Elected by shareholders, the Board of Directors (hereinafter referred to as the “Board”) acts as the decision-making organ outside a company, and takes charge of inner affairs within a company, thus carrying significant influence in the field of commercial law; nevertheless, conflicts between the Labor Law and the Company Law are likely to occur in cases where the Board is involved in employment issues of senior managerial staff, resulting in possible practice of going around the Company Law on the premise of the Labor Law and overturning decisions made by the Board. Therefore, companies need to keep an eye on and differentiate cross-jurisdiction laws in the spirit to avoid legal conflict. The following is a labor dispute case reviewed by the Second Middle People’s Court of Shanghai concerning termination of contract of a senior executive in September, 2015. Since this case is of quotable significance to defusing conflict between the Company Law and the Labor Contract Law as well as the identification of reemployment matters in the case mentioned above, we extend the following discussion.

Case Dispute

1. Overview

In July 1991, Mr. Wang started working as the brand manager in the marketing department of a company in Shanghai. Later both parties signed the unfixed-term labor contract beginning January 1st, 2014, taking Mr. Wang as the general manager on November 19th, 2013; the fixed monthly salary was 51,900 Yuan (RMB, the same below) and adjusted to 54,495 Yuan later on.

On November 20th, 2013, Shanghai Securities Regulatory Bureau of CSRC[1] issued theDecision of Charging Correction, which stipulates that the Company was involved in transactions regarding purchasing & sales and capital inter-lending with HJ Cosmetics from April 2008 to July 2013. PricewaterhouseCoopers Zhong Tian Accounting Firm (hereinafter referred to as “PwC”) was entrusted to evaluate the effectiveness of inner control in the Company’s financial report on December 31st, 2013, and issued negative opinions in theAudition Report on Inner Control on March 11th, 2014, stating three significant deficiencies with inner control of the Company’s financial report, e.g. lacking systems that actively recognizes, acquires and substantiates information of affiliated parties.

On May 12, 2014, the Company convened its 5th session 15th time conference of the Board of Directors, determining the inescapable responsibility Mr. Wang held in the case, deliberated and approved dismissing Mr. Wang’s as the general manager and submitted the proposal to the General Assembly of Shareholders. The Board decided: 1. Since 3 p.m. May 13th, 2014, the Company would dismiss Mr. Wang of all affiliations to the Company and terminate all rights and interests 2. Mr. Wang shall finish the demission process by 5 p.m. May 14th, 2014.

2. Appeal from the Employee

Mr. Wang accepted neither the contents of the notification nor the handling result, and filed application for arbitration in Shanghai Hongkou Region Arbitration Committee of Labor Dispute on June 4th, 2014, requesting: 1. to be reemployed by the Company from May 14th, 2014; 2. To be paid 72,660 Yuan as remuneration from May 14th to June 24th, 2014 (51,900 Yuan per month).

3. Argument from the Company

During the first instance, the Company refused to accept the decision of arbitration and filed a lawsuit, questioning the necessity of reemploying Mr. Wang and paying him the salary of 42,355.17 yuan covering May 14th to June 24th, 2014.

The Company insisted that the precondition for Mr. Wang and the Company to establish labor relations was that Mr. Wang was hired by the Board as the general manager, which was dismissed. Since the original position and salary no longer existed, neither was the basis for the employment contract at question. Meanwhile after over a year of labor dispute arbitration and litigation, there was no mutual trust left for either party to continue on where they left off. Throw in the fact there was no longer a position available for Mr. Wang. The ruling of reestablishing labor relations by the court of first instance was non-executable, and there was no ground for the Company to remunerate Mr. Wang, based on which the Company asked the court of second instance to revoke the original ruling.

4. Ground for Ruling

The court of first instance considered the legality of terminating contract and the necessity to reestablish labor relations center of the issue.

