Following a seminar held between local judges in October 2014, the highest level local court, the Shanghai High People’s Court (the “Court”) issued internal guidelines summarising its discussions and detailing the current prevailing opinions in relation to popular labour disputes. The following update highlights the key issues from those guidelines.

Employment relationship

It is not uncommon for domestic private companies to handle social insurance contributions for some non-employee individuals; this can be for a variety of reasons. The Court has held that handling social insurance formalities, or making contributions, do not necessarily lead to the constitution of an employment relationship. Instead it is one of the factors which a court will take into consideration. Other factors which the Court will assess include:

  1. whether both parties have reached a consensus on establishing an employment relationship;
  2. whether the individual is subject to the company’s management, including whether s/he takes and follows instructions; and
  3. whether labour provided by the individual is part of the business of the company.

Termination

The Court confirmed that a de facto employment relationship receives the full scope of protection provided by Chinese labour laws. Therefore, termination must comply with the 2008 Labour Contract Law (“LCL”). The same liabilities for an employer – double severance or reinstatement (it being the employee’s right to claim either remedy) – apply to a wrongful dismissal.

The Court further clarified that if an employer has performed its obligation of honest consultation but no written agreement could be reached in relation to the requisite clauses, the employer may terminate the employment relationship and pay severance.

Additionally, the Court has provided guidance on how to handle difficult situations. In practice, an employer will need to adjust an employee’s position according to its production and operational needs. Generally, such adjustments constitute a contractual amendment which requires both parties’ consent. However, it is quite common that an employee might request time to consider the amendment. Rather than expressly providing a rejection, the employee might not report for the new job or the original position. Following this, the employer would dismiss him/her due to absence.

The Court generally upholds an employer’s right to make a reasonable and lawful adjustment to an employee’s position where it modifies its production structure or scope of business due to a change in the external market environment. An employee should cooperate in such a situation. If the employee disagrees, s/he should settle the dispute via consultation and should not resist or fight the adjustment through inappropriate means. Therefore, where an employee’s absence resulting from a refusal to work in the new position or the original position constitutes a material breach of the internal rules and regulations of the employer, the employer may lawfully dismiss the employee.

Foreign employment

In general, foreigners must obtain a work permit for them to work in China legally, and the employing company will be named on the work permit. The Court has clarified that, if a foreign individual’s actual employer is different from that which is recorded on his or her work permit, there will be no employment relationship between the individual and the actual employer.

A different rule applies to holders of a permanent residence permit. The Court has confirmed that an employment relationship may still be established, even where they do not obtain a work permit.

With regard to the termination of employment for foreign employees, it is widely accepted among the courts of other cities and provinces that the restricted dismissal situations provided by the LCL apply equally to foreign employees and that any contractual agreement deviating from the statutory rules is invalid.

However, Shanghai takes a different approach. In accordance with long-existing local legislation, companies and foreign employees may agree on termination situations which deviate from the LCL rules. Under such local regulations, an employment contract with a foreign employee may agree on the application of termination conditions as provided by the LCL. In some situations, the contract may keep silent on the consequences for the employer of any termination which is in violation of the terms of the agreement.

The Court confirms that a claim for reinstatement following a dismissal in violation of such a contractual agreement will not be upheld. The key consideration for the Court is whether or not reinstatement is practically possible. If an employer agrees on reinstatement, it can be ruled. However, if the employer disagrees, reinstatement should not be ruled on the basis of the practical difficulty in enforcing the judgment where the employer de-registers the work permit with the labour authority.

As a different case, a contract may agree that the employer shall bear liabilities for its termination in violation of contractual agreement but is silent on the detailed rules about compensation (i.e., no agreement on the calculation method or the amount). In such case, the Court will uphold a claim for compensation of actual losses.