, address and legal representative/person-in-charge of the employer;
  • name, address, ID card number or other valid identity certificate of the employee;
  • contract term;
  • job and work location;
  • working hours, rest days and vacation;
  • labour remuneration;
  • social insurance; and
  • labour protection, working conditions and occupational hazard prevention and protection.

In addition to these mandatory terms, employers and employees in China may opt to incorporate other terms including probationary periods, performance targets, professional training, confidentiality, non-competition, IP protection obligation, contractual benefits for employees, etc.

In consideration of various working patterns of different jobs, three types of working hour systems are designed for full-time employees in China.

Standard Working Hour System

Employees work no more than eight hours per day and no more than forty hours per week. The employer may extend working hours after consultation with trade unions and employees. The extended working hours shall not exceed three hours per day and 36 hours per month.

Flexible Working Hour System

Since certain jobs, such as senior managers, sales promotion or field work, are not suited to fixed working hours, a flexible working hour system provides a solution by allowing employees to arrange their working hours based on actual needs of their duties. Employees under the flexible working hour system are not entitled to overtime compensation or comp-day except for compensation for overtime work on public holidays applicable in certain cities. In most cases, the implementation of a flexible working hour system is subject to employees’ consent, employers’ commitment to preserve employees’ basic right to rest and pre-approval by the local labour authority.

Comprehensive Working Hour System

This caters to jobs which have an intensive workload only within a certain period, such as fishing and harvesting. Under the comprehensive working hour system, working hours may be calculated by month, by quarter or even by year. Within each unit period, if the total working hours exceed the norms posed by the standard working hour system, employees will be entitled to overtime compensation.

Like the flexible working hour system, employers are also required to obtain employees’ consent and pre-approval from the local labour authority before applying the comprehensive working hour system. However, Shenzhen, as the pilot zone chosen by the central government, is authorised to explore a special working hour administration system and has made the first step by allowing employers who are unable to implement a standard working hour system to adopt a flexible or comprehensive working hour system by notifying and making a commitment to the local labour authority, rather than obtaining prior approval.

Part-time employees have a unique working hour system as they are compensated based on hour. Specifically, part-time employee cannot work for the same employer for more than four hours per day, on average, or more than 24 hours per week.

China adopts minimum wage requirement in all cities and employers must pay their employees no less than the minimum monthly wage published by the local municipal government of each city in China.

In addition to monthly base salary, other forms of compensation usually adopted by employers in China include the 13th month salary, year-end bonus, sales commission and allowances. The 13th month salary and the year-end bonus are normally paid before the Chinese New Year Holiday. Besides the minimum wage requirement, China’s employment laws also mandate minimum compensation standards for overtime work. Specifically, the lowest compensation standards are 150%, 200% and 300% of an employee’s normal hourly rate for overtime respectively on weekdays, rest days and public holidays.

Under PRC employment laws, employers are not mandated to increase employees’ wage, but reduction of employees’ wage is strictly regulated. If an employer intends to reduce an employee’s wage, it will not take effect without the employee’s consent unless under special circumstances prescribed by the Provisional Regulations on Wage Payment. For example, employers may withhold the individual income tax and employees’ portion of social insurance contribution from employees’ wage.

Public Holiday Entitlement and Statutory Annual Leave

There are 11 days of public holiday in China. In addition to public holidays, full-time employees are entitled to statutory annual leave if they have been continuously employed for one full year, accumulatively, with all former and current employers.

The length of statutory annual leave is calculated based on employees’ accumulative employment years. Employees’ statutory annual leave would be, per annum, either five days (one to ten years accumulative employment), ten days (ten to 20 years accumulative employment) or 15 days (20 or more years accumulative employment). Both public holidays and statutory annual leaves are treated as paid days for employees.

Maternity Leave, Birth Leave and Breastfeeding

Female employees in China are entitled to a maternity leave of 98 days. Additionally, if the birth is in line with China’s family planning regulation, postpartum employees will be entitled to birth leave, the length of which is subject to the local regulations of each city (eg, 30 days in Shanghai). Before the newborn turns one year old, working mothers can take one-hour paid breaks each working day for breastfeeding. From the perspective of economic support, China’s social insurance fund will provide eligible female employees with a maternity allowance. In August 2021, the PRC Population and Family Planning Law was amended, the updated version of which allows a couple to have three children.

Sick Leave

Employees may take paid sick leave when they are suffering from illness or non-work-related injury. The sick leave period, during which employees are protected from termination without cause, is known as the statutory medical treatment period (SMTP). With the exception of Shanghai, the SMTP is calculated based on employees’ accumulative years of employment, accrued with all former and current employers, and ranges from three to 24 months.

During sick leave periods, employers shall provide sick leave pay to the employees based on the standard agreed in the employment contract or indicated in employers’ internal policies. These standards shall not be lower than the default standard prescribed by the local government of different cities in China. Take Beijing as an example: sick pay shall not be lower than 80% of the local minimum monthly wage.

Confidentiality

In China, a confidentiality obligation applies both during and after employment. However, in practice, it is quite difficult to hold employees liable for breaching the confidentiality obligation by only referring to this general confidentiality obligation. To better protect trade secrets and other confidential information, many Chinese employers choose to explicitly stipulate, in employment contracts or confidentiality agreements, a detailed scope of information that employees shall hold confidential.

Non-disparagement

The non-disparagement obligation does not draw direct legal basis from Chinese statues but can be inferred from the principle of good faith and loyalty. In practice, many employers in China incorporate the non-disparagement obligation into the employment contracts with employees or their internal policies. The provision on non-disparagement obligation is usually phrased to prohibit employees from making any statement or disclosing any information that derogates or damages the reputation or interests of the employers, their affiliated companies, or other employees.

If non-disparagement obligation has been incorporated into employee’s employment contract or employers’ internal policies with certain disciplinary measures, any violation of this requirement could be sanctioned by employers according to the policies by imposing corresponding disciplinary measures. In general, employees will not be bound by the non-disparagement obligation after the employment, unless the employer and the employee reach agreement on the post-employment non-disparagement obligation.

In addition, except for where a service term follows employer-sponsored training or a non-competition obligation is arranged, PRC Employment Contract Law does not allow liquidated damages to be agreed between employers and employees. In that sense, employers may only pursue employees’ liabilities for breach of non-disparagement in terms of recovery of actual losses or other remedies available under tort laws.

