Key Points:

  • Employees shall bear the burden of proof in overtime compensation claims
  • Interpretation III further clarifies that certain situations shall be treated as labor disputes in the people’s courts
  • New Measures protect employees in situations where the employer does not hold qualified legal person status

Since the PRC Labor Contract Law and Labor Dispute Mediation and Arbitration Law went into effect in 2008, the number of labor-related cases filed with the people’s courts has dramatically increased. Statistics show that PRC courts handled 295,000 labor dispute cases in 2008, an increase of 95.3 percent from the 2007 figure; the figure in 2009 was 318,6001. In the absence of clear instruction regarding various practical situations, the large number of cases has caused a lot of headaches for the local courts in China. In light thereof, the Supreme People’s Court released its third interpretation with respect to handling labor disputes on September 13, 2010: Interpretation (III) of the Supreme People’s Court of Several Issues on the Application of Law in the Trial of Labor Dispute Cases (Interpretation III), which went into effect on September 14. This article briefly introduces the highlights of Interpretation III.

Burden of Proof in Overtime Compensation Claims

Different areas in China have different judicial practices regarding the burden-of-proof principle in overtime compensation cases. For instance, Guangdong Province has adopted the principle that the employer denying overtime must disprove the overtime claimed by the employee unless the overtime occurred more than two years ago2. Shenzhen set up a similar rule that if the employer denies the overtime work as claimed by the employee, the employer shall bear the burden of proof3. To unify the practices, Interpretation III took examples from Zhejiang Province4 by stipulating that the employee shall bear the burden of proof for the existence of overtime. However, if the employee has evidence that the employer possesses but fails to provide any evidence of the existence of overtime, the employer shall bear the adverse consequence5. This stipulation is easy to understand and accept as being close to the general principle in civil litigation – namely, “the burden of proof is upon the party who claims.”

Enterprises have complained about increased labor costs and legal risks and have requested a more balanced system between employees and employers. This, of course, has brought challenges from those fighting on behalf of the employees, e.g., lawyers, who reiterate the unequal positions and resources of companies and employees. Some even view this as a sign of a retrogressive trend against the basic principle of labor legislation, which is to protect employees’ interests to the maximum extent. Nonetheless, as the Interpretation III goes into effect, human resource departments of multinational entities shall be reminded again to keep clear records regarding employees’ overtime.

Clearer Scope of Labor Disputes

In the past, local people’s courts have lacked guidance on whether to treat certain situations as labor disputes they should resolve according to labor legislation. Interpretation III indicates clearly that a situation shall be treated by people’s courts as a labor dispute if:

  • A labor dispute arises over an employee’s claim for compensation against his or her employer based on the employer’s failure to complete social insurance procedures for the employee, which resulted in the employee not receiving social insurance benefits;
  • A labor dispute arises over a restructuring voluntarily carried out by an enterprise; or
  • An employee claims additional compensation against the employer according to Article 85 of the Employment Contract Law, which grants labor bureaus the right to order a company to pay labor remuneration, overtime pay or other economic compensation.

Clarification on Labor Disputes Involving Companies With Questionable Legal Status

In certain scenarios in the past, employees who have intended to sue a company have been unable to do so because the company did not hold qualified legal person status – e.g., because it acted without a business license or acted after its business license was revoked. To protect employees’ interests in such a situation, Interpretation III stipulates that:

  • If a dispute arises between an employee and an employer that has not applied for a business license, whose business license is invalidated or that continues to operate after the expiration of its term of operation, the employer or its investor shall be a litigation party; and
  • If the aforementioned employer borrows the business license of other business entities by subordinating those entities or establishing some other means for operation, the employer and the lender of the business license shall be parties to the litigation. Although labor disputes are different from normal civil disputes, this stipulation could be viewed as an extension of the “piercing the corporate veil” principle to the labor area, as it excludes the possibility for investors to escape from legal liability through inappropriate use of legal entities. It also reminds companies not to lend business licenses to any other companies, regardless of the type of contractual arrangement in place between the parties.