Employment & Labor

Much ink has been spilt over the implementation of China's Labour Contract Law (LCL) since its passage in 2008. The law, which raised workers' awareness of their rights, has brought along sweeping changes to the labour status in China. Now that the law has taken effect for two years, it is a good time to review its impact and development.

Signing of Contracts
The LCL set standards for various labour issues including the signing of labour contracts, use of temporary workers, termination of employment, etc. However, as found by a recent study released in May on the impact of the LCL, despite the fact that 60 percent of the interviewees had a contract at the time of interview, the number of workers who have signed valid labour contracts remains low, which reflects that a certain number of organisations are still not in compliance with the law.

Rise in Labour Disputes
Another impact seen is the sharp increase in individual and collective labour disputes. According to the study, in the year after China's Labor Contract Law took effect in early 2008, the number of labour disputes accepted by Chinese arbitration panels and courts nearly doubled. Therefore, the actual implementation of the LCL deserves more attention.

In view of the challenges brought by the LCL, China Labour Contract Law Forum, organised by China Talent Group, was held at Renaissance Harbour View Hotel in late May to explore critical issues in China with labour dispute case analysis.

Mr. Kevin Han, Chief Financial Officer, China Talent Group delivered his welcoming note at the forum. He said, “It is the first time we organise seminar in Hong Kong. Seeing that the LCL has posed tough challenges to employers and HR practitioners, and more organisations are investing in China, we hope to assist employers and HR practitioners in dealing with labour problems that caused by the LCL.”

Prof. Peng Guanghua, Deputy Director, The Institute for Labour Relations and Associate Professor, School of Labour and Human Resources, Renmin University of China mentioned the continuous increase of labour disputes in China and said, “The causes of the disputes are complicated. Whilst it is difficult to settle labour disputes, employers should strive to maintain good employment relationship for the prevention of any unpleasant incidents.”

“In fact, the enactment of the LCL aims to promote harmony, so it values the implementation of procedures, and hope to encourage communication between employers and labourers. To prevent labour disputes, integrity and communication is the key. Enterprises have to be impartial and transparent, with robust systems and policies in place that comply with the law. Remember, to treat your people well,” he continued.

Prevention is better than cure. Therefore, employers are suggested to learn more about previous cases and the law to prepare for any unpleasant happenings. Mr. Tony Jin, Director of Legal Affairs, China Talent Group shared a dispute case with the audience and conducted analysis afterwards.

The background of the case is as follows:
* Company A fired a departmental manager because of his poor work performance and appointed a new manager from members of the department.
* An employee from the department was discontent with the new arrangement and told the company's leadership that he would quit if the company really appointed that employee as the new manager.
* He requested the company to reply him in one week. At last, the company did not accommodate him and he really left the company.
* A few days later, the employee suddenly went to arbitration and requested compensation from the company for labour contract termination.

In this case, is resignation equal to automatic severance? Is a resignation letter necessary and in what form? What can the company do as it did not receive any resignation letters?

“When we refer to the law, we’ll see there isn't the concept 'automatic severance'. And we have to bear in mind that, the employee only talks about his resignation orally, without sending out any formal written documents, so the company can handle this as absence,” Mr. Jin explained.

Mr. Jin strongly suggests that employers should keep all the possible evidence to protect themselves. “Some companies may accept resignation in the form of email. In this case, you still have to print it out and ask the employee to sign on it to make it effective evidence. Still, I suggest better not using email or phone. If you are not familiar with the law, you' d better consult legal experts to ensure compliance.”

Despite the wave of challenges and problems facing enterprises in China, the LCL is believed to have a positive impact on stabilising the labour market, providing a stable supply of labor, and guaranteeing social stability and harmony in the long run. Employers are suggested to ensure compliance of the law for lower labour cost, and should be cautious in dealing with their labour matters.


The Supreme People's Court of the PRC recently issued the Interpretation III on Several Issues Concerning Application of Law In Trial of Labour Dispute Cases (Interpretation III). The Interpretation III, containing a total of 18 clauses and coming into effect on 14 September 2010, draws on the PRC courts' experience in dealing with labour dispute cases and seeks to clarify a number of issues concerning the judicial application of the law further to the promulgation of the PRC Employment Contract Law and PRC Labour Dispute Mediation and Arbitration Law on 1 January and 1 May 2008 respectively. The highlights of the Interpretation III include:

clarifying what types of disputes will fall within the scope of the court's jurisdiction
clarifying who can be sued in a labour dispute case (potentially a company's capital contributor can be liable!)
clarifying who bears the onus of proof in a claim for overtime pay
clarifying the enforceability of termination agreements that an employer may enter into with a departing employee
clarifying new rules for rehiring retired workers and four types of special personnel
This article looks at these highlights of the Interpretation III.