Under PRC Employment Contract Law, employers may agree on post-employment non-competition restrictions in the employment contract or in a separate non-competition agreement with the senior management, senior technicians and other employees who have confidentiality obligations.

The scope, territory and term of non-competition restrictions could be agreed by the employer and the employee upon negotiation, and the maximum term of post-employment non-competition restriction is two years.

During the restricted period, the employee cannot work for a competing employer that produces the same type of products or engages in the same type of business as their former employer, or establish their own business to produce the same type of products or engage in the same type of business, or in any other way to compete with their former employer.

If an employee performs the agreed post-employment non-competition obligation, the employer shall provide monthly compensation to the employees during the restricted period. If the compensation standard is not agreed, the national default compensation standard shall apply, which is 30% of the employee’s average monthly salary in the last 12 months prior to the termination of employment and no lower than the local minimum monthly wage.

Breaching Non-competition Obligations

When employees breach the non-competition obligation, employers are entitled to claim the agreed liabilities for breach, which usually include continued performance of non-competition, payment of liquidated damages, refund of the paid compensation and recovery of actual losses suffered by the employers beyond the amount of liquidated damages.

Apart from the financial liabilities for employees’ breach, it is difficult to enforce specific performance of non-competition obligation under current judicial practice in China for two major reasons below:

  • the compulsory performance of non-competition obligation is believed to conflict with personal freedom to some extent; and
  • the two-year restriction period cannot be interrupted by labour arbitration and litigation proceedings and usually expires before the final court judgment is rendered.

It is difficult to find the legal definition of non-solicitation obligation in PRC statutes, let alone the statutory remedy for breach of this obligation.

However, regardless of this legislative blankness, the non-solicitation obligation is widely used in China, as the very existence of non-solicitation obligation satisfies the general business needs of the employers. The non-solicitation obligation is usually phrased to make clear that employees shall not directly or indirectly solicit, induce or encourage any others to leave their employment, or any customers to end their business relationship with the employers, both during employment and for a certain period after termination of employment.

The enforceability of the non-solicitation clause is still weak under current PRC judicial practice. In theory, employers can claim for recovery of financial losses suffered due to an employee’s breach of valid non-solicitation. However, due to the difficulty in providing evidence on existence of solicitation and the financial losses connected, it is very difficult for employers to succeed with a claim for employees’ violation of non-solicitation obligation in practice.

Under the PRC Employment Contract Law, employers in China have the right to collect employees’ personal information which directly relates to the performance of employment contract, including name, gender, ID number, contact details, education background, work experience, etc.

Under the PRC Civil Code, the form of processing personal information includes collecting, storing, using, editing, transmitting, providing, and disclosing of personal information. Under the context of employment relationship, employers are known as the information processor which shall follow the mandatory principles, conditions, rules, and restrictions in relation to collecting and processing employees’ personal information.

On the basis of the PRC Civil Code, the PRC Personal Information Protection Law (PIPL) has been promulgated in August 2021 which sets more detailed regulations regarding protection of personal information and is deemed as the most relevant and important legislation for employers to comply with when handling with employees’ personal information during employment management. The PIPL will take effect as of 1 November 2021. The following discussion about protection of personal information will focus on provisions in the newly published PIPL.

The Mandatory Principles

According to the PIPL, when processing employees’ personal information, the employers shall:

  • comply with the mandatory principles of legitimacy, justification, necessity, honesty and integrity, without processing any personal information through misleading, fraudulent or coercive method;
  • have a clear and reasonable purpose and adopt the approach with the least impact on individual’s rights and interests without excessive collection of personal information;
  • disclose the rules for processing of personal information and explicitly state the purpose, method and scope for processing of personal information; and
  • shoulder the responsibilities relating to the processing of personal information and take the necessary measures to preserve the security, accuracy and integrity of the processed personal information.

The Employee’s Consent

The basic principle is that processing of personal information should be subject to the individual’s consent, except otherwise prescribed by the law. PRC Employment Contract Law entitles the employer to collect employees’ personal information that is directly related to the performance of employment contract. The PIPL further prescribes that, as an exception, information processor may be exempted from obtaining individual consent provided that such processing is necessary for conclusion or performance of a contract to which the individual is a party or for exerting human resources management based on labour rules or policies formulated or collective agreement signed by law. Though this provision allows employers to process personal information without obtaining employees’ individual consent, from practical point, it is still advisable for employers to obtain employee’s consent so as to better avoid future dispute.

The Informing Obligation

Prior to the processing of personal information, the PIPL requires the employer to faithfully, precisely and completely inform the individuals of the followings in a significant way and with understandable words:

  • name and contacts of the personal information processor;
  • the purpose and method for processing of personal information, category of the personal information to be processed and the period for retaining the personal information; and
  • the method and procedure for the individuals to exercise their rights under the PIPL.

Transfer of Personal Information to a Third Party

In accordance with the PIPL, if the employer transfers any personal information to other personal information processor (eg, for the purpose of payroll service), the employer shall inform the employees of the name and contact of the receiving party, processing purpose and method, category of personal information and obtain the employees’ individual consent.

Where the employer entrusts a third party to process personal information, the employer needs to agree with the entrusted party the purpose, term, handling method, category of personal information, protection measures and respective rights and obligations, and the employer shall also supervise the processing of personal information conducted by the entrusted party. When such entrustment is no longer valid, the entrusted party shall return or delete the personal information without retaining any copy. 

Cross-border Transmission of Personal Information

Multinational employers in China often need to conduct cross-border transmission of personal information during communication with their headquarter. According to the PIPL, one of the following conditions must be met for cross-border transmission of personal information:

  • completion of security appraisal organised by the state cyberspace administration;
  • completion of personal information protection certification conducted by professional agencies appointed by the state cyberspace administration;
  • conclusion of contract with foreign receiving party by using the standard contract formulated by the state cyberspace administration with the rights and obligations of both parties prescribed therein; and
  • any other condition prescribed by law or regulation from the state cyberspace administration.

The Critical Information Infrastructure Operators (CIIO) and the personal information processor that processes personal information shall domestically store the personal information collected and generated inside China and can only transmit such information abroad upon the completion of a security appraisal organised by the state cyberspace administration. The CIIO refer to important internet facilities and information system in key sectors, such as public communications, information service, energy, transport, water conservancy, finance, public service, e-government, scientific industry of national defence and others that can severely threaten the national security, economy, people's livelihood, and public interests if they are damaged, disabled or suffers data leakage.

