PRC: Supreme People's Court releases classic employment cases

中文版

On 30 April 2024, the Supreme People's Court (SPC) published six classic cases on employment disputes, covering issues related to the determination of employment relationship, conclusion of permanent employment contract, non-competition, exit handover and paternity leave. This update summarises the key points of these classic cases. 

Determination of employment relationship 

In the first case, a company entered into a workshop contractor agreement with all the workshop personnel. The agreement stipulated that workshop personnel should comply with the company's safety policies and that the agreement would be considered a collective contract between the company and all workshop personnel. Later, when one of the workshop personnel, Cui, was injured at work, he brought a claim against the company seeking confirmation of his employment relationship with the company. The court ruled in favour Cui's request.

In its accompanying commentary to the case, SPC clarified that in practice, some companies misuse contractor agreements to avoid establishing employment relationships with their employees. Employers who deny the existence of an employment relationship with their employees on the grounds of having signed a contracting agreement are circumventing employer liability. Therefore, when determining the existence of an employment relationship between a company and a contractor, it is insufficient to review the title or a description of the contract. Crucially, a substantive examination of the content and actual performance of the contract is required to determine whether the legal relationship between the two parties exhibits the characteristics of an employment relationship. 

Conclusion of permanent employment contract

In the second case, an employee signed two consecutive fixed-term employment contracts with a company. As the term of the second contract neared its expiration, the company notified the employee that the contract would be ending and requested the employee to complete handover procedures. After receiving no response from the Company despite the employee repeated requests to enter into a permanent employment contract, the employee filed a claim requiring the company to enter into the permanent employment contract requested by the employee. Ultimately, the court ruled in favour of the employee.

Pursuant to Article 14 of the Employment Contract Law, if an employee consecutively signs two fixed-term employment contracts and none of the circumstances stipulated in Article 39 (where the employer can unilaterally terminate the employment contract without notice) and the first and second items of Article 40 (where the employee cannot resume work after the medical treatment period expires or is incompetent for work) apply, the employer is required to enter into a permanent employment contract with the employee upon the employee's request. In its accompanying commentary, SPC emphasised that Article 14 of the Employment Contract Law imposes a mandatory obligation on employers. As long as the requisite conditions under Article 14 are met, the employee is entitled to request for a permanent employment contract, and this cannot be refused by the employer.

Notably, SPC's views in the commentary appear to be inconsistent with current practices in Shanghai, where employers have the discretion to decide whether to establish a permanent employment contract. It would be interesting to see how SPC's decision to highlight this case as a classic case may influence future practices in Shanghai.

Non-competition

In the third case, an employee worked as a massage therapist in a company. The company and the employee entered into a confidentiality agreement, which contained a non-competition obligation stipulating that the employee shall not engage in competing businesses within two years after the employment is terminated. Subsequently, the employee left the company and worked at a community health service centre. The company claimed that the employee had violated the non-competition obligation and demanded to be paid damages for the breach penalty. The company argued that as the employee had access to the company's customer data, product pricing schemes, and training courses, the employee fell within the scope of "other personnel with confidentiality obligations" and thus could be bound by non-competition restrictions in accordance with the Employment Contract Law. On the facts of the case however, the court ruled that the employee only had access to the company's general business information, not core business secrets. Accordingly, the employee did not fall within the scope of personnel who could be bound by non-competition restrictions under the Employment Contract Law, and was not required to fulfil the non-competition obligation.

In its accompanying commentary, SPC emphasised that the primary purpose of non-competition restrictions is to regulate unfair competition, rather than limit the ordinary movement of manpower talent. In practice however, there is a tendency for employers to misuse non-competition clauses. Some employers sign non-competition agreements with employees which stipulate that high penalties are to be paid by the employee in the event of a breach, without considering whether the employees have access to the company's trade secrets, confidential information or intellectual property. Additionally, due to the inequality in bargaining power, employees typically are unable to refuse to sign these non-competition agreements, leading to infringements on their legitimate rights and interests.

In the fourth case, an employee signed a non-competition agreement with a sports company, which provided that the employee could not engage in competitive activities within two years after the employment is terminated.  After the end of the employment relationship between the company and the employee, the employee's spouse became the controlling investor of a company that was in competition with the sports company. The sports company brought a claim against the employee for violation of the non-competition agreement.

The court ruled that given the intimate personal and financial relationship between the employee and his spouse, and the fact that the spouse's investment activities primarily occurred after the employee left the sports company, the employee had violated the non-competition agreement. In its commentary, SPC clarified that the employee, as a senior manager, had covertly violated the non-competition agreement by indirectly operating a competitive business through his spouse. 

Exit handover

In the fifth case, an employee working in a research and development role at a company resigned without completing the required handover procedures, as stipulated in the employment contract. The employee's abrupt departure forced the company to implement backup plans, recruit replacement personnel, and engage third parties to minimise the impact caused to the research and development project due to the lack of proper handover. Despite these measures however, the company faced liability for breach of contract due to delayed project progress. The company sought compensation from the employee for the losses suffered. After considering factors such as the employee's tenure, the timing of the resignation, and the employee's salary, the court ordered the employee to compensate the company RMB 50,000 (~USD 7,000) for the losses incurred.In its commentary, the SPC emphasized that research and development personnel, who possess crucial project information, should follow the principle of good faith when voluntarily terminating their employment contracts. They should comply with the employment contract and legal requirements by notifying the employer of their departure in advance and completing the required handover procedures, in order to ensure the continuity of the company's research and development projects. 

Paternity leave

In the sixth case, an employee took leave from 2 July 2021 to accompany his wife during childbirth. The child was born on 3 July 2021, and the employee returned to work on 20 July 2021. Subsequently, a disagreement arose between the employee and the company in relation to his salary, with the employee seeking payment for his paternity leave. The case took place in Jiangsu Province, where local regulations provided that male employees are entitled to no less than 15 days of paid paternity leave. Therefore, the court ruled that the company should pay salary during the employee's paternity leave.

In its commentary, SPC clarified that paternity leave is an entitlement for male employees to care for their wives and children during childbirth. Employers should strictly comply with relevant regulations and pay salary to male employees during their paternity leave.

Key takeaways

The classic cases released by SPC typically represent the most prevalent and representative employment disputes across the nation, reflecting the authorities' key areas of focus in the employment landscape. It is evident that SPC continues to maintain a protective stance towards employees, while also ensuring that this does not impede the normal operations and innovative growth of businesses.

In particular, the sixth classic case above serves as a timely reminder that employers are required to comply with local regulations regarding maternity and paternity leave entitlements. As the provisions on maternity and paternity leave entitlements may vary across regions in Mainland China, employers should review local regulations regularly and update their policies to ensure that they are compliant.