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Avoiding risks of labor disputes in China is increasingly more important for foreign companies

Foreign companies operating in China may face difficulties navigating local employment laws. In China, the labor dispute system encourages compromise and payment of severance, and in some cases, this can encourage employees to negotiate aggressively to force employers into uncomfortable concessions. 



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Managers accustomed to the dispute resolution processes in the West, where it is essential to establish fault and faultless behavior, may find the Chinese system of encouraging concessions and severance, especially when fraud or bad faith exists, difficult to understand and practice. However, it may be the most practical course of action. 


Avoiding the risks of having a labor dispute is now becoming increasingly more important for foreign companies operating a business in the country. 


Chinese law mandates written employment contracts for all employees, full-time and part-time. Using an overseas template or direct translation from English to Chinese won’t suffice. Employment contracts must comply with China’s national labor laws as well as with pertinent provincial and local regulations.  


In addition to binding employment contracts, a properly localized employee handbook provides important supplemental company rules, workplace policies and procedures that can help shape a productive, legally compliant organizational culture.  


Lawful termination 


To unilaterally terminate employment in China, an employer must establish “lawful” grounds. Otherwise, the termination will be deemed “unlawful”. If deemed unlawful, severance or reinstatement (with back pay) may be mandated. 


When a labor dispute, arbitration, or litigation extends over a period of months, or even years, an “unlawful” termination finding may require reinstatement and back pay, resulting in an expensive conclusion to the dispute. Employers in these situations often offer the employee even more money just to “go away”. 


Labor dispute process 


The main institution in this process is the labor dispute arbitration committee (LDAC), which handles most labor disputes in China. 


Mediation 


In May 2008, the Law on Mediation and Arbitration of Labour Disputes (LDMAL) was enacted, which stipulated that the LDAC must take up mediation before arbitration, and arbitration must occur before civil litigation. This system introduced a four-phased approach in handling labor disputes: mediation, arbitration, first instance civil suit, and second instance civil suit (or an appeal). 


Since the introduction of the LDMAL, many cases have been resolved before the arbitration process. However, if either party is dissatisfied with the result of the mediation process, they can then progress to an arbitration at the local LDAC. The arbitration process therefore became a prerequisite for civil suits. 


Arbitration 


Today, it is relatively easy and inexpensive for most workers to present a case to the LDAC. Workers only need to submit an application with supporting evidence, along with an application fee.  


Arbitration claims must be filed within one year of the day the dispute arose. By contrast, the statute of limitation for other regular disputes (beyond labor) is three years.  


The majority of disputes accepted by LDACs, following the mediation process, are related to remuneration, social insurance payments, and contract termination. A smaller portion of arbitrations involved work-related injury. 


Jurisdiction of the Labour Tribunal  


China’s Labour Tribunal offers employers and employees the means for a speedy and informal resolution of their disputes in a cost-efficient manner. Its jurisdiction is limited to monetary claims for breach of employment contracts or for non-compliance with the Employment Ordinance.  


Issues relating to the jurisdiction of the Labour Tribunal often arise, especially where it involves mixed claims or counterclaims. 


The Labour Tribunal's jurisdiction may be subject to territorial restrictions. The tribunal has the discretion to transfer claims to other courts. 


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When the employment relationship is governed by various documents with differing terms and conditions, it may lead to disputes about the parties' true intention. Including all necessary information in contracts is important to avoid misunderstandings and costly labor disputes. 


Cases relating to enforcement of restrictive covenants are highly fact-sensitive and the court is entitled to take into account all facts and circumstances in balancing the interests of the parties. 


Companies have a legitimate interest in protecting their confidential information and trade secrets through non-competition covenant. In case of a labor dispute, the employer should


present to the court sufficient evidence identifying the confidential information that the ex-employee was privy to and accessed during his employment.  


Even if the ex-employee had physically handed over confidential information at the end of his employment, the court may recognize that there may still have been confidential information retained by the ex-employee in his memory (whether consciously or not) that would justify the enforcement of the non-competition covenant. 


Joint employment 


It is very common for corporate groups to have one company within the group named as the employer under the written employment contracts with its employees working for the group and for such employer company to pay the salary and other payments for its employees. 


However, this does not prevent another company within the group from being a joint employer and from being jointly responsible for the employees' entitlements.  


Even though a wholly owned subsidiary is the named employer under the contract and the entity paying for the employee's salary and making contributions to the employee's mandatory provident fund, the court may look beyond that by adopting an 'overall impression' approach to assess whether the listed parent company should also be seen as an employer at the same time and be held liable for unpaid salary and other payments. 


The court may also consider the recruitment process and the parent company's subsequent conduct.  

Based on these facts, the court may determine that the overall impression is that the subsidiary and parent company are both employers and both are liable for unpaid salary and other payments. 

 

Directors may be considered an 'employer' 


It is an offence under the Employment Ordinance if the employer fails to pay any sum payable under an award of the Labour Tribunal. If an employer is convicted of an offence under the Employment Ordinance, the court has the discretion to order an employer to pay any outstanding wages at the time of the conviction. 


Under Section 2 of the Employment Ordinance, an 'employer' is defined as 'any person who has entered into a contract of employment to employ any other person as an employee and the duly authorized agent, manager or factor of such first mentioned person'.  


In a labor dispute, the court may exercise its discretion to order the director to personally bear the outstanding wages.  


Employers' implied duty of good faith 


Apart from some long-recognized implied terms in employment contracts (such as an employer's implied duty to provide a safe working environment and that of mutual trust and confidence), there is judicial support for having an implied anti-avoidance term in the contract to the effect that employers cannot dismiss employees to avoid the obligation to make bonus payments and the power to terminate or demote an employee should be exercised in good faith. 


'Standby duty' time cannot be counted as rest days 


In a recent case, the Court of Appeal supported a lower court's decision that the days on which the employee was on standby duty cannot be considered 'rest days' and so the employee is entitled to payments for his unpaid rest days. The Employment Ordinance provides that an employee is entitled to not less than one rest day in every period of seven days. Furthermore, a rest day is defined as a continuous period of not less than 24 hours during which an employee is entitled to abstain from working. 

Non-director employees may still owe fiduciary duties 


Depending on the nature of tasks and roles assigned to the employee, fiduciary duties may arise if, objectively speaking, there is a legitimate expectation by the employer that the employee will not use his or her personal position in a way that is averse to the employer's interest. An employee would likely owe fiduciary duties if he or she is tasked with dealing with important duties such as handling the employer's money. 

 

Conclusion 


There is a fine line between the jurisdiction of the Labour Tribunal and the courts. The increase in the number of applications by litigants to transfer proceedings from the Labour Tribunal to the courts (and vice versa) has led to more cases exploring the interplay between the various forums, including the Labour Tribunal, arbitral tribunals and the courts, and their respective functions. 


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According to experts, Chinese courts will continue to further clarify the scope of employers' implied duties and will grant appropriate relief by striking a careful balance between the protection of employees' rights and the protection of employers' business interests.  


More cases dealing with cross-border employment arrangements are expected, as mainland China and Hong Kong continue to strengthen their economic trades. 


It is essential to keep employment contracts current. Using outdated contracts that fail to account for changes in national or local laws can expose the company to significant liability in disputes.


As China’s employment regulations evolve, renewal contracts should be updated accordingly to stay fully compliant. 


 

Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms.


Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.

 

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