The PIPL does not specify the amount of personal information to trigger mandatory security appraisal before cross-border transmission, and it is expected that correspondent regulation to be enacted soon will clarify on this point.

Obligations of a Personal Information Processor

Pursuant to the PIPL, employers as personal information processors shall take the following measures to ensure the processing of personal information complies with the laws and regulations and prevent unauthorised access and leaking, distorting and losing of personal information:

  • formulating internal management policy and operation procedure;
  • implementing classified management of personal information;
  • adopting correspondent encryption, de-symbolising or other technical security measures;
  • setting the operation access involving personal information in a reasonable manner and arranging regular security education and training for relevant practitioners;
  • formulating and organising to implement the contingency plan for personal information security incidents; and
  • other measures prescribed by the law or regulation.

The use of foreign workers is highly regulated in China and subject to pre-approval by the authorities of the State Administration of Foreign Experts Affairs or the Human Resource and Social Security. Under PRC immigration laws and regulations, foreign workers shall apply for and obtain work permits and residence permits to have legitimate work and residential status in China. Failure to obtain work permits and residence permits may subject both the employer and the foreign workers to penalties including warnings and fines; the foreign workers may also be ordered to exit from China within a prescribed time, be kept under detention or even face deportation.

The threshold requirements for a foreigner to work in China are as follows:

  • being 18 years old or above and in good health;
  • mastering professional skills and having corresponding work experience;
  • having no criminal record;
  • having a definite employer in China; and
  • bearing a valid passport or other international travel documents.

For detailed standards to determine whether a foreigner is qualified to work in China see 5.2 Registration Requirements.

The registration requirements for foreign workers to work in China differ based on the working period. Where foreign workers are to complete short-term tasks (ie, 90 days’ stay in China or less) at a subsidiary company, branch company or representative office in China, or to install, repair or provide guidance on use of certain machineries at plants in China, they may apply for business visas to enter China and be exempted from the need to apply for a work permit.

Where the required working period exceeds 90 days, foreign workers are legally obligated to obtain both work permit and residence permit. To obtain these, foreign workers usually establish one of the following two kinds of legal relationship:

  • the foreign workers directly enter an employment relationship with the employers registered in China (“direct employment”); or
  • the foreign workers are assigned to work at the companies registered in China (“international assignment”).

For the second approach listed above, the foreign workers may retain their original offshore employment without establishing an employment relationship with Chinese entities.

Work Permit

Implementing international assignment

To implement the international assignment effectively, two more conditions need to be satisfied:

  • the assignment is arranged between an offshore parent company and its subsidiary in China; and
  • the foreign workers serve at managerial or technical positions in China.

Upon establishment of the legal framework, the application documents need to be submitted for review to the approving authority that administrates the granting of work permits to foreign applicants. During the review process, the approving authority examines the specific conditions of the applicants against the permissible standards for granting a work permit.

The most widely fulfilled standard to obtain a work permit is the holding of a bachelor or higher degree and two years of working experience in relation to the position they are about to serve in China.

Points-based system

Among the permissible standards for granting a work permit, a point-based system is designed to have a comprehensive evaluation of foreign applicants. The point-based system quantifies foreign workers’ conditions from the aspects of total employment years, working periods in China, salary standard, educational background, current age and Chinese language proficiency. Take educational background as an example, a bachelors, masters and doctoral degree respectively score ten, 15 and 20 points under the point-based system. If the final score of a foreign worker is over 60 points, the applicant will be deemed qualified to obtain the work permit.

Work Permit Application during the Pandemic Period

Since outbreak of the pandemic, it has become very difficult for foreign nationals outside China to proceed through all the required steps needed to grant a work permit. Specifically, the additional requirement which mandates the foreign national and their employer inside China to obtain a PU Letter issued by the foreign affair office at the place where the employer is registered. With the intention to minimise cross-broader travels, the competent foreign affair offices have adopted very strict standards on granting PU Letters.

Residence Permit

After a work permit is granted, the foreign worker must apply for a residence permit at the exit-entry administration authority in China. The residence permit will be issued to the foreign worker once the exit-entry administration authority verifies that valid work permit has been granted. With the residence permit, foreign workers are entitled to multiple entries into China with no limitation on each single period of stay as long as the residence permit is within its validity period.

Under the PRC Trade Union Law, the Chinese trade union is the organisation spontaneously founded by workers, and the All-China Federation of Trade Unions (ACFTU) is the leading body of trade unions in China. According to the Articles of Association of the ACFTU, the Chinese trade union is a working class mass organisation led by the Communist Party of China, a bridge and link between the Party and the workers, an important social pillar of the state power, and a representative of the interests of members and workers.

The Role of Trade Unions

According to the PRC Employment Contract Law, trade unions are the bridge and bond which connect employers and employees. Employers shall consult with trade unions on internal policies and other matters relating to the direct interest of the employees; accordingly, opinions, suggestions or requests collected from the employees are relayed to employers, through trade unions, as reference for their decision-making.

Trade unions also play a part to harmonise the relationship between employers and employees if a potential dispute arises. As required by the PRC Employment Contract Law and Trade Union Law, when employers intend to unilaterally terminate employees, they shall notify trade unions of the reason for the termination in advance and the trade unions may demand employers make rectification if any violation of the applicable laws is discovered.

Safeguarding Employees and Internal Trade Unions

To fulfil the duties of representing and safeguarding the interests of employees, the trade union supervises the daily operation of the employee representative assembly and consults the employers on various employment matters. When employers plan to formulate or amend policies which have a direct impact on employees' immediate rights and interests, these policies shall be presented to the employee representative assembly, or all employees, for discussion. After the proposal or opinions being collected during the discussion process, the trade unions or employee representatives shall be additionally consulted on an equal footing.

The PRC Trade Union Law prescribes that companies and other employing entities shall establish internal trade unions if the number of trade union member exceeds 25. Under current practice in China, the obligation to establish trade union is not strictly enforced, employers with large number of employees are frequently lobbied to form trade unions by officials from the ACFTU local district branch or local labour department.

Under the PRC Constitution, state-owned enterprises shall practise democratic management through Employee Representative Assembly (including Employee’s Assembly, collectively the ERA) and other forms according to the laws. The Regulation on Democratic Management of Enterprises, issued by the ACFTU, clarifies that companies in private sectors shall also implement democratic management. The ERA are the basic forms in China through which employers practise democratic administration and for employees to exercise their democratic rights.

