We split the explanation of Beijing authorities’ Answers to Questions of Law Application in the Handling of Employment Disputes published on 24 April 2017 into three parts, in order that the Answers’ main provisions can be easily understood. This is the second part of our explanation.

The circumstances constituting “major changes in objective circumstances”

The Answers provides that“a major change in objective circumstances” means a change after the conclusion of an employment contract that could not be foreseen at the conclusion of the contract, and renders the employment contract or its main articles unenforceable, or makes continued performance result in unfair situations such as excessive cost, which will then in turn make the purpose of the contract difficult to be achieved.

After giving the definition, the Answers further explains that the following situations are “major changes in objective circumstances”: (1) force majeure caused by natural disasters such as earthquakes, fires and floods; (2) changes in laws, regulations and policies that result in significant changes such as relocation, asset transfer or cessation of production, change of industry or change of state or collective ownership of an employer; and (3) change of the business scope of an employer as a franchisee.

[Comments]

Paragraph 3 of Article 40 of the Employment Contract Law, generally understood as the manifestation of the “principle of change of circumstances” under contract law, is widely known and used in practice for two reasons. First, the paragraph appears to cover a wide range of circumstances and is employer-friendly. Second, “objective circumstances” may affect a whole department or team and can be used to lay off a group of people. The question then is: What situations constitute “major changes in objective circumstances”? For a long time, the definition of “objective circumstances” could only be found in the Explanation of the Ministry of Labour on Several Provisions of the Labour Law (Lao Ban Fa [1994] No. 289). The Explanation listed the situations such as force majeure, relocation, merger and acquisition, and asset transfer, and the situations so listed were very limited. Moreover, the Explanation is too out-of-date to account for new circumstances emerging in the past 20 years.

In the drafting process of the Answers, we hoped that it can categorise and summarise arbitration and litigation practices, and enlarge the list of “objective circumstances”. The Answers however takes a different approach. It firstly provides for standards of “objective circumstances”, and further sets forth three situations that generally constitute “major changes in objective circumstances”. The three situations are based on the Explanation with a slight adjustment. For example, the situations of relocation and asset transfer are confined to those merely due to “changes in laws, regulations and policies”, and change of the business scope of an employer as a franchisee is added.

In our opinion, the three circumstances in the second paragraph of the Answers are not exhaustive, but only illustrative. Whether or not other situations can constitute “objective circumstances” should then be decided by referring to the definition in the first paragraph of the Answers. If a suspected “objective circumstance” in practice occurs, and it is not one of the three situations, KWM suggests that it should be assessed pursuant to the standards in the definition provided by the Answers, and reasons therefor should be stated to the arbitration commission or court accordingly.

An employer may terminate an employment contract when an employee severely violates employment disciplines or professional ethics

The Answers provides that according to paragraph 2 of Article 3 of the Labour Law, an employee should observe labour disciplines and professional ethics, a basic requirement for an employee. If the employee violates labour disciplines or professional ethics, the employer may terminate the employment contract in accordance with paragraph 2 of Article 3 of the Labour Law 1995, even though the violation is not expressly listed as “gross misconduct” in internal policies or the employment contract.

[Comments]

An employer’s internal provisions on misconduct and corresponding disciplinary actions are vital when it comes to termination for gross misconduct. Whether the clauses enumerating specific acts of misconduct are well drafted and complete is important for a successful termination. However, even well-drafted clauses can miss one or two acts of misconduct, not to mention the absence of internal policies for start-ups. What can the employer do if an employee is absent from work for one month? What if an employee visits porn websites during work hours? Can the employer do nothing only because there is no relevant provision in internal policies?

The Answers specifically addresses this question and points out that if an employee violates “labour disciplines and professional ethics”, the employer will be entitled to unilateral termination of the employment contract. This provision, to some extent, revives the relevant provision of the Labour Law 1995, and the drafting notes of the Answers also point out that this provision can act as a catch-all clause to Article 39 of the Employment Contract Law 2008. However, the concept and scope of “labour disciplines and professional ethics” is very broad, and discretion must be exercised in adjudication practice. We advise the employer to meticulously set out “labour disciplines and professional ethics” in its internal policies and employment contracts, and, before dismissing an employee according to the Answers, take every factor into consideration and make a reasonable decision.

Return of special benefits when an employee terminates the employment contract prematurely

According to the Answers, except for the situations provided in Article 38 of the Employment Contract Law, if an employer has provided an employee with special economic benefits such as cars, houses and housing subsidy, and the employee terminates the employment contract before it expires, the situation can be dealt with according to the agreement between them linking the special benefits to the employee’s years of service. If there is no such agreement, but it can be confirmed that the special benefits are given due to the service years of the employee, the employer can refuse to continuously provide the corresponding special benefits further. For any special benefits already given or paid, the employer can request the return of benefits proportionately by the employee.

[Comments]

The Employment Contract Law provides for the years of service based on vocational technical training. Besides that, however, the employer often reach agreement on additional years of service with employees based on special financial benefits provided by the employer. According to the Employment Contract Law, the two parties may not stipulate liquidated damages for early termination of the employment contract in respect of these covenants on years of service.

In this context, the Answers clearly stipulates that although there is no liquidated damages provision between the two parties, they can still agree on terms of return of the special benefits. When the agreement is unclear, the employer can refuse to pay the rest of the special benefits to the employee, and ask the employee to return the paid amount on a pro-rata basis.

A signed fixed-term employment contract is valid even if it should have been an open-ended employment contract

The Answers stipulates that if an employee has signed a fixed-term employment contract with an employer and asks to change it to an open-ended one, the court will not support the employee’s claim even if he/she is eligible to sign an open-ended one, unless the employer is proved to practice fraud or coercion, or take advantage of the employee’s difficulties and other circumstances.

[Comments]

In line with the arbitration and litigation practice in Beijing, when a second fixed-term employment contract approaches its expiry date, the employer cannot terminate the employment contract. In this circumstance, if the employee proposes or agrees to enter into an open-ended employment contract, the employer should do so. However, in such circumstances or if the employee has worked for 10 consecutive years for the employer, and the employee does not opt for an open-ended employment contract but chooses to enter into a fixed-term one, how should this situation be dealt with? The Answers provides that both parties’ express of intention should be respected, and the validity of the fixed-term contract should not be affected. In addition, if the employee requests to change the fixed-term contract to an open-ended one, such a request should not be supported. If the employee accuses the employer of fraud, coercion, taking advantage of the employee’s difficulties and other circumstances which will affect the validity of the employment contract, the employee should bear the burden of proof.