Employers need be aware of a recent interpretation issued by the PRC Supreme Court which clarifies a number of employment issues related to service year, non-competition, amendment to employment contract and employment relationship of foreign individual. The PRC Supreme People’s Court issued the Interpretation on Several Issues concerning the Application of Laws in Labor Dispute Case (IV) (the “Interpretation”) on January 18, 2013 which became effective on February 1, 2013.

Recognition of Prior Years of Service – Employee Transfers and Reassignments

When an employee is terminated by an employer, he is entitled to severance payment calculated on his year of service. As a general rule, the employee would be entitled to severance payment of one month salary for each year of service with the employer. The problem arises where the employee, following transfer or reassignment to a new employer due to reasons not of his own (merger of the old and new employer, original employer seconds to new employer, or employee reassigned under a rotation between employer and affiliate company) is terminated by the new employer and the previous employer had earlier failed to calculate and make severance payments. Many new employers would take the position that there was a new employment relationship upon the transfer or assignment, and hence would be only responsible for the years of service under the new relationship.

Specifically, the Article 5 of the Interpretation now provides guidance as the new employer would be held responsible for calculating the years of service with the previous employer where the reasons for the assignment or transfer were not attributable to the employee. Circumstances where the assignment or transfer are not attributable to the employee may include any of the following-

(i) The employer changes but the employee remains working at the same position and location;
(ii) The existing employer seconds or assigns the employee to work for a new employer;
(iii) The employee works for a new employer as a result of the merger or acquisition of the existing employer;
(iv) The employee signs employment contract with the employer and its affiliated company; and
(v) Other reasonable circumstances.

This rule is of material implication in mergers and acquisition transaction where the acquiring company agrees to take over the employees of the target company. We recommend the acquiring company review whether the target company has satisfied its severance payment obligation towards the transferred employees, so if subsequently the acquiring company terminates such employee, the outstanding severance payment obligation will not come back to haunt it.

Non-Competition Agreement

Payment Amount for Non-Competition Compensation – Non Competition Agreement is Silent

Non-Competition agreements are unenforceable unless the employer pays over to the employee non-competition compensation during the non-compete period. The problem occurs where there is uncertainty on enforcing the non-competition agreements; while the employer and employee have agreed to non-compete restrictions, the amount of compensation is silent. Prior to the issuance of this Interpretation, the amount of non-competition compensation, unless fixed by agreement, was unclear as there was no uniform, national standard. Now, Article 6 of the Interpretation provides that if the parties have agreed to a post-termination non-competition provision but it is silent in amount, then the employee is entitled to thirty percent (30%) of either (i) the average monthly salary of the employee for the twelve months immediately preceding the termination of employment, or (ii) the minimum monthly salary in the local municipality, whichever amount being higher.

Termination of Non-Competition Restrictions by Either Employee or Employer

Where the employer fails to pay non-compete compensation for three months, then the employee can be discharged of the non-compete restrictions. Employers, however, have the right to terminate early the non-competition agreement by paying three months of the stipulated non-competition compensation.

Verbal Amendment to the Employment Contract

Article 35 of PRC Labor Contract Law requires that all amendments to the employment contract be in writing. Enforceability problems have occurred where the parties had orally amended the employment contract. Now, Article 11 of the Interpretation establishes an exception to this rule as an oral amendment will be enforceable where it is lawful and the parties have performed the amended contract for more than a month.

Employment Contract Signed before Obtaining Work Approval

Many times a foreign employee will sign an employment contract without obtaining a valid work permit, and later seek to enforce the contract. Article 14 of the Interpretation now makes clear that unless the foreign employee has obtained the required work visa or permit, the employment contract between a foreign individual (including Hong Kong, Macau and Taiwan resident) and a Chinese company will not be recognized and enforceable. Therefore, even though the foreign employee has signed an employment contract with a Chinese company and started work, unless he has obtained proper approval to work in China, he is not entitled to protection under the PRC labor laws.