The general duties of an ERA include advice on employers’ business development and operation and supervision on employer’s compliance with employment related laws and regulations and internal rules and policies. Employers shall consult with the ERA on rules and policies which have a direct impact on employees' immediate rights and interests as well as the plans for reduction in force. In addition, the ERA performs its duties by supervising employers’ performance of the collective agreements, contribution to employees’ social insurance and fulfilment of requirements relating to occupational health and safety, etc.

The Regulation on Democratic Management of Enterprises specifies that the number of employee representatives should not be less than 30 people, and the ERA should be held at least once a year. The local legislative bodies of provinces and cities (such as Shanghai) have issued their own regulations on how the ERA should be convened and held with more detailed rules. At present, the ERA mainly exists in state-owned enterprises and private companies with large number of employees.

Under the PRC labour laws and regulations, collective agreements refer to written agreements concluded through a collective consultation between employers and their employees on matters of remunerations, working hours, rest days and leaves, labour safety and hygiene, vocational training, social insurance and welfare benefits.

During the consultation for collective agreements, both employers and employees shall have an equal number of, and no less than three, representatives with one chief representative appointed on each side. The consultation representatives for the employees shall be selected by the trade unions. Where there are no trade unions established, the consultation representatives shall be elected by majority of the employees.

The collective agreements should be filed for review by the labour administration department after execution. If there is no objection from the labour administration department within 15 days, the collective agreements will take effect. The labour remuneration and other employment conditions agreed in individual employment contracts with employees shall not be less favourable than those in the collective agreements.

Labour disputes arising from the performance of the collective agreements can be resolved through labour arbitration and litigation proceedings.

China’s employment laws is quite pro-employee, and dismissal is highly regulated. Employers can only dismiss employees if a statutory condition appears. When a labour arbitration commission or court decides that a termination made by an employer is wrongful, the employer will either be liable to pay double the statutory severance or reinstate employment depending on the employee’s choice and the arbitral commission or the court’s ruling (see 8.1 Wrongful Dismissal Claims).

Termination for Cause by Employer

Employers are entitled to terminate employment with immediate effect if the employees:

  • fail to reach the employment conditions during probationary period;
  • seriously violate employers’ internal rules and policies;
  • cause material damage to employers due to dereliction or malpractice for personal interests;
  • establish a second employment with another employer which has a serious impact on completion of their original work tasks, or refuse to rectify when requested by their employers;
  • use fraudulent or coercive tactics or take advantage of the employer’s unfavourable position to force the employer to conclude or amend employment contract against its true intention, which renders the employment contract void; or
  • are held as criminally liable.

Termination with 30 Days’ Notice by Employer

Under the PRC Employment Contract Law, termination by a prior 30-day notice is only allowed under the following three statutory scenarios:

  • expiration of statutory medical treatment period (SMTP);
  • employees’ incompetency; and
  • change of objective circumstance.

Employers can also terminate employees based on the above scenarios by paying the employees a one-month salary in lieu of notice. Additionally, certain procedures must be fulfilled by employers prior to the termination. 

Termination due to expiry of the SMTP

When employees contract an illness or suffer from non-work-related injury, they are entitled to the SMTP, during which employers are forbidden from terminating them. The length of the SMTP is determined by an employees' service year(s). Upon the exhaustion of the SMTP, if the employees are unable to resume work in their original positions or in an alternative position arranged by employers, the employers may terminate the employees by either notice, or payment in lieu of notice.

Termination due to employee’s incompetency

If employees are evaluated as incompetent by their employers, the employers are required to either change their job positions or provide additional training. If the employees remain incompetent after change of position or receiving training, the employers may proceed with the termination by either notice or payment in lieu of notice.

Termination due to change of objective circumstance

If material change of objective circumstance renders the original employment contract no longer performable, employers are obligated to negotiate with the employees for the amendment of their original employment contract. If no agreement is reached after the negotiation, employers may terminate the employees either by notice or payment in lieu of notice.

Workplace relocation, merger and acquisition and asset transfer usually amount to material change of objective circumstance. For other situations, the judicial bodies will determine the application of material change of objective circumstance on a case-by-case basis.

Termination by Employees

Under PRC Employment Contract Law, where an employer displays any of the following circumstances, its employees may terminate the employment contract with immediate effect:

  • failing to provide labour protection or work conditions agreed in the employment contracts;
  • failing to pay full remuneration without delay;
  • failing to pay social security premiums for employees;
  • the rules and policies formulated by the employer are in violation of law or regulation and impair the rights and interests of employees; and
  • the employment contract is void due to the employer used fraudulent or coercive tactics or took advantage of the employee’s unfavourable position to conclude or amend the employment contract against employee’s true intention.

Employees may even terminate the employment contract, without notice to the employers, under two exceptional conditions where employees are forced to work by means of violence, threat or illegal restriction of personal freedom, or employers violate safety regulations and order employees to perform dangerous operations which are life-threatening.

Mass Redundancy

In addition to the terminations mentioned above, employers may also pursue employment termination by evoking mass redundancy and undergoing correspondent procedures. There are two thresholds for employers to evoke mass redundancy:

  • the number of affected employees is more than 20 or accounts for more than 10% of the total staff; and
  • the employers have encountered an applicable situation to implement mass reduction of workforce.

Pursuant to the Article 41 of PRC Employment Contract Law, the applicable situations for employers to evoke mass redundancy include:

  • the employers undergo restructure during bankruptcy proceedings;
  • the employers are in severe financial and operational difficulty;
  • the employers introduce technological innovation for new products or change of business model and it is still necessary to lay off employees after amending employment contracts; and
  • any other objective economic situations rendering employment contracts no longer performable.

As mass redundancy usually involves termination of employment with many employees, the local labour authority will review whether the two thresholds have been fulfilled and whether the mass redundancy has been implemented by following the required procedures. In the mass redundancy, the employers shall follow the steps below:

  • explaining the reason for mass redundancy to the trade union or all staff and announcing the redundancy plan;
  • presenting the redundancy plan to the trade union or employees for comments;
  • filing the redundancy plan with other required documents to the local labour authority (must be 30 days later than the first step);
  • collecting the receipt from the local labour authority which is the decoration of successful filing of the mass redundancy; and
  • terminating the employees on the ground of mass redundancy.

