Source: China Law & Practice
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Guangdong is the first province to have issued a guiding opinion on the labour laws. The opinion attempts to clarify some of the ambiguities in the PRC Employment Contract Law, which took effect in January this year. But the issuance of the rules has caused considerable controversy, with some arguing the Guangdong authorities do not have the right to issue guiding opinions and that some its contents are, as a result, against the national law.

2008 has so far been a busy year for the Labour Arbitration Commission. Courts in China’s provinces have been handling a huge increase in labour litigation disputes due to the Employment Contract Law1 which took effect early this year. The ambiguities in the legislation have made it difficult for employers to comply with, causing numerous employment issues and is reported to have resulted in some businesses going bankrupt . As a result, the numbers of labour dispute cases has risen significantly, loading pressure on to the arbitration panels and litigation courts.

Guangdong is a case in point. In the first six months of this year, the courts in Guangdong, a province which serves as the hub of China’s manufacturing industry, had the highest number of litigation cases in the entire country. According to Jiang Junlu, partner at King & Wood, the number of litigation disputes handled by the courts in Guangdong between January and June of this year, was three times that of the province’s entire caseloads of last year.

The reason for the surge in cases is twofold. The Guangdong litigation systems have not been functioning efficiently with the absence of convergence, mutual agreement, and standardise rulings between the arbitration panels and litigation courts. The result has been cases often taking more than two years to settle. Add to this the increase in labour disputes and the delays in hearing them.

“There was no mutual agreement between the panels and the courts. It’s a waste of administrative resources,” says Zhao Liren, partner at Grandall Legal Group Shenzhen office. “The measures between the two departments are different. Employees are forced to wait a year or two before they can get their money back.”

Guangdong cannot wait

Without waiting for the State Council to pass the Implementing Draft on the Employment Contract Law (Implementing Draft), Guangdong issued its own opinion to take the pressure off of the arbitration panels and litigation courts. In June, the Guangdong Provincial Higher People’s Court and the Guangdong Employment Arbitration Commission have jointly issued the Guiding Opinion on Law on the Mediation and Arbitration of Employment Disputes and the Employment Contract Law (Guiding Opinion).

Guangdong’s guiding opinion aims to make the province’s litigation and arbitration system more efficient. According to Jiang, the opinion’s Joint Judicial and Arbitral Announcement and Joint Judicial and Arbitral Standards are groundbreaking. Both seek to bring together the arbitration panels and litigation courts, eliminating any inconsistencies between the two departments. Jiang says that the improved litigation systems in Guangdong not only ease the pressure on the two departments, but also bring a reduction in the time it takes to settle cases, therefore allowing lawyers to anticipate the timings of rulings.

Parallel objective and social effect

The overriding significance of the guiding opinion is that it provides clarification and details on some issues that were ambiguous in the implementing draft and the Arbitration of Labour Disputes Law.

“There are still many issues in the implementing draft, and it has created much debate,” says Jay Chen, associate at Fangda Partners. “The clarification in the Guangdong opinion makes lawyers’ lives much easier.”

One key clarification is stated in Article 1, in which it defines the objective of the legislation must be inline with the social effect that the law creates.

In handling employment disputes, people’s courts and employment arbitration commissions shall abide by principles such as the equal protection of the lawful rights and interests of workers and employers, full utilization of employment arbitration resources and rational allocation of trial resources, lawfulness, impartiality, timeliness, non-retroactivity of laws, and the unity of legal effect and social effect.

Article 1 in fact addresses just what the Employment Contract Law failed to. On the one hand, the Employment Contract Law’s initial aim was to protect both employer and employee benefits; however the consequence of the law was the shutting down of factories. Requirements such as offering employees open term contracts are difficult for employers to comply with. While employees cannot be terminated without specific cause, it is reported that such a requirement significantly increases employers’ burden as well as their operational expenses. Employers who cannot afford the sudden increase of expenses face bankruptcy, leaving employees out of work. The intention of the law and the social effect were therefore at opposite ends of the spectrum.

“After the Labour Law took effect in January, we have only been advising on litigation cases but did not consider the social consequences,” Chen says. “[Guangdong’s guiding opionion] has brought up a very important point of reminding us as lawyers that we need to take social impacts and values into consideration. This is one of the things that make this guiding opinion special,” Chen says.

Standardized overtime payment

Many lawyers also agree the guiding opinion has provided a clearer definition in overtime payment compared to the Employment Contract Law. Overtime payment has always been an issue in China as there is no standardized calculation, and employees have no guarantees they will receive their overtime benefits under the Employment Contract Law. Amounts of overtime payment depend on individual regions or enterprises. While the Employment Contract Law fails to clarify how such payments should be calculated, the guiding opinion provides a standardised method. Accordingly, overtime payments can be calculated on base salary rather than based on regular monthly remuneration as stated in the Employment Contract Law.

