| [Case Playback]
Canadian citizen Mr. Keith Chang (in Chinese 陈德基) was employed as deputy general manager by a subsidary company of Fisher Scientific (in Chinese飞世尔) located in Shanghai. The employment contract period is for one year from 1st January to 31th December of 2006. It is also provided that the contract shall deem to be renewed for another period of 3 year upon expiration if no party give the other written notice not to renew it two months in advance of the expiration date. Further, the contract shall be terminated by any party with one month prior notice period.
As no party inform the other not to renew the contract when the first one year period past, their contract was renewed automatically up to the end of 2009. However, things changed suddenly. In May 2007, the company provided 《Draft Termination Agreement》and 《Confidential and Non-competition Agreement》and want to negotiatie with Mr. Chang’s to terminate his employment contract. When Mr. Chang refused, the Company unilaterily terminate the contract in written form on 30th May, 2007.
The employee Mr. Chang apply for illegal termination and reinstatement arbitration at the Shanghai Labor Disputes Arbitration Committee. The application was not supported and Mr. Chang filed the case at Nan Hui District People’s Court.
In the hearings, the employee argued that the termination clause in the labor contract, on which his dismissal was based on, does not comply with the Labor Contract Law. However, the court did not apply the Labor Contract Law, but local Shanghai labor regulations, the “Number of Views on the management of the employment of Foreigners in China”, issued by the Shanghai Municipal Labor Bureau on April 14, 1998 (in the following “Shanghai Regulations”). Apparently, the court considered these regulations as “lex specialis” to the Labor Contract Law when it comes to the employment of foreigners in Shanghai.
According to Art.16 of the Shanghai Regulations, “the rights and obligations about date, position, salary, insurance, working time, conditions for terminating the employment relationship, etc. between employers and foreign employees can be negotiated through labor contract”.
The court construed this provision as establishing the “principle of autonomy” to determine the rights and obligations between employer and foreign employee. Thus, the Labor Contract Law applies only in the absence of an agreement on the employment conditions mentioned in Art.16 of the Shanghai Regulations. The suit of Mr. Chang was denied accordingly.
[Expert Evaluation]
The Chinese Labor Contract Law does not differentiate between foreign employees and Chinese employees. Article 2 of Labor Contract Law provides: “This law shall govern the establishment of employment relationships between enterprises … (Employers), on the one hand, and workers, on the other hand.” There is no specification on the type of enterprise or the nationality of the “worker”. It thus seems reasonable to apply the Labor Contract Law to all labor relationships between Chinese companies (i.e. Chinese domestic companies as well as foreign invested enterprises) and employees, no matter their respective nationality.
The Chinese Labor Contract Law allows termination of employment relationship from the side of the employer only for definite reasons specified by the law:
- “Personal reasons”, i.e. reasons originating from personal characteristics of the employee, not related to his behavior. For instance, long-term illness or incompetence;
- “Operational reasons”, i.e. personnel cutbacks necessary due to the economic situation of the company. Since the cutback has to involve a certain minimum amount of employees, it is also called “mass layoff”;
- “Behavioral Reasons”, i.e. the employee committed some serious misconduct.
Any other reasons not provided by Labor Law or Labor Contract Law shall be illegal and the employee may claim damage or reinstatement.
From their home countries, foreign employers are often used to “regular” termination clauses, allowing the employer to terminate the labor contract without special reason, but with a certain prior notice period, e.g. 3 months. The Chinese Law does not know this kind of clauses. The reasons for termination as provided by the Labor Contract Law are deemed exhaustive. However, foreign employers do not want to forgo this option and include it in labor contracts between their Chinese subsidiary company and foreign employees. The validity of such a clause shall depend on whether China Labor Contract Law apply to foreign employees. If it applies, then such a clause shall be invalid, and the termination according to this clause shall be illegal.
Not only in conflict with China Labor Contract Law, the Shanghai Regulation is also somewhat inconsistant with Rules for the Administration of Employment of Foreigners in China (in the following “Minstry Rules”) by PRC Labour Ministry, interpreted by the “Shanghai Regulation”. Article 26 of the Ministry Rules provides that “should the labour disputes arise between the employer and its foreign employee, they should be handle in accordance with the Labour Law of the Peoples Republic of China and the Regulations of the Peoples Republic of China on Settlement of Labour Disputes in Enterprises”. Now the Regulations of the Peoples Republic of China on Settlement of Labour Disputes in Enterprises has been replaced by Law of the People’s Republic of China on Mediation and Arbitration of Labor Disputes.
Lawyers and judges from courts outside of Shanghai, especially from Beijing, criticize this interpretation by arguing that the Labor Contract Law applies throughout China, to all Chinese enterprises and to Chinese and foreign employees without difference. There may be room for the principle of autonomy to determine the employment conditions, but these agreed conditions cannot be lower than the standards provided by the labor contract law. Otherwise, the purpose of the labor law to protect the employee would be circumvented. The employee is typically in a weaker position when it comes to negotiating the conditions of the labor contract. The principle of autonomy in its full extent, however, can only apply to negotiations between parties who are “peers” in the sense of similar negotiating power.
Nevertheless, this decision of Shanghai Nan Hui District Court seems to represent the currently prevailing view in the Shanghai judiciary. The newly explaination from a Shanghai authoritative person is that the Shanghai practice is in line with international custom, especially with UK and US case law. In his view, Labor Contract Law is following German labor law system in some respect, however, when China Labor Contract Law came into force, the German Labor Law has changed already.
[Legal Provision]
《Labor Contract Law of the People’s Republic of China》Article 2
The establishment of employment relationship between enterprises, individual economic organizations, non-enterprise private entities and other entities (hereinafter referred to as the employers) and the workers thereof, as well as the conclusion, performance, alteration, cancellation or termination of labor contracts shall be governed by this Law.
《Rules for the Administration of Employment of Foreigners in China》Article 26
Should the labour disputes arise between the employer and its foreign employee, they should be handle in accordance with the Labour Law of the Peoples Republic of China and the Regulations of the Peoples Republic of China on Settlement of Labour Disputes in Enterprises.
《Number of Views on the management of the employment of Foreigners in China》Article 16
The rights and obligations about date, position, salary, insurance, working time, conditions for terminating the employment relationship, etc. between employers and foreign employees can be negotiated through labor contract.
《Circular on Certain Issues Concerning the Implementation of Labour Contract Regulations of Shanghai Municipality》
26. The rights and liabilities of foreigners and personnel from Taiwan, Hong Kong and Macao who are approved to be employed within the jurisdiction of Shanghai Municipality shall be determined by the board of directors or management body of the employing unit and then embodied in the labour contract.
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