In September 2015, the Second Intermediate People's Court of Shanghai made a decision to uphold a former senior manager's claim for reinstatement, which has drawn a lot of attention. It is widely believed, at least in Shanghai, that a court will not order reinstatement of a former senior manager if the company's board of directors passes a resolution supporting the dismissal. The latest decision overthrows this idea and is bad news for employers who may need to dismiss senior managers.

However, in a slight twist which is helpful for employers, the court did not reinstate the former senior manager into the original position which has already been taken up by a successor appointed by the company. It ordered the company to resume employing the former senior manager, but in an unspecified role and pay him average wages of the company. Going forward, employers in Shanghai who intend to replace their senior managers will need to assess the risk of a successful reinstatement claim in its separation negotiation and defence strategies.

The Intermediate People's Court of Shanghai (Intermediate Court) is normally the court of final appeal for labor dispute cases in Shanghai. Chinese courts are not bound by the doctrine of precedent, though reviewing recent decisions are helpful to understand potential outcomes and navigate the risks. This article will discuss the recent decision of September 2015 as well as other relevant decisions.

Case summary

The case reported in the introduction is between Shanghai Jahwa Co Ltd (Jahwa) and its former General Manager, Mr. Wang. Wang worked at Jahwa during 1991-1997 and 2004-2014 and was appointed General Manger in 2012. In 2013, there was a finance audit on Jahwa, which resulted in Jahwa paying substantial fines to the China Securities Regulatory Commission (CSRC). Following an internal review of the incident, Jahwa's board of directors removed Wang as the General Manager on May 12, 2014 and a notice was sent to him the next day to terminate his employment with immediate effect.

Wang claimed wrongful termination and requested reinstatement. The Second Intermediate Court decided that Jahwa's decision to terminate Wang's employment was erroneous. The issue identified by the CSRC had existed since 2008 but Wang only became the General Manager at the end of 2012 so he could not be held primarily responsible. More importantly, the court held that:

  1. Removal of senior manager by board resolution does not automatically lead to termination of employment. The court stated that: "the board's right to appoint or remove senior managers is a right granted by company law … For those senior managers who are employees of the company, removal of their roles through board resolution must be regarded a position adjustment, but that does not automatically lead to termination of their employment".
  2. Wang could be reinstated despite the board resolution removing him and appointing a replacement. The court took the view that even if the role of General Manager is no longer available because the board of directors removed Wang from the role and appointed a replacement, Wang indicated that he is willing to be placed in another position and he has taken various positions at Jahwa before. Therefore, Jahwa can arrange an appropriate role for Wang in accordance with his ability and knowledge and the company's operational needs.

The Second Intermediate Court ordered Jahwa to resume employment with Wang and pay Wang the average wage of the company but not his full wage from his previous role.

Comparison with other Shanghai decisions

The decision in Jahwa is consistent with some of the recent decisions by the Intermediate Courts in Shanghai but not others.

In the case Qian Weisheng vs Shanghai Jiajie Environmental Protection Engineering Co Ltd, the Second Intermediate Court took a similar view that a board resolution to remove a senior manager may result in an adjustment to the senior manager's position. Its judgement dated January 2014 states that: "The removal of Qian Weisheng's role as General Manager pursuant to the board resolution is compliant with company law and the articles of association of Jiajie Co. Accordingly, it is not possible to perform the employment contract signed by both parties, so it is appropriate for Jiajie Co to arrange for Qian Weisheng to work as a technical lead at the technical department and determine the salary based on the new role".

By contrast, in the case Fulvge Paint Trading (Shanghai) Co Ltd vs Miao Jun, the First Intermediate Court took a more employer friendly approach by rejecting any form of reinstatement outright. It held in May 2015 that the company's termination decision is erroneous as there is lack of evidence of the misconduct.

However, the board of directors has passed a resolution removing the plaintiff from her role and "the position of deputy general manager of Fulvge Shanghai Co has been taken up by another person, therefore, the court rejects Miao Jun's request for resumption of the employment relationship".

The employer friendly decision in Fulvge echoes the view expressed by the Second Intermediate Court in January 2011 in the case of Ruan Xusheng vs Xunda (China) Escalators Co Ltd. The court said that "since the general manager have direct impact on the stability of the company's production and operations, whether such contracts can resume needs to be considered more carefully … Xunda Co has appointed Mr. Fang as General Manager of its Shanghai branch, the role is replaced by another person … therefore, the resumption of the contract in dispute is not necessary and not possible".

Conclusion

The decisions summarized above reflect an approach taken by the Shanghai courts which recognize that it is impossible to reinstate a former senior manager into his/her original position if the board of directors has passed a resolution removing him/her from the position and appointing a replacement.

However, the approach taken in Jahwa and similar cases is that although reinstatement into the original position is impossible, the employer is still required to resume the employment relationship. This approach is not taken by the Shanghai courts in all cases and will add more uncertainty to employers seeking to remove senior executives in Shanghai.

Going forward, employers in Shanghai who intend to replace their senior managers will need to assess the risk of a successful reinstatement claim in its separation negotiation and defence strategies. The risk assessment will need to take into account both the risk of a full reinstatement of the employee into the original position and the risk of a partial reinstatement of the employee into a different position.