Mr. Shi entered into a one-year fixed term employment contract with Company A in 2006, and renewed the employment with Company A respectively in 2007 and 2009, both with the term of two years.

In July 2011, Mr. Shi admitted to Company A his misconduct of setting up illegal “off-the-books” during the time from 2006 to 2007, in a conversation transcript which was signed by him. Then at the end of July 2011, Company A terminated the employment contract with Mr. Shi for gross misconduct.

Mr. Shi thus initiated labor dispute arbitration, claiming for compensation for illegal termination initiated by Company A. While his request was not supported by the arbitration commission, Mr. Shi filed a suit with Yangpu People’s Court of Shanghai.

During the trial, Company A argued that the reason why it didn’t deal with Mr. Shi’s misconduct before the employment contract with Mr. Shi was expired in 2007 was that, it didn’t discover Mr. Shi’s misconduct. As to employer’s argument, Mr. Shi believed that, it doesn’t make sense that Company A didn’t discover his misconduct until 2011, because the company should have investigated the matter after he left the position in 2007 according to the company’s financial audit policy.

The court ruled that, the employer is not entitled to terminate the employment with an employee for previous misconduct, unless both parties have agreed in the renewed employment contract that the employer may terminate the employment for the misconduct occurred during the term of previous employment contract, or the employer indeed is not able to discover the misconduct timely in the course of normal operation and the misconduct is severe enough to make the employer not renew employment contract with the employee. In this case, the termination conducted by Company A is deemed illegal by reason of lacking evidence, and Company A should pay compensation accordingly.

KWM Comments:

Pursuant to Labor Contract Law, the employer is entitled to terminate the employment with the employee who severely violates the employer’s internal policy. However, the law is not clear about the time limit for the employer to dismiss the employee upon the occurrence of misconduct. According to the above case, if the misconduct occurred several years ago, the employer should bear the burden of evidence to prove that it couldn’t discover the employer’s misconduct due to objective causes. In addition, the employer should terminate the employment with the employee within a reasonable period after discovering the employee’s misconduct.