Chinese law on the termination of employment contracts is extremely stringent. If an employer wishes to end an employment contract unilaterally, it must be based on one of the statutory reasons provided. The burden of proof of establishing one of these reasons is on the employer and in practice, this can be very difficult.

On 24 April 2017, the Beijing Higher People’s Court and the Beijing Employment and Labor Arbitration Commission jointly issued the Answers to Questions on Application of Law in Trial of Labor Dispute Cases (“Answers”). This was aimed at unifying the enforcement of local law. The Answers provide practical guidance on difficult questions employers face in unilateral termination cases.

Probation period

The Labor Contract Law (“LCL”) allows immediate termination by the employer if it is established that the employee is unable to meet the recruitment conditions during the probationary period.

The Answers mention the following as examples of being “unable to meet the recruitment conditions”:

  1. concealing or making up facts about basic information or documents which has an impact on the performance of the employment contract. This includes providing false academic certificates, ID certificates or other important certificates, or making materially false statements about experience, skills, health conditions or other personal information;
  2. making mistakes during one’s work – subject to employment laws, internal policies of the employer and agreements under the employment contract; or
  3. other circumstances agreed upon by the parties.

As the standards applied during the probationary period may be lower than those applied after the probationary period is completed, this may reduce the burden of proof placed upon the employer.

The employer is required to inform the employee of the following:

  1. recruitment conditions at the time of employment;
  2. specific reasons for termination; and
  3. the legal basis for termination if and when the employer does terminate the contract.

From a practical standpoint, we would recommend that the recruitment conditions be in written form, with poor performance or other circumstances which would deem the employee as unsuitable for employment being specified in the contract or in the employer’s policies. The employer should also keep records of written communication of such terms with employees.

Serious violation of internal regulations

The LCL also allows immediate termination by the employer if the employee seriously violates the employer’s internal policies. In practice, arbitrators or courts usually require the company to prove that the employee’s misconduct corresponds exactly with the definitions provided in the employer’s policies. In many cases, this has resulted in challenges for employers, particularly where internal rules are too vague or where they are not detailed enough. It is also impossible for the employer to exhaustively list every potential violating act.

The Answers have, however, made termination of an employment contract in respect of a serious violation easier for employers. One article of the LCL specifies that the employee shall observe “labour discipline” and professional ethics. As this is a basic requirement for employees, the Answers allow the employer to terminate where the employee has seriously violated this requirement, even if the violating act is not clearly defined in the employer’s policies or the employment contract. This is a significant expansion and, if implemented, companies could resort to it as a catch-all provision. The provision is, however, subject to reasonableness and it may therefore be interpreted more strictly if not based on written internal policies.

To reduce the associated risks for employers, it is advisable to have a policy on disciplinary actions which lists what the company deems to be misconduct. In light of the Answers, employers may also want to set out basic ethical and professional standards in order to allow flexibility in cases of atypical misconduct.

Material changes to objective circumstances

The LCL allows termination by the employer with 30 days’ notice if there have been material changes to the “objective circumstances” relied upon at the time of entering into the employment contract. It is necessary that these circumstances make it impossible for the employer to perform the contract, and that the parties are unable to reach an agreement on an amendment to the contract.

Previously, a 1994 Ministry of Labor interpretation was relied upon for a definition of “objective circumstances”. This interpretation included “force majeure” events or other circumstances which rendered it impossible to perform all or part of the contract (such as relocation, the employer being acquired or an asset transfer). As changes to “objective circumstances” can be very broad and may affect a group of employees, this reason is widely used in, for example, mergers and acquisitions, restructuring or relocation cases.

The Answers now provide a general definition of objective circumstances

“Changes which are unforeseeable at the conclusion of the labor contract, rendering it impossible to perform all or main terms of the contract, or where continuing performance will result in obvious unjust circumstances like excessive costs, and make it difficult to realize the purpose of the contract.”

This is a broader interpretation when compared to the 1994 interpretation, as it considers performance costs even where the contract is objectively still enforceable.

The Answers also give three examples which should count as material changes to objective circumstances:

  1. force majeure caused by natural disasters;
  2. relocation, asset transfer or other major changes such as cease of production, change of a production line or restructuring due to changes in laws, regulations and policies; or
  3. change of an employer’s business scope operating through a franchise.

Although these three examples are not intended as an exhaustive list, they provide clarity on circumstances which are of an “objective” nature.

Employers should be prepared to explain the objective nature of the alleged change, resulting in the contract’s purposes becoming unrealizable, and the reasonableness of any termination arising out of the material change.

Reinstatement

If a unilateral termination by the employer is held to be unlawful, the employee may claim reinstatement or a double severance payment. If an employee requests reinstatement, the arbitrator or court will normally uphold this request, unless it is impossible for the contract to continue. What is “impossible” in this respect is not defined in statute and very much depends on local practice. Reinstatement is, however, usually a less popular result for employees as compared to a double severance payment.

The Answers provide a specific list of scenarios under which the contract is unenforceable and cannot continue:

  1. bankruptcy, revocation of a business license, ordered closure or early dissolution of the employer;
  2. the employee reaching the statutory retirement age;
  3. the employment contract term expiring and an open-ended contract not being statutorily required;
  4. the employee’s original position being unique (e.g. general manager or CFO, etc.) and occupied by another, with the parties not being able to agree on a new position for the employee;
  5. the employee getting a new job;
  6. during the arbitration or litigation the employer has required the employee to continue working but the employee refuses; or
  7. other suitable circumstances.

Notable from the above is that the impossible reinstatement cannot be justified simply because the position has been occupied by others (iv), but that an attempt needs to be made to agree on another position. Under scenario (v), if the employer can prove that another entity is making social insurance contributions in respect of the employee, the burden of proof shifts to the employee. The employee would therefore need to prove that he/she has not established an employment relationship with another employer.

To reduce the risk of successful reinstatement requests in employment cases, employers may decide to fill the position with a new candidate. Employers should also keep an eye on the employee’s new job and make sure to keep relevant evidence where necessary.