China Releases Interpretations on Resolving Labor Disputes
Apr. 18 – China’s National People’s Congress adopted the “Decision on Revising the Labor Contract Law of the People’s Republic of China” on December 28, 2012, which tightens loopholes on hiring dispatched workers and offers better protection for such workers. However, the revised law fails to provide clear and practical guidance over some common issues arising out of labor disputes. In response, China’s Supreme People’s Court issued two interpretations to deal with labor disputes in January this year. Detailed information can be found below.
One of the interpretations, named “The Interpretation on Several Issues Regarding the Application of Law in the Trial of Cases Involving Labor Disputes (IV) (fashi  No. 4, hereinafter referred to as the ‘Interpretation I’)” was issued on January 18, and clarifies several issues concerning the application of laws when labor disputes are brought to trial.
Standard for Non-Competition Compensation
Prior to the issuance of Interpretation I, China did not have a uniform, national standard regarding non-competition compensation, thereby causing confusion over the validity of non-competition clauses in labor contracts. Interpretation I clarifies the issue by providing the following:
- Where the parties have agreed upon a non-competition clause in the labor contract or confidentiality agreement, but have not agreed upon the compensation amount to the employee in the event of contract termination, and the employee has fulfilled the obligations under the non-compete clause. Under these circumstances, the employee may claim a monthly payment of 30 percent of his/her average wage over the 12-month period preceding the termination of the contract.
- Where the parties have entered into a non-competition agreement and have agreed upon the non-competition compensation, the employee can be discharged of the non-competition restrictions if the employer fails to pay such compensation for three months.
- Where the employer terminates the non-compete agreement during the non-competition period, the employee may claim additional three-month compensations from its employer.
Verbal Amendments to Labor Contract
China’s Labor Contract Law requires that any modification to a labor contract shall be made in writing, but an enforceability problem arises when the parties concerned have verbally amended the labor contract.
According to Interpretation I, verbal amendments to a labor contract are enforceable if:
- The parties concerned have actually performed the verbally-modified contract for more than one month.
- The modified contract is not in violation of laws, administrative regulations, State policies and public order.
Labor Relationship with Foreigners
Interpretation I clearly stipulates that if a foreigner fails to obtain the working visa and working permit in China, the labor contract between a foreign individual (including Hong Kong, Macau and Taiwan residents) and a Chinese company will not be recognized.
- In situations whereby a foreigner, stateless person or a Taiwan, Hong Kong or Macau resident signs a labor contract with an employer in Mainland China without obtaining the proper work permit, the relevant People’s Court shall not uphold requests from such employees to confirm the existence of a labor relation with the employer.
- Labor relations may be confirmed if a foreign national holds both a Foreign Expert Certificate and a Work Permit for Foreign Experts, and has entered into employment relations with an employer within Mainland China.
China’s Supreme People’s Court released another interpretation regarding labor disputes on January 22, clarifying various terms and standards regarding the crime of maliciously failing to pay labor remunerations to an employee (hereinafter referred to as ‘Interpretation II’).
The crime was first introduced by Amendment VIII of China’s Criminal Law in 2011. According to the amendment, where an employer has been “maliciously failing to pay labor remunerations” to an employee, and holds a “relatively substantial amount” of an employee’s labor remunerations in arrears, the employer may face three years imprisonment or criminal detention, and where there have been “serious consequences” caused to the employee, the imprisonment period can be up to seven years.
Interpretation II has resolved the ambiguity under the amendment by defining the following terms.
Labor remunerations shall include the following:
- Overtime payments
- Other remunerations paid under special circumstances
Relatively Substantial Amount
Non-payment under any of the following circumstances shall be determined as reaching the threshold for “relatively substantial amount”:
- Non-payment of remunerations in excess of three months for one employee, and the amount thereof is no less than RMB5,000 and no more than RMB20,000
- Non-payment of remunerations for 10 or more employees, and the amount thereof is no less than RMB30,000 and no more than RMB100,000
Interpretation II has listed certain circumstances which constitute “serious consequences,” specifically:
- Where the consequence of non-payment of remunerations has seriously affected the livelihood of the employee and the employee’s dependants
- Where the employer uses violence or threats against the employee demanding labor remunerations payment
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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