Firstly, there was no evidence supporting the Company’s claim that the above mentioned three significant deficiencies were due to Mr. Wang’s personal severe negligence of duty or breach of protocol. Secondly, Mr. Wang was appointed manager since December 18th, 2012. The affiliated transaction time period determined in the Decision of Charging Correction were 5 years 3 months from April 2008 to July 2013, while most of the affiliated transactions took place before the end of December 2012. Mr. Wang was involved in the time period for about only seven months as the general manager. Therefore it was unreasonable for him to take all the blame stated in the PwC’s report. Thirdly, the Prior Notification of Administrative Punishment revealed that it was illegal for the Company not to disclose affiliated transactions from 2008 to 2012 accordingly, but Mr. Wang was not the general manager until December 18th, 2012, and such Notification was not an effective administrative penalty decision, thus couldn’t be considered binding or evidence in proving Wang’s unlawful conduct.

Therefore the court of original instance ruled that as the employing unit, the Company shall bear the burden of proof regarding Mr. Wang’s severe negligence of duty or severe breach of regulation and the adverse legal consequences if unproved on account of the lack of factual basis.

In addition, even though the Company considered Mr. Wang unfit for the position of general manager assigned by the broad, relevant adjustments should’ve been made in accordance with the Labor Law. Mr. Wang explicitly made his willingness known to accept any other position. There were no circumstances disallowing the continuation of employment.

Case Analysis

In this case, we consider the following contentious issues: One is the potential conflict and solution between the execution of the Company Law from the Board of firing senior executives such as the general manager and the Labor Contract Law. The other is if there is ground for restoring labor relations after decision to dismiss.

With regard to the first issue, companies tend to resort to the Company Law for the Board to dismiss a senior executive, and it may factually counteract the legitimacy and effectiveness of the resolution from the Board if outweighed by the Labor Contract Law, inducing head-on conflict between the Labor Law and the Company Law. Senior executives, however, are employees just as everybody else, and it seems only plausible if the decision made by the company to terminate contracts is in abeyance with the Labor Law.

The Company Law aims to govern relations in terms establishment, organizing, running or dissolution of a company while the Labor Contract Law focuses on labor relations between the employment unit and the employed, combining labor protection and supervision. Managers exercising lawful rights and answering to the Board is indicative of inter-organization management within a company.

For senior executives in binding contract, they are hired by the company, and conduct production and business operation under the supervision of the Board, ergo the clear establishment of employment.

For senior executives with built labor relations with the company, the resolution passed by the Board to dismiss their duty shall be deemed as changes in the position, not necessarily termination of employment. The effectiveness of the resolution from the Board shall be reviewed and approved in compliance with the Though there are overlapping sections in between the two laws, they are not mutually exclusive.

In terms of the second issue, it has been articulated in the above argument that the Board removes senior executives only from their post; the regaining of labor relations revolves on the premise that it should be regained and is viable. Employing units or lawyers tend to argue that employment shouldn’t be forcibly restored in that both parties have lost trust in one another, which in most cases is very difficult stand in real practice.

In the previous senior executive demission cases trial, courts in Shanghai tend to take the attitude like “the position of the senior executive has been filled, and thus the labor contract cannot continue execution” (e.g. Ruan Jinping v. Xinhua Co.[2] ; Jia Wenqing v. Kaisida Co.[3] ), and even have further attitude like “when the dismissed senior executive offers to replace working position but the company disagrees, the court would not support to continue the labor contract”, and only support the reimbursement of illegal termination of the labor contract instead (e.g. Cai Jin v. Lixin Co.[4]). But in this case where the original position had been replaced and the employing unit had no other similar position to provide, the court still judged to regain the labor relationship; though this took the employee’s expressed will during the trial (that whatever position would fit for him as long as the labor relationship could be regained) into consideration to a degree, this judgment is still a rare example in practice.

In the published report, the employee is unsatisfied with the regained position by ruling. The issue is still at dispute. Given the practical significance of the case, we’ll stay close on any new development.