Continuity of service in severance calculations
Non-compete compensation


In January 2013 the Supreme People's Court issued the long-awaited Interpretation (IV) on Various Issues Concerning Application of Law in the Trial of Employment Disputes (commonly referred to as 'SPC IV'), which provides a certain amount of clarity on some hot-button issues. It became effective on February 1 2013.

Continuity of service in severance calculations

SPC IV provides that if an employee continues to work in the same workplace and job position even though his or her employer has changed, the new employer must recognise the employee's previous years of service to the original employer when calculating the employee's severance, unless the original employer paid severance to the employee. Other examples of when a new employer must recognise previous years of service are also specified. The Implementation Regulations of the Employment Contract Law include a similar provision on this issue, but fail to provide any specific examples of when a new employer must recognise employees' years of service to a previous employer. Furthermore, while the implementation regulations do not limit "the recognition of the employee's prior years of service" to severance calculation purposes only, SPC IV in contrast appears to focus only on severance (years of service may also be relevant for determining when an employee becomes entitled to an open-term contract). This provision may become important for intra-group employee transfers and potentially in asset transfer deals as well, although it remains to be seen how local courts will interpret the provision.

Non-compete compensation

SPC IV also provides for specific rules related to enforcement of non-compete restrictions. In particular, it provides that if a non-compete agreement is silent on the non-compete compensation standard (enforcement of non-competes requires separate compensation to be paid), the non-compete compensation per month should be 30% of the employee's average monthly salary over the 12 months before termination. It is unclear whether this is meant to be a de facto minimum standard of compensation (national law is silent on the minimum amount of compensation payable), or whether the parties can agree by contract to a lower compensation standard. If the employer fails to pay the non-compete compensation for three months, the employee may terminate the non-compete agreement. Furthermore, the employer may terminate the non-compete agreement during the non-compete period, but it must provide three months' non-compete compensation to the employee in such a situation.

For further information on this topic please contact Andreas Lauffs or Jonathan Isaacs at Baker & McKenzie's Hong Kong office by telephone (+852 2846 1888), fax (+852 2845 0476) or email (andreas.lauffs@bakermckenzie.com or jonathan.isaacs@bakermckenzie.com).