Labour authorities in China are usually unwilling to grant a receipt to endorse a mass redundancy because they intend to stabilise employment and avoid labour disputes, especially during the pandemic period. Therefore, it is currently not an easy task for employers in China to fulfil all of the required steps and achieve an employment termination in this manner.

Notice Period

Under PRC Employment Contract Law, employers in China are only allowed to terminate employees with a 30-day notice under the three statutory situations mentioned in 7.1 Grounds for Termination. If employers and employees agree in writing on other situations that apply termination by notice, such agreement is deemed as invalid and not enforceable.

From the perspective of employees, they are entitled to terminate employment relationship by serving a 30-day notice, or a three-day notice during probationary period, to the employers.

Severance

For terminations by notice, through mutual negotiation or under mass redundancy, employers are required to pay severance to employees, which is calculated based on employees’ years of service with the employers at the rate of one month's wage for each year of service. The period more than six months but less than one year shall be counted as one year and compensated with one full month of wage, while a period less than six months shall only be compensated with half a months' wage.

If an employee's average monthly wage in the last 12 months prior to the termination is greater than three times the average monthly wage of the locality, as published by the local government (the “City Cap”), the City Cap shall be used as the monthly wage for severance calculation, and the compensable service is capped at 12 years.

These rules are prescribed in the PRC Employment Contract Law which took effect from 1 January 2008. Different cities in China have followed different rules to calculate severance for service years accrued before 2008, some of which directly apply PRC Employment Contract Law, while others chose to apply local regulations or regulations which were effective before 2008.

Under PRC Employment Contract Law, an employer may terminate an employee with immediate effect if the employee materially violates employer’s internal rules or policies (“summary dismissal” or “for cause”). To implement a summary dismissal, employers shall serve written termination notices to employees in which misconducts are explicitly specified and internal rules or legal provisions quoted. In addition, employers are under a legal obligation to notify trade union regarding any summary dismissal.

Employees who are dismissed for cause in China can file complaints to the labour arbitration commission and court, claiming that they were wrongfully terminated. If the employees succeed in the claim, they will be entitled to either double severance pay or reinstatement of employment, based on employees’ choice and the arbitral commission or court’s ruling (see 8.1 Wrongful Dismissal Claims).

In the labour dispute resolution proceedings, employers bear most of the burden of proof and will take the adverse consequences if the proofs are deemed insufficient by the labour arbitration commission or court. To mitigate the potential risks, employers in China are advised to use summary dismissal with prudence and collect solid and admissible evidence on employees’ misconducts before implementation.

Under PRC Employment Contract Law, employers may enter into mutual termination agreements with employees and there’s no specific procedure/formality requirement for signing them. Employers may propose and achieve mutual termination agreements with employees at any time during or even after employment, except in very limited circumstances. The releases incorporated in the mutual termination agreements are generally enforceable unless one party can sufficiently prove serious misunderstanding or obvious unfairness.

In practice, termination through mutual agreements is the most ideal way to end an employment relationship because this approach has no legal requirement of prior notice and, from a cost-efficient perspective, they can avoid potential dispute resolution proceedings for both parties. In most cases, employers provide ex-gratia payments on top of statutory severance to the employees in exchange of mutual termination.

Employers in China are prohibited from terminating certain employees by notice or through mass redundancy. These employees include:

  • those who have lost whole or partial labour capacity due to occupational disease or work-related injury;
  • those who are in the statutory medical treatment period due to illness or non-work-related injury;
  • those who are female employees either pregnant, on maternity leave or in the breastfeeding period;
  • those who have accrued 15 years of continuous service with the current employer and are within five years of retirement; and
  • those who are exposed to occupational disease and have not undergone an occupational health examination or are suspected of having an occupational disease and are under diagnosis or medical observation.

Additionally, the employment contracts with full-time chairman, vice chairman and commission members at the basic level of trade union shall be extended in line with the length of their office terms. For a part-time chairman, vice chairman or commission member whose contract term is shorter than their office term, the term of their employment contract shall also be automatically extended to the end of the office term. The exceptions are circumstances where the trade union leaders have serious misconduct or have reached statutory retirement age during their term.

Termination in violation of the PRC employment laws is referred to as wrongful dismissal. In judicial practice, the grounds for a wrongful dismissal claim could be classified into the following two categories:

  • the dismissal does not have factual basis; or
  • the dismissal does not satisfy procedural requirements.

If employees in China believe they are wrongfully dismissed, they may resort to either of the following two remedies according to the PRC Employment Contract Law:

  • employers’ payment of double statutory severance; or
  • reinstatement of employment and the back payment of salary and social insurance contribution for the entire dispute resolution period.

Under PRC Employment Law and Employment Promotion Law, employees shall not be discriminatorily treated due to their nationality, race, gender, or religious belief during recruitment process and performance of employment. Further, employers are forbidden to exert discriminatory standards against female candidates due to their marital status or pregnancy during the recruitment process. Any employer that releases recruitment information with standards that are found discriminatory against females will be subjected to a warning or fine from the labour authority.

In China, the total number of claims related to discrimination is small. In cases related to discrimination, the grieved employees usually bear the burden to provide preliminary proof on the existence of discrimination. The remedies available for such employees include rectification of discrimination, compensation for mental suffering and formal apology from the employers. Where employers are found to have committed wrongful dismissal due to discrimination, employees are entitled to the statutory remedies mentioned in 8.1 Wrongful Dismissal Claims.

According to the PRC Mediation and Arbitration Law on Labour Dispute, except for special circumstances, employment disputes go through two stages of judicial procedures known as labour arbitration and labour litigation. Employment disputes in labour arbitration proceedings and labour litigation proceedings are respectively heard by the labour arbitration commissions and the people’s courts. In practice, if either party to the dispute are dissatisfied with the award given by the labour arbitration commission, such party can proceed to initiate labour litigation within 15 days upon receipt of the arbitral award, otherwise the arbitral award will become effective and enforceable.

Labour disputes should first be submitted to the labour arbitration commission, which is the pre-condition for initiating labour litigation. If the labour arbitration commission fails to render its award before the time limit, 45 or 60 days from acceptance of the case, either party may directly initiate the labour litigation.

Labour Litigation

The labour litigation may include two legal proceedings, ie, the first instance and the second instance. If either party to the dispute is dissatisfied with the judgement of the first instance, the party may further appeal it to a higher court for the second instance, and the court of second instance will issue the final judgement on the dispute.

