New Draft Interpretation IV of the Supreme Peoples Court on Several Issues Concerning the Applicable Law in the Hearing of Labour Dispute Cases

The Supreme Peoples Court has issued a draft Interpretation IV of the Supreme Peoples Court on Several Issues Concerning the Applicable Law in the Hearing of Labour Dispute Cases（最高人民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“) to seek for public comments from 27 June 2012 to 28 July 2012.

Although the provisions in the Interpretation IV have not yet been finalised, they do provide an idea on how certain labour issues are likely to be interpreted and adjudicated by the relevant PRC courts in case of disputes.

The Interpretation IV consists of 18 articles which address issues like jurisdiction among courts at different localities/levels and arbitration tribunals; calculation of severance payment for employee being transferred to a new employer; legal force of employee handbook; enforceability of non-compete provisions; amendment of terms of labour contract by conduct; severance payment obligations; validity of labour relationship with non-PRC nationals without valid work permit and relationship of representative offices with PRC nationals directly employed without going through designated labour dispatch services provider. Below is a highlight of some of the salient provisions:

Issues Concerning Non-Compete Provisions

The Interpretation IV among other provides that:

• Where the non-compete provisions fail to specify the economic compensation payable to the employee, the non-compete provisions shall not be enforceable by the employer. However, if the employee has performed the non-compete obligations, the employee may request the employer to pay economic compensation on the basis of the average salary of the 12 months immediately preceding the termination of employment.
• Where an employer fails to pay the economic compensation specified in the non-compete provisions to the employee for over 1 month after the termination of employment, the non-compete provisions shall not be enforceable by the employer unless the employee agrees otherwise.
• Where a party wrongfully terminates the employment or a party terminates the employment unilaterally due to the other party's fault, the non-compete provisions shall not be enforceable by the party in default.
• Mutual agreement shall be reached by the parties for the termination of the non-compete provisions during the non-compete period. Otherwise, the non-compete provisions shall continue to be binding.
• 60 days' prior written notice shall be given to the employee if the employer wishes to terminate the non-compete provisions on the ground that the trade secret or the confidential information relating to intellectual property rights have been made public.

Issues Concerning Relationship of Representative Offices with PRC National Staff

The Interpretation IV provides that where a representative office directly employs PRC national staff without going through designated labour dispatch services provider (e.g. FESCO), their relationship may be deemed as a labour relationship.

Under the current regulations, representative offices are required to engage PRC nationals through designated labour dispatch services provider. In light of the Interpretation IV, representative offices may additionally be penalised in case they employ PRC nationals in violation of the current regulations because if there is deemed to be a labour relationship, the representative offices will need to assume the obligations and liabilities as an employer under the labour laws and regulations.

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Upon the formal promulgation of the Interpretation IV, it will become the guidelines for the PRC courts in adjudicating labour disputes cases. It is advisable to keep an eye on the latest development and bear in mind the relevant guidelines in negotiating and preparing employment documentation and managing employment relationship.