Chen says that such a clarification is still not thorough. “More information is still needed. I think it needs time for the authorities to amend and revise, but at least it clarifies some ambiguities in the Employment Contract Law and the Arbitration of Labour Disputes Law.”

Debates on open term contract

The definition of an open term contract (Article 22) in the guiding opinion has also clarified some ambiguities in the Employment Contract Law. The Article addresses prohibited actions that some employers have been attempting to use in order to prevent offering employees an open term contract2. Under the Employment Contract Law, employers can only give a maximum of two fixed term contracts to employees. Thereafter, employers must give employees an open term contract. Such an obligation makes it difficult for employers to terminate workers. As a result, many employers prefer to terminate workers whose fixed-term contracts are coming to an end. In November 2007, local company Huawei Technologies set up a voluntary resignation scheme, which encouraged 7,000 employees to resign and then rehired them almost immediately. The guiding opinion now attempts to prevent a similar situation happening in the province.

“Article 22 is written with Huawei in mind,” Chen says. “The guiding opinion emphasies that such action is strictly prohibited. This article again brings up the point that both the legislative objective and social consequence have to be parallel.”

However, Baker & McKenzie’s Andreas Lauffs has a different point of view: “It is difficult to harmonise the provisions with the clear requirements under the Employment Contract Law,” he says.

According to the guiding opinion, company rules issued before January 1 2008 are still valid even if they were not adopted in accordance with the Employment Contract Law’s employee consultation procedure, provided that the rules do not violate applicable law and have been publicized to employees.

Lauffs says that the guiding opinion has relaxed requirements on employers to complete employee consultation procedures in connection with the issuance of company rules. He says it appears to conflict with recent court decisions that employee consultation procedures were required for company rules issued prior to January 1 2008.

“The Guangdong opinion interprets the Employment Contract Law quite loosely. It remains to be seen how the long-awaited Implementing Rules to the Employment Contract Law will address the issues covered by the Guangdong Opinion, and whether the Guangdong opinion will be revised accordingly. For the time being at least, the net effect of the Guangdong opinion is that the law is applied differently in Guangdong from many other locations in China,” Lauffs says.

Potential reference for draft

As controversial as it is, the opinion does provide a clearer picture on the Labour Law, says Zhang. And as Guangdong is the first province to issue such a guideline, Zhang suggests the rest of the country, including the State Council, and all other local governments and labour authorities will have been paying close attention to its impact.

“Guangdong has been in a leading position in terms of implementing labour regulations and issuing the labour provisions,” Chen says.

“It’s more practical,” says Grandall Legal Group’s Zhao. “As the guiding opinion has further explained the law, it allows us to immediately understand the details and know how to advise clients in different situations.”

But some argue that the Guangdong Provincial Higher People’s Court and the Guangdong Employment Arbitration Commission have no right to issue the rules. The guiding opinion is not a regulation and thus does not have enforcement power. According to Chen, the Guangdong higher people’s court does have the right to draft and implement local judicial interpretations in Guangdong. However, the force effect of such Guangdong Instructional Advice is different from the Implementation Draft as a national rule.

“The guiding opinion is just for reference,” says Chen Yan, labour consultant and labour arbitrator at Wang Jing & Co. Law Firm. “Cities in Guangdong can continue to follow their own rules.”

Yet Zhang Qingwei from Jingtian & Gongcheng says that the opinion does contain a certain level of authority. While it is not compulsory, both the arbitration panels and litigation courts in Guangdong province will comply with it in practice.

“They are influential to all the parties of the labour relationship,” he says. “We need to study them and follow them. The impact is not only on in-house counsel, but also to private lawyers, human resources managers, and employees.”

The Guangdong opinion will be a handy reference for lawyers and foreign enterprises, according to James Yao, legal counsel at Ping An of China. Yao says that the opinion can provide detailed information for foreigners who are interested in working in the province and that it can definitely strengthen employer and employee’s relationship.

“The guiding opinion can improve the management in companies,” he says.

Chen, who has had many discussions with Shanghai lawyers and labour law specialists on the guiding opinion, believes the Shanghai government and the State Council will use Guangdong as a reference to further implement the labour law, so to make it clearer.

“It’s a shame that the Guangdong opinion cannot be applied in Shanghai,” he says.

