Labor Case Study: Terminating a Manager in China

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China Briefing Exclusive

By Allan Xu
Manager, Business Advisory Services
Dezan Shira & Associates, Shanghai

For foreign enterprises operating in Asia, terminating an employee is a process fraught with various dos and don’ts. Employers may encounter regulations that seem to offer an overly high degree of protection to the employee’s job security, or anachronistic legislation that hasn’t kept pace with the given country’s current environment.

The procedure for terminating an employer differs markedly across Asia. Previous ASEAN Briefing and Vietnam Briefing articles illustrate how diverse the process can be within the Association of Southeast Asian Nations, with each country in the ten-nation bloc having their own distinct set of laws. Failure to identify and adhere to the relevant regulations can result in unfair dismissal suits and prove costly for the perpetrating company. 

Foreign enterprises operating in Asia need to be fully versed in the relevant government framework to avoid unnecessary disputes. In this article, we present a case study from China Briefing that illustrates how a successful termination can be made in China – a country with a unique regulatory framework connected to human resources. 

Background

Mark joined a Chinese supermarket in 2011 as a sales manager in its sales department. In 2012, he entered into an agreement to buy products from a relative’s company without notifying his employer. The supermarket discovered this one year later, deemed it to be in violation of their Employment Handbook, and decided to rescind Mark’s labor contract.

Mark believed that the supermarket had rescinded his labor contract simply because they did not wish to continue employing him. He therefore applied for arbitration, claiming that he had been illegally terminated. Because his employer did not give a written notice to him 30 days in advance, he requested that the supermarket compensate him on the basis of his service period in addition to a severance payment of one month’s wage.

The supermarket took the stance that the rescission abided by the PRC’s Labor Contract Law and its Employment Handbook, citing the rule that: “Any person that participates in and/or engages in conflicts of interest with the company without prior notification, as stipulated in the company’s anti-bribery rules, is committing a serious violation. In this instance, [the] company can rescind the labor contract without any severance payment/compensation.” As a result, Mark’s labor contract was legally terminated without compensation.

Professional Service_CB icons_2015RELATED: Payroll and Human Resource Services from Dezan Shira & Associates

Outcome

The Arbitration Committee deemed that the rescission of the labor contract was lawful. Because there was a relevant stipulation in the Employment Handbook, Mark’s transaction with his relative offended the company’s interest. It was also in breach of Article 39(2) of the PRC’s Labor Contract Law. The Arbitration Committee therefore did not support Mark’s claim.

Key points
  1. Whether or not the company can provide relevant evidence to prove that Mark violated the relevant stipulation in the Employment Handbook;
  2. Whether or not the Employment Handbook is legal and valid.
Analysis

According to the evidence provided by the employer, the case can be analyzed with the following points:

  1. The facts of Mark’s serious violation

As a sales manager for the supermarket, Mark entered into an agreement with his relative for their own interest without giving any prior notice to his employer. The supermarket provided a transcript which showed that Mark acknowledged he purchased products from his relative’s company at a normal price, but did not report so. The supermarket also provided a record from the Public Security Bureau to prove that the owner of the company was Mark’s relative.

  1. Violation of relevant stipulation in the Employment Handbook

Based on the above facts, Mark’s behavior matches the definition of a serious violation as stipulated in the supermarket’s Employment Handbook.

  1. The Employment Handbook is formulated by lawful procedure

In line with Article 4 of the PRC’s Labor Contract Law, when an employer formulates, revises or decides on major matters pertaining to, for example, labor remuneration, working hours, rest periods and off days which directly involve the interests of workers, such matters are discussed by the employee representatives’ congress, or all staff who make proposals and give their opinion, and the employer.

The supermarket provided the meeting minutes to demonstrate that they convened the employee representatives’ congress and passed the Employment Handbook, which proves the Employment Handbook is legally formulated.

  1. Employee is aware of and signed the Employment Handbook

The supermarket provided a record of Mark signing the Employment Handbook.

  1. The rescission abided by legal termination procedures

An employer that unilaterally rescinds a labor contract must notify the labor union of the reason beforehand. In this case, the supermarket provided the relevant documents to prove that they sought the opinion of the labor union.

  1. Relevant stipulation on rescission proposed by the employer

According to Article 39(2) of the PRC’s Labor Contract Law, where the worker has committed a serious breach of the employer’s rules, the employer may rescind the labor contract. In this case, Mark committed a serious breach, and the rescission of the labor contract proposed by the employer was therefore lawful.

RELATED: Terminating an Employee in China
Notes

Article 6 in the Law of the People’s Republic of China on Mediation and Arbitration of Labor Disputes states that, where a labor dispute arises, the parties concerned have to provide evidence for their own claims. If an employer intends to rescind the labor contract of an employee with the claim that the employee violated the rules and systems of the employer, they bear the burden of proof on rescission. Whether or not the employer wins this case hinges on providing adequate evidence to prove the rescission is lawful.

Based on the above, where an enterprise attempts to rescind a labor contract, we strongly recommend that the enterprise keep all relevant evidence, including the transcripts of conversation, meeting minutes, and receipt of employee signature of the Employment Handbook.

Allan Xu worked as an arbitrator in a district Arbitration Institute in Shanghai for seven years. She has dealt with more than 2,000 labor arbitration cases as a labor arbitrator. Allan has a degree in Law from East China University of Political Science and Law, and also holds the Certificate of Lawyer’s Qualification.


About
Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email asia@dezshira.com or visit www.dezshira.com.

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