On 14 April 2014, Zhejiang High People’s Court and Zhejiang Labour Dispute Committee jointly released the Reply II on Several Issues Concerning Labour Disputes (“Reply”). This Reply mainly enhances requirements under the existing regulations and also clarifies certain open issues.

Establishment of employment relationship

The Reply clarifies whether an employment relationship is established in the following special cases.

  • If an employee retains an employment relationship with an employer while he/she works for another employer, an employment relationship will be established with the second employer. Therefore, the employee’s valid claim for remuneration, severance payment and leave entitlement against the second employer will be upheld.
  • If an individual concludes an engagement agreement with a company for providing a service, the relationship between the parties will be defined according to their agreement. However, an employment relationship will be established if: (1) the company’s internal rules and regulations apply to the individual; (2) the individual is subject to the company’s management and engages in works as arranged by the company for which the companypays remuneration; and (3) the work provided by the individual is a part of the company’s business.
  • If an individual who is beyond the statutory retirement age works for a company, the relationship between the individual and the company is a service relationship.

Open-term contract entitlement and liabilities

According to the Reply, Zhejiang implements the two-fixed-term-contract rule for open term contract entitlement in the same way as Beijing. The employer must conclude an open term contract with an employee if he/she has two fixed-term contracts (as of 1 January 2008) and requests an open term contract upon expiration of the second contract, unless one of the statutory dismissal situations applies.

If an employer fails to conclude an open term labour contract, an employee will be entitled to double salary for the period during which the open term contract is not concluded (of up to 11 months). If the employee’s claim for double salary of the last month of the period is not beyond the statutory limitation of 1 year, his/her claim for the entire period will be upheld.

Contract extension

An extension may constitute a separate contract under the Reply. If an employment contract provides that its term will be deemed to be extended if the employee continues to work for the employer after the initial term expires, the extension will be deemed as a separate contract. Therefore, his/her claim for double salary due to no written employment contract during the extended period will not be upheld. Consequently, if the term of the extension expires, the employee will be entitled to an open term contract.

Dismissal

The Reply also clarifies the following issues for the most common statutory dismissal situations.

If an employer intends to dismiss an employee by invoking the statutory reason of a material breach of the internal rules and regulations, it must exercise its dismissal right within 5 months from when it knew or should have known about the material breach.

In respect of the statutory dismissal reason of incompetence, the Reply confirms that performance being rated as worst among colleagues does not constitute grounds for statutory dismissal reason of incompetence.

Calculation of statutory severance payment

In general, for calculating the statutory severance payment, each full year of service will be compensated by one monthly salary averaged over the 12 months prior to termination. The Reply clarifies that for the purpose of calculating the average salary, the salaries should be those received during the period when the employee works in normal status, excluding abnormal periods such as those for medical treatment.

For employees whose actual monthly average salary exceeds triple of the local average salary, the Reply caps their total compensable working years (including years before and as of 2008 when the new Labour Contract Law becomes effective) at 12.

Vivien Xu