SPC strikes balance over employment contracts

“The draft was more pro-union or pro-employee, but the final version has become more balanced,” said Gordon Feng, a labour and employment lawyer with Paul Hastings in Shanghai.

“All these changes indicate that the Interpretation tends to balance the interests of the parties by lightening the employer's obligations in all these situations, in particular, non-compete clauses,” said Kathleen Healy, a partner with Freshfields Bruckhaus Deringer in Hong Kong.

Non-compete

The Interpretation has provided welcome guidance over non-compete compensation as Article 6 states that compensation shall equal 30% of the previous 12 months' average salary. This only applies to non-compete clauses where the compensation amount was not specified in the contract.

Article 6 will resolve a common issue that many non-compete clauses do not specify what the non-compete payment will be and can lead to clauses being unenforceable. In addition, employers and employees often did not know how to agree on the non-compete payments as there were no standards.

“The Interpretation still does not indicate a statutory standard, but it gives some guidance on how much payment could be regarded as reasonable – 30%,” said Healy.

Company policies

The draft was also perceived as pro-employee because it stated that if employers failed to go through the necessary democratic consultation procedures for company policies, the courts cannot judge cases based on these policies.

In practice, courts hold differing positions as to whether company policies are binding on employees without going through the consultation procedures. “Some judges hold that as long as the content of the company policy complies with the law, this policy should be binding,” said Healy.

“In the final version the provision on consultation requirements was removed – the reason is because this clause is very controversial as in reality a lot of companies do not go through the democratic consultation requirements for their policies due to various reasons,” said Feng.

Oral changes

Article 11 provides that if both parties orally change the employment contract and if there is no objection within one month, it will be binding for both the employer and employee.

In the past, the courts and labour tribunals held that if the employer cannot provide sufficient written evidence, any changes agreed by the employee are not valid.

“But after this Interpretation, the practice will change a lot and disputes will be judged on a case-by-case basis – it is hard to anticipate the overall influence this will have until disputes arise,” said Lu.

Union notification

The draft also required employers that have a union to inform them of any termination. However, this has changed in the final version as employers do not have to inform the union until after termination, but before any first instance court proceedings.

“Notifying the union can be done at any time before the complaint is filed, for example, during the labour arbitration procedure – typically this is between one to three months after termination,” said Feng.

The Interpretation works in conjunction with the recently-amended PRC Employment Contract Law (中华人民共和国劳动合同法). The Law was criticised for simplistic definitions and vague wording that will still leave loopholes over the use of labour dispatch workers.

The Opinion can be seen as clear and practical guidance over some of the most common issues that arise in labour disputes, for which there has been no clear legislation since 2008, when the Employment Contract Law was first promulgated.

By David Tring

A full translation of the Interpretation will be available online in early March and will appear in the March/April issue of China Law & Practice

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Opinion: How to deal with trade unions

How to structure non-compete clauses