Chinese courts provide guidance on commonly fought employment disputes
Main image
Jonathan Isaacs
Jonathan Isaacs (pictured) is head of Baker McKenzie’s China employment practice based in Hong Kong; Zheng Lu is a senior counsel and Bofu An a partner at FenXun Partners based in Shanghai and Beijing, respectively

Chinese statutory laws are often very vaguely worded or silent on issues that employers have to grapple with on a daily basis. This, plus the fact that different courts (sometimes even in the same city) will often come to different conclusions on similar cases, makes it difficult for employers to know how to address or handle different types of situations when managing employees.

Last year, the Supreme People's Court (the highest court in China) issued a notice to lower courts urging them to consider and refer to court decisions and official guiding opinions issued by higher courts and courts in the same locality when deciding on legal points of dispute. While this does not mean that prior court cases will be legally binding (China is still a civil law country), this hopefully will lead to more consistent court decisions and more predictability for employers in the future.

It is, therefore, worth reviewing how courts in various localities throughout China are deciding on controversial, commonly fought-over issues. Below is a survey of recent cases decided on by higher-level courts in the more economically advanced localities in China such as Jiangsu Province, Shanghai, and Beijing.

Breach of epidemic prevention measures

The Jiangsu High People’s Court recently detailed 10 employment dispute cases in Jiangsu Province that may provide guidance to the courts in Jiangsu. Of particular note is one that relates to the termination of employment for violation of epidemic prevention measures.

In this case, the employee was employed by a labour dispatching agency and then was dispatched to a Nanjing university. Earlier in 2020, the university had formulated and adopted a series of policies on epidemic prevention controls.

In May 2020, the university discovered the employee had left Nanjing before the commencement of the new academic term, without notifying the university and had not undergone quarantine on return to Nanjing in accordance with the university's policies.

In addition, the employee commuted between Nanjing and Wuxi without notifying the university and undergoing quarantine. The university returned the employee to the agency on the basis they violated the university’s epidemic prevention measures, after which the agency terminated the employee. The employee sued the agency for wrongful termination.

The court ruled in favour of the agency and determined that the termination was justifiable. The court held that the employee’s behaviour not only violated the policies of the university, but also was irresponsible vis-a-vis the health of other persons.

This case demonstrates that violation of an employer’s epidemic prevention measures may amount to a serious violation of the employer’s rules and regulations, and such breach may justify summary dismissal. It also highlights the importance for employers to set out clearly in their rules, regulations, and policies the types of misconduct that may result in summary dismissal. Such rules should be adopted in accordance with Article 4 of the PRC Employment Contract Law.

Employment liabilities in the event of a company liquidation

In a separate case also highlighted by the Jiangsu High People’s Court, the employee commenced employment with a Wuxi company in April 2016, and was injured at work in September 2016. In July 2018, the Wuxi Human Resources and Social Security Bureau determined that the injury was a work-related injury. In November 2018, the company announced the liquidation of the company in a newspaper.

In April 2019, the employee was identified by a formal labour ability appraisal committee as having a Grade 8 disability. The company was de-registered in May 2019 based on a shareholders’ resolution to dissolve the company. The de-registration documentation filed with the local administration of market regulation indicated that the company did not owe any debts. The employee filed a lawsuit against the members of the liquidation team to claim losses incurred relating to the work-related injury (ie, medical expenses and nursing expenses, etc).

Ruling in favour of the employee, the court held that the company was required to pay compensation to the employee for the work injury suffered by the employee since the company had not purchased social insurance for the employee.

In addition, members of the liquidation team had not informed the employee about the liquidation of the company, despite knowing the employee had suffered a work injury and that the company had not paid any work injury benefits to the employee. The court found that the members of the liquidation team knowingly failed to notify the employee in writing of the dissolution and liquidation of the company in accordance with the law when they knew that the company owed debts to the employee.

This case demonstrates that employers may be liable to compensate employees for work injuries suffered where the relevant employee is unable to claim benefits from the social insurance fund due to a reason attributable to the employer (eg, the employer’s nonpayment of social insurance). It also makes clear that work injury compensation constitutes employment liabilities that are subject to protection under the PRC Company Law and Enterprise Bankruptcy Law.

Paying non-compete compensation lower than legal standard will not invalidate the restriction

On 30 April 2021, the Suzhou Intermediate People’s Court (the highest court in Suzhou) published information on typical cases involving post-termination non-competition restrictions in an employment context. We highlight below the main points for employers to note.:

In the first case, Company A and its employee signed a non-compete agreement, which provided that the monthly non-compete compensation would be RMB 7,208. After the employee left Company A, he joined a competitor, Company B. Company A paid non-compete compensation to the employee based on the agreed amount in the contract, amounting to a total of RMB 122,536 for 17 months.

The court found that the employee’s total compensation for the 12 months before the termination with Company A was RMB 350,034. The court held that although the monthly non-compete compensation of RMB 7,208 was lower than 30% of the employee’s average monthly compensation for the 12 months before the termination (which is the amount stipulated in the Supreme Court’s judicial interpretation), this did not in itself invalidate the non-compete restriction.

