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POLICY EXPLANATION: Unscrambling of Interpretation IV on Several Issues Concerning the Application of Law in Hearing of Labour Dispute
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On 31 January 2013, the PRC Supreme People’s Court (SPC) issued the Interpretation IV on Several Issues Concerning the Application of Law in Hearing of Labour Dispute (“Interpretation IV”), effective as of 1 February 2013. 
 
Compared to the draft issued for public comments in June last year, Interpretation IV contains a number of changes which may have a significant impact on the PRC’s employment law practices. 
 
This article highlights these key provisions and issues:
 
I. Verbal Amendments to Employment Contracts  
 
Before the promulgation of Interpretation IV, any valid and enforceable amendment to an employment contract must be agreed in writing, otherwise it is not binding upon the Parties. Article 11 of the Interpretation IV, however, introduces an exception for verbal amendments provided that both Parties have acted in line with the oral variation of the employment contract for more than one month, and such variation does not contravene or violate any laws, regulations or state policies and good customs.  
 
II. Intra-Group Transfer
 
As stated in Regulation on the Implementation of the PRC Employment Contract Law, where an employee is transferred to a new employer for reasons not attributable to themselves, his seniority with the last employer shall be consolidated into his seniority with the new employer. As a matter practice, however, it is somewhat ambiguous and vague to clarify which reason shall be considered as not attributable to the employee’s personal reason, and as a consequence, the original clause leaves a room for the employer to play a card. With the purpose of avoiding the situation getting worse, the Interpretation IV explicitly specifies the reasons which shall be treated as “reasons not attributable to the employee’s personal reason.” This includes when: (1) the employee remains in the same job position and on the same premises and only the employer has been changed; (2) the work transfer is caused by the employer’s delegation or appointment; (3) the work transfer is due to merger, demerger or similar such actions of the employer; or (4) the employment contract with the employee is entered into alternately with the employer and its affiliated company. 
 
III. Severance payment for Termination due to Expired Business License
 
An employee is entitled to claim severance payment against an employer if any of the statutory requirements as set forth in the Labour Contract Law is achieved. However, prior to the Interpretation IV, the Labour Contract Law is silent on the severance payment in terms of termination of employment contract because of expired business license. The Interpretation IV provides that if an employer is unable to continue its performance of a labour contract due to the expiry of its approved business term, the employer is still obliged to pay economic compensation to the employee.   
 
IV. Expatriate Employees
 
Article 14 of the Interpretation IV states that no employment relationship will be recognised by a Chinese court if a foreigner or a Hong Kong, Macau or Taiwan permanent resident, concludes an employment contract with a PRC entity without obtaining a work permit, regardless of whether an employment contract was signed by the parties. A foreigner with an Expert Certificate and The Work Permit for Foreign Experts in China is also eligible to establish a Labour relationship with a PRC entity.   
 
V. Non-competition Obligation
 
Labour Contract Law empowers an employer to force a non-competition obligation upon an employee by entering into a non-competition agreement or a non-competition clause. During the non-competition period, the employee is prohibited to engag in or starting a similar profession or trade in competition against the employer, in exchange, the employer shall pay a sum of economic compensations on a monthly basis within the non-competition period. However, much uncertainty used to surround the question of how much the employer should pay to an employee for his observation of non-compete obligations. Some localities have provided for specific percentages of monthly pay but most localities remain silent.
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For the first time at national level, indication of an acceptable quantum has surfaced. Interpretation IV provides that a claim for 30% of the monthly average of the employee’s salary over the last 12 months prior to departure should be upheld by the court. Interpretation IV further states that if no compensation payable is included in a non complete clause, an employee who has abided by his obligation of non competition may claim for the said 30% average monthly pay. 
 
This is therefore a pitfall for many employers, because many of them fail to stipulate a monthly compensation in a non competition clause. An employee who has left and not worked at all or has worked in noncompeting new jobs can come back later to claim against their employer for the 30% monthly pay on the grounds that he or she observed the covenant, supposedly even whereby he or she did not mean to observe it but just could not find a job or a competing job.
 
To this regard, it is of significance for an employer to take a serious consideration on whether a non-compete clause is so needed that every employee shall be entered into such a covenant. If they do have one already and decide they do not need it, they should notify the employee in writing to release him from his duty of non-competition, preferably before the termination or cancellation of his employment contract. As stated in the Interpretation IV, an employer is also free to terminate the non-competition agreement. However, in such cases, an additional three months of non-compete compensation shall be paid to the employee. And the Interpretation IV is silent on the feasibility to give a three month notice in lieu of the payment.  
 
In terms of a non-competition covenant, there is also good news for the employer. The Interpretation IV explicitly demonstrates that where an employee breaches his duty of non-competition, in addition to damages, the employer is entitled to claim the employee continuous performance of his duty in compliance with the non-competition clause. 
 
VI. Termination: Prior notice to Trade Union
 
The Interpretation IV reiterates the importance of trade unions in terms of termination of an employment contract. Where an employer has established a trade union, an employee may bring an action for damages on the ground of unlawful dismissal, if such employers fail to give a notice to the trade union prior to the termination of the employment contract. There will be an exception where the employer has rectified its conduct before the lawsuit. 
 
VII. Conclusion 

The number of Labour-related cases which are tried in Chinese courts has increased dramatically in recent years. Employers in China are advised to keep a close eye on all developments related to the interpretation of Labour Contract Law and to try to ensure that their employment contracts, handbooks, rules, policies and practices are consistent with this law as it is interpreted by the SPC and other government organisations. 
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 By Simon Bai
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