Issuing Body: Supreme People's Court

Issuing Date: June 27, 2012

In an ongoing effort to provide guidance to Chinese courts on the handling of labor-related cases, the Supreme People's Court (SPC) issued the Draft Interpretation on Several Issues Concerning the Application of Law in the Trial of Labor Disputes (IV) (Draft Labor Disputes Interpretation IV) on June 27, 2012, for public comment. The Draft Labor Disputes Interpretation IV consists of 18 articles and addresses both procedural and substantive aspects of labor disputes. The key provisions that are most relevant to foreign investors are summarized below:

Jurisdiction of Labor Disputes

In many civil contracts, it is common practice for the parties to agree which authority has jurisdiction to hear disputes relating to the contract. However, the parties to an employment contract are not currently allowed to do so. The current legal position is that parties involved in a labor dispute may file a lawsuit (after going to labor arbitration in the first instance) with either the court in the location of the employer or in the location where the employment contract is performed. If lawsuits are filed in both locations, the court where the first lawsuit was filed will have jurisdiction. The underlying rationale is to prevent an employer from filing a lawsuit in an arbitrary location that would make it difficult for an employee to respond to the lawsuit.

Article 1 of the Draft Labor Disputes Interpretation IV states that the parties to an employment contract can agree in the contract which court in the two locations will have jurisdiction to hear labor disputes. As employment contracts are generally prepared by employers, this will give them more control over the location where any labor disputes may be litigated.  

Employer's Internal Rules and Regulations to Go Through Consultation Process

Article 7 of the Draft Labor Disputes Interpretation IV states that internal rules or regulations that have not gone through the employee consultation procedures set out in Article 4 of the Labor Contract Law of the People's Republic of China (Labor Contract Law) will not be recognized by the courts.

It reiterates the requirement for employee consultation procedures to be followed when implementing or amending internal rules or regulations in response to the fact that some courts have allowed deviations from this requirement. For instance, the Beijing High Court has indicated that internal rules or regulations that have not gone through the employee consultation process may still be valid if (i) they comply with the law, administrative rules and policies, and (ii) the employer informed the employees of the rules or regulations.

Non-Compete Obligations

Article 8 of the Draft Labor Disputes Interpretation IV states that any post-termination, non-compete obligation will not be enforceable against a former employee if (i) the parties have not agreed to the amount of the monthly compensation to be paid to the employee or (ii) they have agreed on the amount but payment of any of the agreed compensation is delayed by more than a month. Currently, in some locations, non-compete obligations may still be enforced despite a lack of agreement on the amount of compensation, as the authorities will impose an amount they consider to be reasonable if the parties cannot subsequently agree on this point.

Additionally, Article 8 goes on to state that if the parties have not agreed on the compensation but the employee has complied with his or her non-compete obligations, then he or she is entitled to monthly compensation that is equal to his or her average monthly remuneration for the 12 months prior to the termination of the employment contract.  

Article 11 of the Draft Labor Disputes Interpretation IV states that if a post-termination, non-compete obligation is agreed by an employer and employee, then such obligation can only be terminated upon the mutual agreement of both parties. Currently, the authorities in both Shanghai and Beijing have clearly stipulated that an employer can unilaterally terminate such agreement at its own discretion.

Verbal Amendments to Employment Contracts

Currently, any amendments to an employment contract must be agreed in writing to be valid and enforceable. Article 12 of the Draft Labor Disputes Interpretation IV reiterates this requirement. However, it also introduces a new exception for verbal amendments if the verbally amended contract has been performed; the verbal amendment does not violate any laws, regulations, polices, public orders or good customs; and the employee has not raised any objection to the verbal amendment within one year after performing what was verbally agreed.

Employment Relationships Between PRC Nationals and Representative Offices

Under the current regulations, representative offices of foreign companies are required to employ PRC nationals through approved labor dispatch agencies. Representative offices do not have legal person status so they cannot enter into contractual relationships with parties.

Article 18 of the Draft Labor Disputes Interpretation IV seems to indicate that, in the event that a representative office fails to comply with the above requirement and the elements of an employment relationship exist, then the relationship will be deemed to be an employment relationship and the employee will be entitled to the protections under China's labor laws. However, the current wording is somewhat vague, and it will be interesting to see if there is further clarification on this point.

Expatriate Employees

Article 18 of the Draft Labor Disputes Interpretation IV states that an expatriate's employment relationship with a local entity will only be recognized if he or she has obtained the necessary work permit, regardless of whether an employment contract was signed by the parties. However, even in situations where the necessary work permit was not obtained but an employment contract was signed by the parties, the employee will still be able to make a claim for the agreed remuneration.  

Implications

The number of labor-related cases which are tried in Chinese courts has increased dramatically in recent years. Employers in China are advised to keep a close eye on all developments related to the interpretation of the Labor Contract Law and to try to ensure that their employment contracts, handbooks, rules, policies and practices are consistent with this law as it is interpreted by the SPC and other government organs.