Trial of labour dispute cases – Interpretation IV

On 31 January 2013, “Interpretation IV of the Supreme People's Court of Several Issues on the Application of Law in the Trial of Labour Dispute Cases (最高法院关于审理劳动争议案件适用法律若干问题的解释(四))” (“Interpretation IV“) was issued. Interpretation IV came into effect on 1 February 2013.

Interpretation IV comprises 15 articles, covering aspects relating to procedural matters, continuation of employment period, non-compete restrictions, legal effect of oral amendments to labour contract, termination of labour contract and employment of foreign nationals in China.

1. Employment with former employer to be recognized

Interpretation IV clarifies the circumstances under which an employee's employment with his former employer shall be recognized for the purpose of determining the statutory severance payment, when the new employer terminates the employment. Basically, where the employer is changed due to a reason NOT caused by the employee (such as where the change of employer is the result of a corporate merger or separation or rotational employment on the part of the employer and its affiliated companies, etc.), then, when the new employer terminates the employment, it shall have to count in the employee's period of employment with his former employer in the calculation of statutory severance due to the employee.

2. Non-compete restrictions

Interpretation IV clarifies several issues relating to non-compete restrictions contained in a labour contract, including the legal consequences of failure to specify the economic compensation payable or to make payment of agreed economic compensation, and the remedies available in case of breach of non-compete restrictions.

Employers should note that where a labour contract contains a non-compete restriction but does not specify the amount of economic compensation payable, such non-compete restriction will not become void automatically upon termination of the labour contract, and the parties may still agree on the economic compensation payable notwithstanding termination of the contract. If the amount of compensation is not agreed, and the employee observes the non-compete restrictions nonetheless, he shall be entitled to claim against the employer for an economic compensation equal to 30% of his average monthly salary (with the average being calculated based on the employee's salary for the 12-month period preceding termination of employment). An employer may terminate a non-compete restriction but it will have to pay the employee an additional amount equal to the economic compensation payable for 3 months.

3. Legal effect of oral amendments to labour contracts

Interpretation IV allows the employer and employee to orally amend the labour contract entered into between them, on the condition that the contract is performed as amended with no objections to such amendments having been made in writing by either party within one month thereof, and that the contents of the contract as amended do not contravene any laws, governmental rules, state policies or social security practices.

4. Termination of labour contract

It would be necessary for the employer to notify the trade union (where it exists) in advance of its termination of a labour contract; otherwise, pursuant to Interpretation IV, such termination shall be treated as an unlawful termination for being procedurally flawed, with the employer being required to make compensation payment, unless the employer shall have remedied such flaw before a legal proceeding is instituted against it.

Interpretation IV also provides for the right of an employee to demand for economic compensation where his employer is unable to continue to perform the labour contract due to discontinuation of business operation upon expiration of its term of operation.

5. Employment of expatriates

As is consistent with the current judicial interpretation and implementation of the PRC labour regulations, Interpretation IV does not consider an employment relationship to have been established when an expatriate (being a non-PRC national) enters into a labour contract with his supposedly employer if the expatriate fails to process for and obtain the relevant work permit.

Interpretation IV has basically clarified or otherwise supplemented the prevailing PRC labour regulations and the implementation rules of the same in several aspects, and the above highlights those which (in our view) are of particular significance to the employer.