The People's Republic of China's Supreme People's Court recently published a circular outlining the approach courts should take in handling civil and commercial trials (the Circular), which includes guidance on how to decide labor dispute cases. According to the Circular, courts should adhere to the principle of protecting both employees' lawful rights and interests and employers' ongoing business and development.

Traditionally, PRC courts tend to be heavily protective of employees' interests. The Supreme Court's emphasis on protecting both employees and employers' interests signifies a possible change in the attitude of the courts to a more balanced approach in deciding labor dispute cases, which is good news for employers.

Published on 30 November 2016, the Circular (named "Summary of the Eighth Convention of National Courts on Civil and Commercial Trials") contains several points which are useful for employers to take note of.

Balance between employees and employers

Firstly, the Circular states that decisions made by courts on labor disputes have important ramifications on not only the harmony of labor relations, but also the improved allocation of resources such as manpower, capital, skills and management, as well as stimulating innovation, promoting business start-ups and the development of new technologies and new industries. As a result, courts should adhere to the principle of protecting both employees' lawful rights and interests and employers' ongoing business and development.

The emphasis on stimulating innovation and promoting the development of new technologies and new industries echoes clearly the Central Government's plans to encourage the transition of the economy from labor intensive to technology intensive industries.

By stating that courts should protect employers' business and not just employee's interests, the Supreme Court is signifying the possibility of a more balanced approach in deciding labor dispute cases to facilitate the Central Government's goal of reallocating resources and restructuring the economy into an innovation driven economy. Though not expressly stated by the Supreme Court, one potential area where this could be applied is in relation to disputes where employees request reinstatement due to wrongful termination of employment, as reinstating employment tend not to align with business needs to restructure or reorganize.

More flexible service relationships

Perhaps as an example of what the new, more balanced approach means in terms of deciding labor disputes, the Supreme Court stated that courts should prevent the overliberal definition of employment relationships and should differentiate service relationships from employment relationships. Although no specific guidance is provided on the dividing line between employment relationships and service relationships, it signals a better willingness by courts to consider the existence of service relationship, which is more flexible and mostly governed by the terms of the contract, rather than employment relationship, which is mostly governed by mandatory labor laws and regulations that provide protection to employees.

Power of courts to adjust damages in non-competition disputes

In the Circular, the Supreme Court asserts that where an employer and employee have agreed to an amount of penalty for breach in a non-competition agreement, the courts may adjust the agreed amount of penalty if it is much higher or much lower than the actual losses.

This would allow courts to overrule overly oppressive penalty provisions in noncompetition agreements to facility employees' transition to a new employer. To avoid the risk of such ruling, companies should be careful or may want to seek legal advice when deciding the amount of penalty for breach to put in a non-competition agreement with an employee.

Prohibition of "bottom elimination" or "competition for post"

Notwithstanding the possibility of a more balanced approach in determining labor dispute cases and more flexible service relationships, the Circular expressly prohibits any unilateral termination of employment on the basis of "bottom elimination" or "competition for post". "Bottom elimination" means an employee whose individual performance is ranked at the bottom of the team is automatically eliminated from the job. "Competition for post" means there is only a limited number of employees that will be allowed to stay and the employees have to compete for best performance in order to be eligible to stay.

The prohibition of "bottom elimination" or "competition for post" based termination means that there is a limit to which courts will support employers decision to terminate employment and desire for a flexible workforce.

While it is too early to tell how this Circular will be implemented in practice, we will keep monitoring the developments on this area.