China's Supreme People's Court Released 7 Guiding Labor Cases

On July 6, 2022, the Supreme People's Court of China released 7 guiding labor cases on its official website. Guiding cases are not part of the formal source of law in China. However, people’s courts at all levels can refer to them in the trial of similar cases, and cite them as reasoning in the verdicts, but they cannot invoke them as ruling basis. Below are the key rulings of those guiding labor cases and some initial thoughts of ours.

Guiding Case No. 179 specifies the basic principle of substance over form. This principle prevents employers from taking advantage of their dominant position to circumvent labor laws and regulations by concluding other types of contracts to conceal the fact of establishing labor relationships. In this case, the employer and the employee entered into an agreement under the name of “cooperative operation”. However, the trial court determined the nature of the legal relationship by examining the rights and obligations of both parties and the actual performance of the agreement. The trial court found that the individual in this case actually accepted the management of the enterprise, and reported monthly to the enterprise on attendance, money allocation, expenses, sales, work plans and applications for reserve funds, and that the remunerations paid to the individual were closely related to the number of days of attendance. The trial court decided that the legal relationship formed between the parties was indeed a labor relationship because the performance of the contract met the dual characteristics of a labor contract, i.e. personal subordination and economic subordination.

Guiding Case No. 180 clarifies that when judging the legality of an employer's unilateral termination of labor contract, the people's court shall base its decision on the content of the termination notice issued by the employer to the employee. The people's court should not support any reason that the employer put forward separately during the trial and beyond the bases and causes stated in the original termination notice. In practice, in view of the employer's heave burden of proof, the employer should, as fully, specifically and clearly as possible, list all relevant causes and bases for the dismissal in the written termination notice. If other causes for the dismissal are identified afterwards, the employer should consider a timely addition and sending the supplemented / new termination notice to the employee again. The employer should avoid any delay in documenting and presenting its termination bases and causes. Any delayed presentation during the trial would not be supported by the people's court.

Guideline Case No. 181 clarifies that if an employer's manager fails to take reasonable measures in response to the complaints of employees who are sexually harassed, or even connives or, interferes in the investigation of, the sexual harassment, the employer may legally terminate the labor contract with the manager for his/her failure to perform job duties and serious violation of the employer’s rules and regulations. In practice, employers should consider establishing clear rules and regulations to prevent sexual harassment in the workplace and to regulate the mechanisms for training, handling and punishment etc.

Guiding Case No. 182 clarifies that if an employer stipulates that an employee can receive a bonus after completing certain performance, the employer is obliged to examine the application of eligible employees for bonus payment. If the employer refuses to fulfill the obligation of examination and approval without justifiable reasons, and the employee can prove that the conditions for the bonus payment are met, the employer should be ruled to grant the bonus in accordance with the relevant regulations of the employer.

Guiding Case No. 183 clarifies that although an employer has the right to determine at its own discretion whether to pay bonus and the conditions and criteria for the payment according to the employer's own business situation and the employee's performance, the bonus payment rules set by the employer should still follow the principle of fairness and reasonableness. As to whether an employee who has left the company before the annual bonus is paid can receive the annual bonus, it should be considered in the light of various factors such as the reason for and time of leaving the company, work performance and the degree of contribution to the company. Although the employer's rules and regulations stipulate that employees who leave before the annual bonus is paid are not entitled to the annual bonus, the people's court should support the employee's claim for the payment of annual bonus if the termination of the employment contract is not due to the employee's own negligence or voluntary resignation, and the employee meets the [substantial] criteria for bonus payment.

Guiding Case No. 184 regulates issues related to non-compete covenants to protect employees' freedom to choose jobs. In this case, the employer and the employee agreed in the non-compete clause that the period for applying for arbitration or litigation for disputes in this regard would not be included in the non-compete period. Such agreement, on the one hand, limited the employee’s right to judicial remedies to a certain extent as it reduced the employee to a dilemma where if he/she seeks judicial remedies, the non-compete period would be extended, and if he/she does not seek judicial remedies, the employee's rights and interests would be damaged. On the other hand, such agreement allowed the employer to unilaterally and disguisedly extend the employee's non-compete period by filing arbitration or litigation, relieving itself of its statutory liability to a certain extent. Therefore, the trial court found that this agreement was prohibited by law as it exempted the employer from its legal liabilities and excluded the employee's rights, and should be null and void.

Guiding Case No. 185 clarifies that in recruitment, employment discrimination exists where an employer who treats an employee differently without justifiable reasons on the basis of any innate factor that is not necessarily related to the intrinsic requirements of the job such as place of origin or region of the employee and the employer shall bear the corresponding legal liabilities therefor (such as compensation for emotional comforts, reasonable expenses for asserting rights and public apology in the newspaper, etc.). Article 3 of the Law of China on Employment Promotion uses the word “etc.” following the four legally prohibited elements for differential treatment: ethnicity, race, gender, religious beliefs, indicating that this provision is a non-exhaustive list. In other words, the Law considers that in addition to the four aforementioned elements, other similar elements should also be prohibited if they would lead to unreasonable differential treatment. An important criterion for determining whether an element would lead to unreasonable differential treatment and be prohibited is whether an employer makes a selection based on “acquired factors” such as the employee's profession, education, work experience, work skills and professional qualifications that are closely related to the “intrinsic requirements of the job”, or based on “innate factors” such as gender, household registration, identity, region, age, physical appearance, ethnicity, race or religion that are not necessarily related to the “intrinsic requirements of the job”. The latter constitutes unreasonable employment discrimination prohibited by law.