On 31 January 2013, the PRC Supreme People’s Court issued the Judicial Interpretation IV of the Supreme People’s Court on Several Issues Concerning the Application of Law in Hearing Labour Dispute Cases (“Interpretation IV”), effective as of 1 February 2013.

Compared with the draft issued for public comments in June last year, Interpretation IV contains a number of changes which may have a significant impact on PRC employment law practice.

This article highlights the key provisions and issues.

I. Non-compete Covenants

  1. Quantum of Non-compete Compensation

Much uncertainty used to surround the question of how much the employer should pay to an employee for him or her to observe non-compete obligations.

Some localities have provided for specific percentages of monthly pay but most localities remain silent while their courts have unpublished standards in adjudicating cases.

For the first time a national level indication of an acceptable quantum has surfaced. Interpretation IV provides that a claim for 30 percent of the monthly average of the employee’s salary over the last 12 months prior to departure should be upheld by the court. This is likely to be considered by many employers as an indication of judicial thought as to what is the minimum reasonable compensation for non-compete obligations and we expect that many employers will insert this 30 percent figure into their employment contracts.

Several questions however still remain. For instance, for localities which have set minimum quantum standards, will these still apply? We believe that local courts will feel obliged to observe Interpretation IV, and therefore that 30 percent will likely work even in such localities.

  1. Additional Payment for Early Termination

During the non-compete period, the employer is entitled to terminate the non-compete agreement at any time. However, in such cases, the employee will be entitled to an additional 3 months of non-compete compensation.

Several questions come to mind:

Can the employer give the employee 3 months of notice in lieu of the payment (since the employee would still be receiving the 3 monthly payments except the obligations will still apply until the end of the 3 month period)?

What if an employer has a non-compete clause with amount of compensation agreed but prior to the date of the employee’s departure decides that the obligations are no longer necessary? Can the employer just release the employee or should the 3 month compensation or prior notice be required? Judging from the previous draft, it would seem that the purpose of this early termination compensation was to tide the employee over while looking for another job that could be competing, and if so, then such compensation or notice may be considered by the court to be necessary.

  1. Right to Terminate on Non-payment by Employer

During the non-compete period, where an employer has not paid the non-compete compensation for 3 months due to its own reason, the employee is entitled to a release from the non-compete obligations.

There is no mention of whether this 3 months is continuous or cumulative and may be subject to abuse by an employer choosing to delay payment by almost 3 months each time.

  1. Continued Observance after Damages

Where an employee is in breach of the non-compete obligations, in addition to damages, the employer is entitled to request the employee to continue his observance of the non-compete obligations in accordance with the contract.

  1. Pitfall: Non-compete Clause without Payment Stipulation

Interpretation IV provides that if there is a noncompete clause with no stipulation on the compensation payable, an employee who has observed the covenant may claim for the said 30 percent average monthly pay.

This is therefore a pitfall for many employers because many contracts do contain a non-compete clause but with no stipulation on payment. An employee who has left and not worked at all or worked in noncompeting new jobs can come back later to claim against his employer for the 30 percent monthly pay on the ground that he or she observed the covenant (supposedly even where he or she did not mean to observe it but just could not find a job or a competing job since the person’s real intentions cannot be proven).

Employers ought therefore to give some thought to this issue. If they do not need a non-compete clause, they should not have one in the contract. If they do have one already and decide they do not need it, they should notify the employee in writing that he or she is released, preferably well before the departure date.

Interpretation IV contains a few other terse provisions on a miscellany of issues, as follows:

II. Intra-Group Transfers

Where arrangements have been made for an employee to work for a new employer for some reason other than the employee’s personal reason, his or her years of service with the last employer should be recognised by the new employer. This includes when:

  • the employee remains in the same job position and on the same premises and only the employer has been changed;
  • the work transfer is caused by the employer’s delegation or appointment;
  • the work transfer is due to merger, demerger or like actions of the employer;
  • the employment contract with the employee is entered into alternately with the employer and its affiliated company

III. Oral Variation of Contracts

Oral variation of a labour contract will be legally recognised provided that both the employer and employee have acted in accordance with the oral variation of the labour contract for more than a month, and such variation does not contravene any laws, administrative regulations, or national policy, and is not disruptive to public order or morals.

IV. Termination: Prior Notice to Union

Without prior notice to the trade union (if existent) as required by law, if an employer terminates the employment of an employee, the employee may bring an action for damages based on such dismissal being unlawful, except where the employer has rectified its conduct before the employee files the lawsuit.

V. Expired Business Licence: Severance Payable

After the date of effect of the PRC Labour Contract Law, if an employer is unable to continue its performance of a labour contract due to the expiry of its approved business term, the employer is still obliged to pay economic compensation (i.e., severance) to the employee.

VI. Foreigner Work Permit

No employment relationship will be recognised by the Chinese courts if a foreigner (including a stateless person) or a Hong Kong, Macau or Taiwan permanent resident, enters into a labour contract with a PRC entity without obtaining a work permit where required.