At the end of November 2013, the Supreme People’s Court issued the fifth batch of guiding cases. Case No. 18 is about the labor dispute between ZTE (Hangzhou) Co., Ltd. and Wang Peng. The case was heard by the People’s Court of Binjiang District, Hangzhou, Zhengjiang Province.

Judgment Essentials  

Ranking the last in performance evaluation is not equivalent to incompetence and does not constitute the statutory ground of unilateral termination. Thus, employers can not unilaterally terminate the employment contract under this circumstance.

Primary Facts

On July 2005, Wang Peng joined ZTE (Hangzhou) Co., Ltd. (the “ZTE”), and was in charge of sales work in the Distribution Department as stipulated in the Employment Contract. In January 2009, Wang Peng was transferred to work as a salesman in East China Region due to the dissolution of ZTE Distribution Department. 

In Wang Peng’s  performance evaluations in the latter half year of 2008, first half year of 2009 and latter half year of 2010, all results were C2, indicating that his performance needed to be improved. According to the Measures on the Administration of Employees’ Performance, the ratio of C1 and C2 is 10%. An incompetent employee will generally be assessed as C2.

ZTE alleged that Wang Peng was incompetent and remained so after a transfer of position, thus ZTE terminated the Employment Contract after paying economic compensation.

Judgment 

The court held that ZTE’s allegation of Wang Peng’s incompetence had inadequate basis and the termination of the Employment Contract is against the law, thus ZTE should pay double severance to Wang Peng as compensation. The judgment is now effective and legally binding on both parties.

Court’s Reasoning

  1. As ZTE unilaterally dismissed Wang Peng due to his incompetence and continuous incompetence after a transfer of position, ZTE should bear the burden of proof.
  2. In spite of the result of C2 in the performance evaluation, C2 does not equal incompetence. Such a result could not prove that Wang Peng is incompetent and thus ZTE’s unilateral termination of employment due to the result was not in compliance with the law.
  3. Although Wang Peng was transferred from Distribution Department in January 2009, his job duties before and after the transfer were the same, i.e. sales.  And it should also be noted that the transfer was directly resulted from the dissolution of ZTE Distribution Department. Therefore, it can not be proved that the transfer was due to Wang Peng’s incompetence.

 (Source: the Chinese Court website)

KWM Comments:In accordance with Article 40(2) of the Labour Contract Law of the People’s Republic of China, employers may terminate employment contract by giving the employee a written notice 30 days in advance or by making an additional payment of one month’s wage to the employee when the employee is incompetent of his/her duties and remains incompetent after training or job transfer. But ranking last in performance evaluation does not equal to incompetence and thus cannot justify the unilateral termination. Accordingly, unilateral termination due to last rank is against the law.                                    

PRC law imposes strict limitation on unilateral termination for incompetence. Generally, an employer should have an evaluation policy in place. The policy should be clear and reasonable and have gone through the democratic and publicizing procedures. After the employee is deemed incompetent after evaluation, the employer should provide training to the employee or change his/her position. Only when the employee remains incompetent after training or position transfer can the employer unilaterally dismiss the employee.