However, the PRC Mediation and Arbitration Law on Labour Dispute limits the employers, but not the employees, from initiating labour litigation following the labour arbitration award for two kinds of cases:

  • disputes on recovery of remuneration, medical expenses for work-related injury, severance or compensation with the claimed amount being no more than municipal minimum yearly wage of the last year; and
  • disputes on implementation of statutory standards in respects of working hours, rest and holidays, social insurance, etc.

This arrangement is believed to facilitate an efficient resolution of employment disputes for employees whilst preventing employers from unduly prolonging the contentious period and delaying performance of their obligations to employees. Nonetheless, employers are permitted to submit an application to the intermediate court for the revocation of an arbitral award if a mistake is found concerning procedures or the application of law, etc.

Employers and employees may choose to solve employment disputes via mediation before heading into labour arbitration. The mediation institutions in China include:

  • labour dispute mediation commission within employers;
  • labour dispute mediation commission set by law; and
  • other organisations that serve the function of mediation on labour disputes established at the county.

The settlement agreements reached between employers and employees during the mediation process, witnessed by mediation institutions, are legally effective. However, if one party fails to perform its obligations under the settlement agreement, the other party is unable to apply for the court’s direct enforcement of such agreement. Any dispute over performance of the settlement agreement needs to be resolved through judicial process.

As provided by the Regulation on Labour Security Supervision, employees who believe that their employer has infringed upon their lawful rights or interests under labour security laws and regulations may file a complaint to the authority of labour security supervision. The authority of labour security supervision is responsible for receiving reports and complaints on employers’ violations of labour security laws and regulations and lawfully investigating, correcting, and punishing the violators.

According to PRC judicial practice, the prevailing party in labour disputes usually will not be supported in recovering legal fees accrued during the contentious period. However, there is an exception to this practice. Under a local regulation in Shenzhen city, when employees succeed in labour cases, they may claim and recover attorney’s fee from employers with the amount capped at RMB5,000.

Zhong Lun Law Firm

6/10/11/16/17/F
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Shanghai 200120
P.R.China

+86 21 6061 3666

+86 21 6061 3555

carolzhu@zhonglun.com www.zhonglun.com
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Trends and Developments


Authors



King & Wood Mallesons is a leading law firm with exceptional legal expertise and depth of knowledge. It provides comprehensive one-stop-shop legal solutions to clients in China as well as internationally. The labour and employment department has six partners and more than 20 attorneys and assistants based in Beijing, Shanghai, Shenzhen, Guangzhou and Suzhou, which enables them to quickly and effectively resolve labour law issues across mainland China. They have provided legal services to more than 300 Fortune 500 companies, multinational companies, large state-owned enterprises and well-known domestic enterprises. Their extensive experience in handling both adversarial and non-adversarial matters, as well as direct participation in legislation, facilitates a deep and accurate understanding of the complicated and rapid changes in PRC labour and employment laws and policies, as well as the latest practices of HR, management and employment issues.

The Lasting Impact of the COVID-19 Pandemic on the Employment Sphere

With COVID-19 now being well managed, work and life in China have largely returned to normal since the second half of 2020. Nevertheless, the lasting implications of the pandemic on employment and working life call for a response from employment law and practice.

In addition, recent court judgments of labour disputes over employees’ loss of equity incentive due to employment termination may signal new trends of judicial view of restricted stock units (RSUs) granted by an employer’s overseas affiliated company.

The following trendy employment law and practice developments are particularly noteworthy for employers: redundancy using “economic layoff” under PRC laws, labour disputes over loss of RSUs of employees due to employment termination and development on electronic employment contracts.

Redundancy Using Economic Layoff Under PRC Laws

Since early 2020, many businesses have been adversely impacted by COVID-19 and consequently started to execute redundancy projects. Although COVID-19 gradually faded in China since the second half of 2020, due to the lagged effects COVID-19 had on businesses, many employers are still in need of carrying out redundancy. It is noteworthy that most of the employers when doing redundancy will consider the possibilities of resorting to “economic layoff” under the PRC laws as one of its redundancy plans.

Article 41 of the PRC Employment Contract Law contains the requirements for economic layoff. According to Article 41, when the production and operation of an employer face severe difficulties, and if it is necessary for the employer to terminate at least 20 employees, or if the employer terminates fewer than 20 employees but they account for at least 10% of the number of all employees, the employer should inform and consult the trade union or all the employees 30 days in advance of the layoff. Prior to layoff, it is also required that the employer should file the economic layoff plan and other required documents to the local labour bureau, and if the filing is accepted by the local labour bureau, the employer can then proceed to unilateral termination based on economic layoff.

Prior to COVID-19, it was rare that employers were able to pull off economic layoff for redundancy. The main reasons were the relatively complicated procedures required and the foreseeable difficulties of obtaining from the local labour bureau an acceptance letter for the submitted filing. During COVID-19, however, employers have grown much more interested in exploring the possibilities of utilising economic layoff, in that the number of employees involved is considerably larger and employers may not have had the reservoir of cash required for implementing a generous mutual termination plan for the employees.

The new developments in using economic layoff can be better demonstrated in the analysis of each of its four requirements below.

An employer needs to have a required economic circumstance

There are four economic circumstances under economic layoff that will allow an employer to conduct economic layoff under Article 41, and an employer must fall into one of the circumstances in order to be considered eligible.

In the current practice, many employers would try to fit into the category of “major change in objective economic circumstances” using COVID-19 as the supporting background in the filing to the local labour bureau. The reason is that most other categories under Article 41, such as severe difficulties in operations, have stricter thresholds for eligibility in practice. For example, in some cities it is required that an employer should have been in a deficit for the last three years in a row before being considered having severe difficulties in operations.

The definition of major change in objective economic circumstances is, however, unclear under PRC laws and, in practice, whether an employer can be considered eligible under the influence of COVID-19 would largely depend on the discretion of the local labour bureaus. This being said, compared with trying to fit into other categories under Article 41, most employers in practice are still choosing to test the water with major change in objective economic circumstances. In Beijing, the local labour bureaus are willing to consider accepting filings submitted by employers under major change in objective economic circumstances, provided that the local labour bureaus consider an employer’s situation to be serious enough for invoking Article 41.

At least 20 or 10% employees should be on the list of redundancy

Under Article 41, if there are fewer employees than required to be made redundant, then an employer will not be able to successfully submit a filing to the local labour bureau for economic layoff. On this requirement, employers in practice often do not have problems assessing their eligibility, in that all the numbers in the equation are certain and easy to judge.