Endnotes

1. See Will the New Labour Contract Law of the PRC Increase Cost of Doing Business in China in CLP February 2008.

2. See Guangzhou City, Urgent Circular on Strengthening the Administration of Mass Layoffs by Employers in CLP February 2008.

Labour Contract Law 2007

• Written employment contracts must be put in place for all full-time employees within one month of employment. Penalties apply if employer fails to do this: double salary payable to employee and an open term contract is deemed to apply if still no contract in place within one year.

• Two fixed terms rule: employers must then give an open term contract to employee (unless the employee rejects contract on the same or better terms) – it is unclear whether the employer has the right not to renew at the end of the second fixed term.

• Consultation process for company handbooks, rules and policies: employers must consult with all employees (or an employee representative congress) and labour union on such rules and any revisions to these. The process for consultation is unclear but seems to fall short of obtaining consent of employees. Also not clear whether this applies to rules existing prior to effectives of the new law.

• Non-compete: employers must pay compensation on a monthly basis during non-compete period, but no further guidance on level of compensation. Non-compete obligations only applicable to senior management, senior technicians and other personnel with confidentiality obligations.

• Overtime: reiterates generally that employers must pay overtime but without further guidance on any exemptions or how to calculate payments.

• Staffing agencies: required to give minimum two year contracts to employees.

Draft Implementing Regulations 2008

• Written employment contracts: employer may terminate an employment contract with three days’ written notice but no severance payment if employee refuses to enter into employment contract within one month after employment. If employer is required to pay double salary for failing to put written contract in place, the double salary applies from the end of the one month (i.e. not retrospective).

• Two fixed terms rule: no further guidance or clarity on how the two fixed terms rule should be implemented.

• Consultation process for company handbooks, rules and policies: no further guidance or clarity on the required consultation process. Some helpful wording from a previous unpublished draft (providing that employers must consult but could then decide on implementation and future changes must be announced but no consultation required) does not appear in this draft.

• Non-compete: personnel to whom obligations can apply are managers, deputy managers, financial officers, board secretaries and other personnel covered in the Articles of Association.

• Staffing agencies: employers generally may only use agency workers for non-core and temporary positions – not clear whether representative offices excluded from this requirement.

Law on the Mediation and Arbitration of Labour
Disputes 2007

• Provides very broad scope for type of disputes that can be referred to labour arbitration commissions, basically covering all types of dispute that arise from an employment relationship.

• Sets out qualification criteria for arbitrators and specific timings for the composition of arbitration tribunals, convening of hearings and issue of arbitration awards.

• Statute of limitations: period of time for bringing a claim is extended from 60 days to one year from the time a dispute arises or party knows its rights have been infringed. No time limit on claims involving employee remuneration if employee still employed by relevant employer and then one year from date of termination of employment.

• Increased burden for employer to provide evidence relating to employment disputes. Failure to provide evidence will be “held against” employer.

• Employers only permitted to appeal awards regarding remuneration, severance pay, damages, working hours and leave and social insurance if able to show error in application of law, evidence fabricated or statutory procedure not correctly followed.

Guangdong Guiding Opinion

• Confirms that one year statute of limitation will apply to disputes accepted after 30 May 2008.

• Provides that certain time limits referred to in the Law on the Mediation and Arbitration of Labour Disputes are “working days”.

• States that disputes in relation to housing fund contributions are not considered labour disputes – this seems to conflict with the Law on the Mediation and Arbitration of Labour Disputes.

• Implies that representative office can engage certain staff directly (such as part-time or domestic help staff) but that this will not be considered an employment relationship. No suggestion that the requirement to engage normal staff though a staffing agency is removed.

• Consultation process for company handbooks, rules and policies: provides that rules will not be invalid for failure to consult with employees if formulated prior to Labour Contract Law becoming effective and provided that they comply with other relevant laws and regulations and have been disclosed to employees. Rules will in principle be invalid if formulated after 1 January 2008 and without consultation.

• Written employment contracts: if employer is required to pay double salary as penalty for not entering into written contract, such double salary will not be applied for the purposes of calculating any severance payment applicable.

• Overtime: calculation of overtime payments can be based on base salary (excluding allowances, bonuses and subsidies) if this has been agreed with employee. In Beijing and Shanghai the labour bureau takes the view (in absence of clear regulations) that overtime should be based on all regular monthly remuneration. In addition, employer has an obligation to provide evidence that employee has not done / should not do overtime if it rejects an employee claim for overtime.

• Prevailing law: national laws and regulations should prevail over the Guiding Opinion if they cover the same issues.

Source: Matthew Durham, Simmons & Simmons

This entry was posted on Wednesday, September 17th, 2008 at 5:28 pm and is filed under China Legal News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.