In a recently publicised Chongqing case, an employer's termination of an employee based on the employee's poor performance ranking was ruled unlawful, even though poor performance ranking was stated as grounds for termination in the employment contract and company rules. The employee was unilaterally terminated by the employer because the individual ranked in last place in the year-end performance evaluation for two consecutive years. The local labour dispute arbitral tribunal ruled that the employer may unilaterally terminate its employees' contracts only on statutory termination grounds, such as incompetence. In a forced ranking system, there will always be an employee ranked at the bottom and it does not necessarily mean that the relevant employee is incompetent (eg, there may be a situation in which all employees are excellent or good).

Under Chinese law, if an employer intends to terminate an employee based on the employee's incompetence, the employer must prove that the employee fails to meet objective and reasonable performance standards. Moreover, in a case of proven incompetence, job adjustment/retraining must be offered before terminating the employee. Failure to prove incompetence or comply with the procedural requirement to offer job adjustment/retraining would result in an unlawful termination, even though the relevant employee ranked in last place in a performance evaluation system.

Forced ranking systems like the one in this case are common in some US companies. However, as shown in this case, many courts will take the view that poor ranking alone cannot justify an employee's unilateral termination. This is in line with a 2009 guiding opinion issued by the Shenzhen Intermediate People's Court, which stated that a termination based on a forced ranking system was explicitly classified as an unlawful termination.

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).

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