Highlights of the Interpretation III
Further Defining the Scope of Labour Dispute Cases Accepted by Courts
In addressing the previous uncertainties as to whether some disputes should be accepted by the court, the Interpretation III makes it clear that the following three types of labour dispute cases fall into the scope of hearing by the court:

an employee's claim for compensation from his/her employer on the ground that he/she cannot enjoy social insurance benefits as a result of the employer's failure to undertake the social insurance formalities for him/her and the social insurance agency cannot make up such formalities;
any labour dispute arising from the restructuring of an enterprise at its own volition (as opposed to restructuring initiated and led by the government); and
an employee's claim for additional compensation from his/her employer due to its failure to pay wages in full and on time, failure to pay overtime wages or severance pay or pay wages below the minimum wage standard.
Clarifying the Parties to the Labour Dispute Case
The Interpretation III provides that in the event of any labour dispute arising between an employee and a company which does not have a valid business license (e.g. failing to obtain a business license, or business license has been cancelled or has expired), the court can name either the company or the company's capital contributor (e.g. shareholder) as the party to the labour dispute. If such company "borrows" (or uses) another entity's business license for its business operation in the form of affiliation etc., then the lender of the business license must be listed as one of the parties together with such company.

Allocation of the Burden of Proof in Overtime Claims
The Interpretation III gives guidance on the allocation of burden of proof in overtime claims. It makes clear that where an employee claims overtime wage, he/she must assume the burden of proof as to the fact that he/she performed overtime work. If the employee has evidence to prove that the employer actually maintains and manages the records relating to the overtime work but the employer fails to provide such records to the court upon request, the employer shall face the adverse consequences, which means the court could uphold the employee's claim for overtime wages. Based on this provision, the employee is obliged to provide prima facie evidence in relation to the claimed facts of overtime work. This changed some local court's previous practice that put the burden of proof mainly on the employer's side in an overtime claim (particularly claims of overtime wage within two years of the employee's separation with the employer) to prove the employee had not undertaken any overtime work, and failure to do so meant that the employer would possibly lose the case.

The Interpretation III does not mention what types of evidences the employee is required to produce, but evidence including attendance record, overtime work notice, payroll slip etc may suffice. If the employee has evidence to prove that the employer maintains the evidences relating to his/her overtime work, then the burden of production shifts to the employer. If the employer fails to provide any evidence, it could face adverse consequence such as losing the case. Accordingly, it is still important for an employer to ensure that good records are kept of overtime performed by its employees.

Criteria for Recognising the Validity of a "Disposition Agreement"
In practice, some companies would enter into agreements with their leaving employees in regards to formalities for terminating or ending the employment contract, remuneration, overtime wages, severance pay, compensation etc. for the purpose of settling the relevant rights and obligations. The Interpretation III makes it clear that an agreement reached between an employee and employer on such matters is deemed valid as long as (a) it does not violate the mandatory provisions of laws and administrative regulations and (b) it is not reached by fraud or duress or by taking advantage of the other party's hardship. If there is any major misunderstanding in the agreement or its provisions are obviously unfair, any party has the right to request revocation of such agreement which will be upheld by the court.

New Rules for Rehiring Retired Workers and Four Types of Special Personnel
The Interpretation III clarifies that for employers rehiring workers who have started to enjoy pension benefits, the service relationship between them will not be deemed as an employment relationship, and any dispute arising thereto will not be deemed as a labour dispute. Such dispute will be treated as a civil dispute based on a service relationship. Whereas, any dispute arising from an employer hiring any of the four types of "special personnel" (i.e. individual who is on leave with pay suspension, has not reached the statutory retirement age and retired internally, is removed from post in his/her original enterprise or waiting for a post or is on a long leave as a result of production cessation of original enterprise) will be accepted as labour dispute. This provision suggests that employers who hire any of the four types of personnel must also sign employment contracts with them and perform other obligations under the labour law of an employer towards these types of employees who are subject to protections and entitlements under the labour law. However, it is not clear how the new employer can perform some obligations for them, e.g. whether the new employer must contribute social insurances for and on behalf of them, since these types of personnel would still have employment relationships with their original employer who may still be contributing the social insurances for them.

Others
The Interpretation III also sheds light on what constitutes final arbitral award and confirms that the standard for deciding whether or not an arbitral award made on claims brought according to subparagraph (1) of Article 47 of the Mediation and Arbitration Law is final will be based on the "awarded sum of each item" instead of the "claimed sums". This provision means that in practice if an employee is claiming labour remuneration, medical fee, severance pay etc. with each or total claimed sums exceeding 12 months of the local minimum wage standard, whether the arbitral award made by the labour arbitration commission is final or not would depend on whether or not each awarded sum exceeds 12 months of the local minimum wage standard. If not, then the arbitral award is final and binding on both parties.

The Interpretation III also makes it clear that any action brought against an effective mediation record made by the labour arbitration committee will not be accepted by the people's court. This indicates that for any dispute in a labour arbitration stage, if both parties would like to settle the dispute, then an effective approach is to submit the settlement agreement to the labour arbitration commission for it to make a mediation record. The mediation record will be final and conclusive after entering into effect.

Comments
The Interpretation III takes a practical approach in dealing with some unclear issues, and should help to unify the judicial practice on trial of labour disputes on a number of issues. It represents an ongoing effort to protect employees' rights but also seems to seek to strike a balance between protection of the interests of employers and employees. Companies operating in the PRC should pay attention to the relevant clauses under the Interpretation III and other labour regulations to ensure compliance and prevent potential employment legal risks.

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