Answers to Several Issues Concerning the Trial of Labor Dispute Cases (III) (the “Answers to Labor Dispute Issues (III)”),issued by the First Tribunal of Zhejiang People’s High Court and Zhejiang Labor Dispute Arbitration Committee on 29 September 2015, have clarified several issues with respect to the application of law for the labor dispute cases in Zhejiang province. Issues that are worthy of attention by employers in Zhejiang are as follows: 

Issues in Non-competition

Firstly, Article 2.1 and 2.2 of the Answers to Labor Dispute Issues (III) stipulates that where the employer and the employee agree on non-competition clauses or conclude a non-competition agreement, but fail to agree on the non-competition compensation or the rate of the non-competition compensation agreed is low, the non-competition clauses or the non-competition agreement reached by the parties shall still be deemed valid. The employer should pay the monthly non-competition compensation at 30% of the employee’s average monthly salary for the 12-month period prior to the end or termination of the employment contract. If the amount of that 30% standard is below the minimum wage standard at the place of the employee’s workplace, the employer should pay the non-competition compensation at the local minimum wage standard. 

Pursuant to this provision, in Zhejiang, if the non-competition agreement reached does not include the non-competition compensation clause or the agreed non-competition compensation is low, the validity of the non-competition agreement will not be affected. The employer can reach a supplementary agreement with the employee to further specify the standard of non-competition compensation. If no such supplementary agreement is reached, the employer should pay the monthly non-competition compensation to the employee at 30% of the employee’s average monthly salary for the 12-month period prior to the end or termination of the employment contract or at the local minimum wage standard (the higher amount will apply). 

Secondly, Article 2.3 of the Answers to Labor Dispute Issues (III) provides that where the employer fails to pay non-competition compensation for three months after the end or termination of the employment contract due to the employer’s own reason and the employee thereafter engages in any of the competing activities, the employee’s such competing behavior will be deemed to constitute the employee’s request for terminating the non-competition agreement. Under this circumstance, if the employer requests that the employee undertakes the responsibility of breaking the non-competition agreement, such request should not be supported. 

Thirdly, Article 5 of the Answers to Labor Dispute Issues (III) stipulates that the period of non-competition includes but is not limited to the period after the employment contract is terminated or ended. The employer and the employee can agree on non-competition obligations for the period that employment relationship exists and such agreement is valid. If the employer requests the employee to assume liability for violating the agreement on non-competition during employment, such request shall be supported. If the employee requests that the employer should pay the non-competition compensation for his/her fulfillment of non-competition obligations during employment or claims that the agreement on non-competition during employment is invalid on the ground that the employer does not pay the non-competition compensation, such requests shall not be supported. Therefore, the employer and the employee can reach agreements on non-competition obligations for the period of employment as well as on the relevant breaching liabilities, and the employer needs not pay any extra compensation to the employee for his/her performance of non-competition during employment. But once the employee breaches the non-competition agreement during his/her employment, the employer is entitled to require the employee to assume the relevant liabilities for breaching the agreement. 

The arbitration committees and courts will not accept the new dismissal reasons that are raised by the employer after employment terminations.

Article 8 of the Answers to Labor Dispute Issues (III) explicitly stipulates that the courts and arbitration committees should only focus on and examine the dismissal reasons raised by the employer when terminating the employment contract, and the other dismissal reasons raised by the employer afterwards should not be considered and accepted. 

Pursuant to the provision above, employers should explicitly specify the dismissal reasons when terminating the employment contract and should not supplement or alter the reasons after the termination of the employment contract. In other words, even if the employer later discovers a new dismissal reason other than the reason it have relied on when doing the employment termination, the courts and arbitration committees will not accept the new reason and will only examine the dismissal reason specified when terminating the employment contract in order to judge on the termination decision. 

As such, when handling employee dismissal cases, the HR and legal staff of the employer need to try best to investigate on all the relevant facts and should select the most applicable dismissal ground(s) as stipulated by law. 

Where the employer fails to notify the employee 30 days in advance for the termination decision or fails to pay one month salary as payment in lieu of notice, it will constitute a procedural flaw only.

Article 9 of the Answers to Labor Dispute Issues (III) stipulates that where the employer unilaterally terminates the employment contract in accordance with Article 40 of theEmployment Contract Law, the absence of a notice 30 days in advance or payment of one month salary in lieu of notice shall be defined as a procedural flaw and will not lead to the result that the termination held wrongful. If the employee requests the employer to pay compensation for illegal termination, such a request shall not be supported by the courts or the arbitration committees. However, if the employee requests that the employer should pay one extra month salary, the courts or the arbitration committees shall support such a request. 

Pursuant to this provision, under Article 40 of the PRC Employment Contract Law, the employer’s failure of fulfilling the obligation of giving advance notice or paying one month salary in lieu of notice will be considered as a procedural flaw and will not make the unilateral termination decision being held wrongful. Under this circumstance, an employee’s request for double severance for illegal termination will not be supported, but they are entitled to request for one month salary as payment in lieu of notice.