According to the spirit of the Supreme Court’s labour dispute judicial interpretation, even if the agreement between the employer and the employee is silent on the amount of the non-compete compensation, such compensation can still be made up by the employer to the amount stipulated under the law and will not necessarily lead to the invalidation of the non-compete agreement. Therefore, the court ruled that Company A should make up the amount of the non-competition compensation to the amount prescribed under the law, and found that the employee had violated the non-compete restriction and should pay liquidated damages.

Employee found to have breached non-compete obligation

In this typical case, an employee served as a sales manager in Company C (a packaging company) and signed a non-competition agreement with the company. After the employee resigned, the employee helped Company D (established by his wife) to promote products that were competitive to Company C’s customers. At the same time, the employee was making social insurance contributions through a separate transportation company.

During the course of the employment arbitration and litigation, the employee provided social insurance details made through the transportation company to prove that he was not engaged in a competitive business. However, after reviewing the facts of the case, the court determined the employee had violated the non-compete restriction and ruled that the employee should pay Company C liquidated damages.

The key takeaway from the case is that an ex-employee may still be in breach of a non-compete restriction if they provide services to a competitor company (despite being employed and contributing to social insurance via a non-competitor company).

Note, however, that courts in different cities may take a different approach on non-compete issues. For example, unlike in Jiangsu, in some cities, non-compete compensation lower than the legal requirement may entail risks of invalidating the non-compete agreement. Therefore, companies should check the local requirements when dealing with non-compete issues.

Cessation of employment when employee reaches statutory retirement age

The Shanghai High People's Court recently denied an employee’s claim demanding compensation for wrongful cessation of employment in a situation where the employee had reached statutory retirement age, but had not yet started to enjoy pension insurance benefits.

In this case, the company sent a notice to the female employee who had just reached 55 years old (the statutory retirement age for female managerial employees) informing her of the cessation of her employment. The employee then filed a complaint against the company with the labour arbitration committee, claiming wrongful termination.

The employee argued that as she had not started to enjoy her pension insurance benefits, (notwithstanding the fact that she had reached the statutory retirement age), under the PRC Employment Contract Law (ECL), the company was not entitled to end her employment.

This dispute arose primarily due to apparent inconsistent provisions in the ECL and the Implementing Regulations of the ECL. The ECL provides that an employer may end an employee’s employment when the employee starts to enjoy pension insurance benefits. On the other hand, the Implementing Regulations of the ECL provide that an employer may end an employee's employment when the employee reaches the statutory retirement age.

In this Shanghai case, the labour arbitration committee ruled that the ending of employment was legal, and rejected the employee’s claim. The employee then filed a claim with the court. Both the first instance and appellate courts decided that the company was entitled to apply the Implementing Regulations of the ECL to end the employment relationship since the employee had reached the statutory retirement age.

The employee then applied for a retrial with the Shanghai High People’s Court. The Shanghai court subsequently rejected the employee's claim and ruled that an employer may apply either the ECL provision or the Implementing Regulations provision when ending the employment relationship.

This case provides welcome guidance on an issue that has caused some controversy in practice due to the difference in the wording of the ECL and its Implementing Regulations. The Shanghai High People’s Court has now clarified that an employer may end the employment contract either when the employee reaches the statutory retirement age or when the employee starts to enjoy their pension insurance benefits. Although technically, there is no binding court precedent in China, this case at least provides guidance on this issue that lower courts may refer to.

General manager required to return salaries due to false background information

In a recent Beijing court case, an employee was forced to return to his employer part of salaries he received during the employment period. The company had hired the employee as general manager with a monthly salary of RMB 90,000. The company required the employee to provide original copies of his diploma and related authentication certificates during the recruitment and on-boarding processes, but the employee failed to do so, claiming that the original copies were missing. The employee subsequently passed his probationary period and resigned from the company after six months of work.

After the employee had left employment, the company conducted an internal investigation and discovered that all the education and business experience-related information provided by the employee were false. The company sued the employee: (i) arguing that the employment contract was invalid because of the employee’s fraudulent conduct; and (ii) claiming a return of part of salaries paid to the employee.

The employee admitted that he had falsified his educational background and business experience. However, he also argued that he was competent for the position of general manager because of his experience and capability. The employee further contended that the company should have checked his educational background and business experience at the time of recruitment or before the expiration of the probationary period, in a timely manner.

The court supported the company’s claims and held that the employment contract between the company and the employee was invalid due to the employee’s fraudulent tactics. The employee was also required to return part of his salaries received in the amount of RMB 300,000, which was decided at the court's discretion.

Historically, courts have been reluctant to require an employee to return salary because of the employee’s misconduct. Submission of false background information by an employee may lead to the employment contract being declared to be invalid. Where the employment contract has been declared invalid, the employer can also try to claw back any inappropriate salary payment made to the employee. However, in order to avoid having to rely on this course of action, employers should ensure that they conduct adequate background checks during the recruitment process.