The PRC Supreme People’s Court released the Fourth Interpretation on Certain Issues regarding Application of Laws in Trial of Labor Disputes (Draft for Consultation) (the “Draft Labor Interpretation”) on June 27, 2012. Views or comments from the public were sought before July 28, 2012. So far, no finalized Interpretation in this regard has been promulgated by the Supreme People’s Court. The Draft Labor Interpretation addresses severalsignificant issues relating to the choice of forum by parties, effectiveness of the company’s internal regulations and rules, and non-compete restrictions. 

I. Choice of Forum Clause 

The Draft Labor Interpretation provides that the employer and the employee are allowed to choose either thecompetent basic people’s court in the place where the employment contract is enforced or the place where the employer is registered. Additionally, the employment contract may specify the choice of forum. 

II. Employers’ Internal Regulations 

Pursuant to the PRC Labor Contract Law, when drafting or amending any company rules, polices or regulations(the “Employers’ Internal Regulations”) involving employees’ interests, the employer is required to discuss with all of its employees or designated representatives of the employees and solicit their opinions. The employer shall also publicize the Employers’ Internal Regulations or inform their employees of the new regulations. The Employers’ Internal Regulations shall not be used as basis for a labor dispute before the court. 

III. Non-Compete Clause 

1) Enforceability 

The non-compete clause is valid if and only if both the non-compete provision and economic compensations are specified in the employment contract. Furthermore, an employer may only enforce a non-compete clauses are against the former employees upon the dissolution or termination of the employment contracts if economic compensation has been paid to the employee on time or one month after the scheduled date in the employment contract. 

2) Compensation to Employees 

If economic compensation is not specified in the employment contract, an employee that has fulfilled the non-compete obligations after termination of employment contract shall be entitled to economic compensations based on his/her average monthly remuneration for the past 12 months immediately preceding the termination of the employment contract. 

3) Independent Clause 

If the non-compete provision and economic compensation are specified in the employment contract, and the employer and the employee mutually consent to terminate the employment contract, the non-compete shall remain in effect unless otherwise agreed by both parties. 

If the termination of employment is initiated by the employee due to the faults of the employer according to Article 38 of the PRC Labor Contract Law, the employer shall not require the employee to fulfill the non-compete obligations unless otherwise the employee has agreed. 

If an employer terminates employment because of an employee’s actions in accordance with Article 39 of the PRC Labor Contract Law, the non-compete remains effective. 

4) Termination of a Non-Competent Clause 

Termination of a non-competent clause during the non-compete period shall be based on mutual consent of both parties. Otherwise, the clause shall remain effective. Additionally, if the employer seeks to terminate the non-competent clause due to the disclosure of the trade secrets or confidential information related to intellectual property rights, the employer shall give sixty-day notice to the employee before terminating the clause. 

IV. Change of Employment Contract 

Any changes or amendments to the employment contract shall be in written form. However, an exception exists if the oral amendments to the contract 1) have been performed; 2) are in compliance with laws, regulations,polices, public orders and good customs; and 3) have not been objected to by the employee within one year after implementation.

V. Expatriate Employees 

The court recognizes an expatriate’s working relationship (including the Hong Kong, Macau or Taiwan employee)and the employer shall obtain the work permit when entering into an employment contract with the employee. Otherwise, the employment relationship won’t be recognized by the court even in the presence of an employment contract; however, the employee can still claim for compensation of their labor in compliance with the employment contract. 

A representative office established by foreign investors or Hong Kong, Macau or Taiwan investors can hire employees directly without outsourcing employment services to a human resources company. 

• Fourth Interpretation on Certain Issues regarding Application of Laws in Trial of Labor Disputes (Draft for Consultation) 
• Issuing Authority: the Supreme People’s Court of the People’s Republic of China 
• Date of Issuance: June 27, 2012 / Effective date: N/A