In practice, the question is whether every employee to be made redundant must be unilaterally dismissed by an employer using economic layoff – what if employers trying to mitigate the risks of unilateral termination choose to negotiate with the impacted employees for mutual termination in the first place and would only conduct unilateral termination using economic layoff for those who refused mutual termination? Can the employees willing to accept mutual termination be considered constituting part of the quantity of employees required under economic layoff? Most people in practice would argue that it does not make sense to rule out the employees who are willing to accept mutual termination offered by an employer, and these employees should be considered eligible to constitute part of the quantity of employees required under economic layoff. The rationale is that employers should not be punished for trying to reduce the risks of unilateral termination of economic layoff by firstly offering the impacted employees a chance to accept mutual termination.

There is currently no decisive opinion widely supported by the local labour bureaus, arbitrators and judges. It appears that some local labour bureaus are willing to accept economic layoff filings submitted by employers offering mutual termination solutions to their employees as the first step of their economic layoff plan, while some local labour bureaus interpret Article 41 rigidly and require that employers should try to offer mutual termination first and can then submit a filing for the rest employees.

Prior consultation with a trade union or all employees 30 days in advance

Prior to COVID-19, the form of consultation was relatively simple – an employer can try to hold a trade union meeting or a meeting involving all the employees if there is no trade union and secure the evidence of the meeting having taken place (eg, meeting minutes bearing trade union chop or employees’ signatures). During COVID-19, however, due to the compulsory quarantine measures, it has been very difficult to hold any meetings, not to mention an organised meeting with a trade union or all the employees of a company, particularly if there is a large trade union or a company with hundreds of employees or more.

On this point, considering the difficulties of organising meetings, some employers have resorted to the choice of organising online meetings using tools such as Zoom, and recorded the meetings to be used as evidence for submission to the local labour bureaus. The local labour bureaus in different cities in practice tend to have different attitudes for using online meetings to complete the consultation procedures. The reason is that if online meetings are used, it would then not be possible for employers to obtain the trade union’s seal or all the employees’ signatures which are usually required by the local labour bureaus.

In practice, some local labour bureaus, such as some of the bureaus in Beijing, are willing to accept video conference as a form to complete consultation. Some others, however, are still insisting that employers must hold a meeting with the trade union or all the employees. It is noteworthy that, with the easing of COVID-19 quarantine measures in China, it is now not so difficult to organise meetings and more and more local labour bureaus are only willing to accept sealed or signed meeting minutes as evidence for consultation.

Filing to the local labour bureau should be accepted

Under Article 41, and in practice, if the filing submitted by an employer to the local labour bureau is not accepted, the employer will not be able to proceed to laying off employees using economic layoff. Note, however, that acceptance of filing by the local labour bureau does not guarantee the lawfulness of economic layoff (the local labour bureau for acceptance will not carry out substantive examination of the materials). It has been seen that even if a filing had been accepted by the local labour bureau and later on when employees challenged the economic layoff through legal proceedings, arbitrators and judges still considered the economic layoff to be wrongful. However, that being said, in practice, if the filing to the local labour bureau is accepted, this can drastically increase the success rate of economic layoff when employees challenge it through arbitration and litigation.

During COVID-19, when examining a filing submitted by an employer invoking the circumstance of major change in objective economic circumstances, the local labour bureaus often looked at the economic layoff statement explaining the background and circumstance for economic layoff, the redundancy list containing details of each employee to be laid off, the economic layoff plan explaining the schedule of layoff and calculation of severance, the meeting minutes demonstrating that the details of layoff have been discussed with employees and other relevant documents as deemed necessary by the local labour bureaus.

With many constantly evolving factors and requirements in practice, economic layoff is actually a quite research-worthy topic. During COVID-19, many employers have been trying to test where the boundaries of Article 41 are and as a result each city has been able to present their own interpretations according to their actual situations.

Labour Disputes over Loss of RSUs of Employees Due to Employment Termination

At the end of year 2020, there was a high-profile case in Beijing where an employee who was unilaterally dismissed initiated a labour dispute requesting double severance payment for unlawful termination and the loss of RSUs due to employment termination, and the employee’s requests for both double severance payment and loss of RSUs were supported in legal proceedings.

In this case, the employee’s equity (RSUs) was issued by the employer’s parent company overseas in accordance with the legal documents executed between the employee and the overseas entity. In the legal documents, it is explicitly stipulated that no claim or entitlement to compensation or damages should arise as consequence of forfeiture of any unvested portion of the award as a result of the employment termination, regardless of the reason for termination and whether the termination is regarded as lawful or unlawful. In addition, the governing law and venue stipulated in the legal documents are not Chinese courts and Chinese laws. Later on, the employee was unilaterally dismissed. The employee, in addition to requesting to confirm that the dismissal was unlawful and double severance payment, he also requested the loss of unvested RSUs. In the end, both the employee’s double severance payment and the loss of RSUs were supported by the judge.

Apart from the above-mentioned high-profile case, through public case research in Beijing and Shanghai, there are also other similar cases in which employees requested the loss for unvested equity (RSUs, stock options, etc) granted by the employer’s associated company overseas due to employment termination that was ruled as unlawful, though the number of relevant cases available for analysis is limited.

Opinions of the courts

In the limited cases, the opinions of the courts are divided, with almost half declaring jurisdiction and supporting the employees suing for loss of unvested equity, the other half denying jurisdiction.

For the judges supporting the employees’ requests, their opinions generally are the following.

  • Since an employee can only have the opportunity of being granted equity based on the employee’s employment with the domestic entity, and the arrangement is not against the law, the court should have jurisdiction over the loss so caused by the cancelling of unvested equity, especially where there is evidence showing a connection between the employment relationship and award of equity such as relevant languages in offer letter, employee handbook, and other internal policies.
  • Since the termination is wrongful, an employer should be responsible for paying the loss of unvested equity which otherwise would have been vested if the employee continued to work for the employer assuming that unlawful termination never took place.
  • For determining the value of the unvested equity, judges will mainly look at the number of unvested equity and the market price for each unit of the equity (if the overseas entity is a company listed on a stock exchange, ascertaining the price will be easier).

For the judges denying jurisdiction, their opinions generally are the following.

  • The relevant equity documents are signed between an employee and an overseas entity. Since the domestic entity (ie, employer) is not a party to these documents and it did not give the employee any equity, the domestic entity should not be a relevant party to the litigation proceedings.
  • Employees should initiate disputes against the company granting the equity or the party to the relevant equity agreement in other proceedings. Disputes on RSUs are beyond the jurisdiction of employment disputes and therefore should not be heard and dealt with in employment disputes.
  • In the relevant cases, the governing law and venue of some equity documents are agreed as the law of a foreign country and foreign courts/arbitration, hence the court believe that it should not have jurisdiction over the dispute.

In light of the above cases reflecting dividing opinions in this regard, we think it may be pre-mature to draw any firm conclusion, but it is possible that judges of labour disputes are taking stricter attitude towards this RSUs issue and may hold the view that an employer should be responsible for paying the loss of unvested equity granted by an overseas entity which would have been vested if the employee was not unlawfully dismissed.

Electronic Employment Contracts

It may be surprising to learn that, while electronic signatures and related laws have been developing for a long time in some countries such as the USA, it is only at an early stage of development in China. It was not long ago that people were still debating over the validity of executing employment contracts electronically.

In March 2020, the PRC Ministry of Human Resources and Social Security published an official reply and confirmed that employment contracts can be executed electronically. The question is then, how to know whether an employment contract, or in fact any contract, that has been executed electronically is valid under PRC laws?

Electronic signatures

The answer to this question lies within the PRC Electronic Signature Law. The PRC Electronic Signature Law has a concept of “reliable electronic signature”, which can have the equal enforceability under PRC law to handwritten signatures. The four conditions below listed in the PRC Electronic Signature Law can further explain a reliable electronic signature:

  • the signatory is the sole owner of data that generates the electronic signature;
  • the data that generates the electronic signature is controlled exclusively by the signatory during signing;
  • any modification of the electronic signature after signing is detectable; and
  • any modification of the format or content of a sign contract after signing is detectable.

It can be seen from the above conditions that the PRC Electronic Signature Law, when defining a reliable electronic signature, only provides its requirements without specifically limiting the approaches or technologies that should be used to finish electronic signatures. As such, if the validity of an electronic signature is challenged in arbitration and litigation, as long as sufficient evidence can be produced to prove that the electronic signature in question satisfies the above conditions for a reliable electronic signature, arbitrators and judges can be convinced to acknowledge the validity of the electronic signature.

In addition to these conditions, albeit not compulsorily enforced, the PRC Electronic Signature Law also provides that electronic signatures can be certified by a third party electronic certification service provider (the "Certificate Authority" or CA) in order to enhance the reliability of an electronic signature (eg, to execute an electronic signature through a CA a signatory’s identity has to be verified by the CA). In order for a service provider to become a CA, a license should be obtained from the relevant government authority.

Further reliability

So, electronic signatures can be executed in practice between organisations and individuals. In order to be considered a valid and enforceable electronic signature when a dispute takes place, an electronic signature needs to meet the conditions of a reliable electronic signature analysed above. To further enhance the reliability of an electronic signature, signatories can resort to the assistance of third-party service providers for certification service. Among third party service providers, there are government approved CAs whose service standard has been certified by the relevant government authority, and once a dispute takes place it is more likely that an electronic signature done through a CA is considered to be a reliable signature.

In addition to the above conditions set out by PRC Electronic Signature Law, in some cities and areas such as Shenzhen and Suzhou, local rules and policies were released by local authority in order to provide best practice guidelines for executing electronic employment contracts. In July 2021, the PRC Ministry of Human Resources and Social Security also released the guidelines for the conclusion of electronic employment contracts (“Guideline”). Below are the main points worth noting:

  • To conclude an electronic employment contract, it is essential to select a qualified platform. It is recommended that employers choose a platform that meets the conditions of the Guideline and is acknowledged in judicial practice.
  • Verifying the identification and confirming willingness of entering into an electronic employment contract of signatories are important, though the verification and confirmation process will be mainly handled by the platform.
  • Reliable electronic signature and credible timestamp should be used.
  • Employers are required to perform certain obligations before and after the execution of the electronic employment contract including explicitly informing an employee of the procedures, principles and precautions of executing an electronic employment contract and channels to view and obtain the employment contract before execution, notifying an employee upon completing the execution of the electronic contract via message, WeChat, email, etc, and reminding an employee of accessing and saving the employment contact in a timely manner and providing assistance if necessary after execution.

Conclusion

As widely acknowledged, COVID-19 is adefining global crisis, and may be the greatest challenge humankind has faced since World War Two. The influence it has brought to lives and legal systems simply cannot be ignored – for employment law, particularly so. It is expected that COVID-19 will continue to change the way people live and the way laws are interpreted.

The trends and developments summarised in this article are only a small part of the greater picture that is yet to be completed, and there will no doubt be more to share in the future.

King & Wood Mallesons

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World Financial Center 1 Dongsanhuan Zhonglu
Chaoyang District
Beijing 100020
P. R. China

+86 010 5878 5161

+86 010 5878 5599

linda.liang@cn.kwm.com www.kwm.com
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Law and Practice

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Zhong Lun Law Firm was founded in 1993 and is one of the largest full-service law firms in China, with over 360 partners and over 2,300 professionals working in 12 domestic offices across China and six overseas office in Tokyo, London, New York, Los Angeles, San Francisco and Almaty. Zhong Lun has built a diversified and far-reaching global platform to provide clients more effectively with comprehensive and one-stop legal services. Zhong Lun’s labour and employment team handles both contentious and non-contentious matters for clients. The team deals with domestic labour and employment issues as well as cross-border employment issues. Zhong Lun’s clients include large and medium-sized multinational and domestic enterprises as well as small start-up companies.

Trends and Development

Authors



King & Wood Mallesons is a leading law firm with exceptional legal expertise and depth of knowledge. It provides comprehensive one-stop-shop legal solutions to clients in China as well as internationally. The labour and employment department has six partners and more than 20 attorneys and assistants based in Beijing, Shanghai, Shenzhen, Guangzhou and Suzhou, which enables them to quickly and effectively resolve labour law issues across mainland China. They have provided legal services to more than 300 Fortune 500 companies, multinational companies, large state-owned enterprises and well-known domestic enterprises. Their extensive experience in handling both adversarial and non-adversarial matters, as well as direct participation in legislation, facilitates a deep and accurate understanding of the complicated and rapid changes in PRC labour and employment laws and policies, as well as the latest practices of HR, management and employment issues.

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