China Employment Law Update July 2018

Executive Summary

1. The State Council has endorsed the Interim Regulations on the Human Resources Market to further stimulate the human resources market in China
2. Shanghai First Intermediate People's Court publishes Five Guiding Judgments for Non-Competition Disputes
3. Tianjin enacts rules to clarify employer’s autonomous right to unilaterally adjust employees' job positions

The State Council has endorsed the Interim Regulations on the Human Resources Market to further stimulate the human resources market in China

The Interim Regulations on the Human Resources Market ("Regulations") were endorsed by the State Council on 29 June 2018. The Chinese government considers the human resources market to be of great importance and aims to create a competitive, intelligent platform to further promote sustainable and healthy economic development. The Regulations contain the following key policies and measures:

a) Free services by public human resources institutions

Public HR institutions are established by the people's governments at or above the county level. The Regulations stipulate that the institutions shall provide information release, employment introduction, career guidance, employment assistance, policy and legal consultation services and other prescribed services free of charge to the public.

b) Strengthen regulation of commercial human resources service agencies

• Commercial HR service agencies engaged in professional intermediary activities will require a licence;
• Commercial HR service agencies engaging in services such as collecting and releasing of employment information, employment guidance, HR consultancy, HR training and/or HR service outsourcing shall complete, within 15 days from the date on which they commence business, a filing with the administrative department of human resources and social security;
• Agencies engaging in labour dispatch shall abide by the applicable laws and regulations;
• HR agencies shall submit an annual report to the department of human resources and social security;
• The department of human resources and social security will have the authority to conduct on-site inspections, publish the results and coordinate with public enforcement agencies in the investigation of illegal or criminal activities.

c) Employers must provide real information in recruitment

Basic recruitment information such as recruitment conditions, job content, work place and basic labour remuneration, issued by the employer or provided by the employer to human resources service agencies, must be true and legal, and must not be discriminatory, e.g. on grounds of ethnicity, race, gender, religious beliefs, etc.

Shanghai First Intermediate People's Court publishes Five Guiding Judgments for Non-Competition Disputes

On 5 July 2018, the Shanghai First Intermediate People’s Court held a press conference to announce a white paper, summarising the court's conclusions in regards to worker non-competition disputes it has dealt with between January 2015 and March 2018.

According to the White Paper, the recent judgements reveal:

1. the scope of a non-competition agreement is continuously expanding; some employers have non-compete agreements with all employees irrespective of whether such employees have access to confidential information of the company;
2. the value of such disputes is much higher than other kinds of labour disputes, and such disputes mainly involve senior management and talented employees in technical roles;
3. non-competition disputes are very likely closely associated with other disputes such as termination, intellectual property and corporate interest infringement; and
4. there are cases in which an entire sales or technical team quits to join a competitive enterprise or create a competitive enterprise, triggering a "class action" lawsuit.

The White Paper also highlighted five judgments to give guidance to the public on non-compete matters. Below, we have summarised several rules established by those guiding cases:

a) Employees will be liable for breaching non-competition obligations, even if their actions do not have material impact such as loss of clients or the formation of a significant competitor to the ex-employer being competitive.

b) If a non-compete agreement goes beyond the scope of the business which the employer originally registered with industry and commerce authorities, then it does not necessarily lead to a void non-competition clause provided that the following conditions are met:

• the business activities covered in the non-competition scope are actually carried on by the employer even though not detailed in its registered business scope; and
• the employer can prove that it engages in such activities.

c) The employee has the right to request a waiver of the non-competition obligation if the employer fails to provide for compensation in the employment contract for the employee's compliance with the obligation for three months after the termination of employment. However, if the employee's intention to be exempted from the non-competition obligation has not been properly notified to the employer, employees shall remain bound by the non-competition obligations even if the legal or agreed conditions for exemption are met.

d) For foreign employees working in Shanghai, confidentiality and non-competition agreements between them and their employers are valid and enforceable provided that applicable laws or regulations are complied with. It should be noted that the regulations on the employment of foreigners may be different in different regions of China. The performance of foreigners’ non-competition obligations must also be subject to local laws (if any).

Tianjin enacts rules to clarify employers' autonomous right to unilaterally adjust employees' job positions

On 5 July 2018, the Human Resource and Social Security Bureau of Tianjin published the Implementing Rules of Tianjin for Several Issues concerning the Application of Labour Contract Law (the "Implementing Rules"). The Implementing Rules will come into force on 1 August 2018. The Implementation Rules provide detailed guidance on managing common problems which occur in the course of employment, such as the calculation method of overtime payments. The provisions on the unilateral adjustment of job positions deserve special attention.

It is commonly known that under PRC Employment Contract Law, an employer can rely only on Article 40.1 and 40.2 to unilaterally adjust an employee's job position. These Articles provide that, an employee's job position can only be unilaterally adjusted where either the employee is proved to be incompetent in his or her duties, or where the statutory medical treatment period prescribed for an employee suffering illness or non-work-related injury has expired and the employee still cannot perform their duties.

Some argue that employers' autonomy on adjusting employees’ positions is too greatly restricted by the law, which lags behind changes in the way businesses are managed. To remedy this, the Implementing Rules provide that the employer and employee agree in their employment contract that the employer may unilaterally adjust the employee's position based on actual production and operation needs. However, to balance interests and protect employees from potential abuse of such a right, the Implementing Rules further provide that:

a) a unilateral adjustment should comply with the following conditions:

• the purpose of the adjustment must be to meet the objective needs of the business;
• the seniority of the original and new positions must be materially similar;
• the adjustment of position must not be discriminatory or insulting; and
• it must not violate any other laws and regulations.

b) where there is no prior agreement in the employment contract and there are no relevant provisions in the company rules, the employer cannot unilaterally adjust an employee's job position.

In addition to the above, the following details of the Implementation Rules are also worthy of attention:

• where the employee is suffering from an illness or a non-work-related injury during the probation period, the probation period may be suspended by mutual agreement;
• the employer must ensure that the company rules are in accordance with the law, and the consequences of breaching those rules must be made clear. If a type of misconduct is not clearly defined in the company rules, then the employer cannot lawfully terminate an employee for that misconduct.

To sum up, the Implementing Rules increase the importance of clear employment contracts and company rules for businesses domiciled in Tianjin. As a result, we suggest that employers in Tianjin should incorporate clauses giving unilateral rights to change employees' positions and additional provisions regarding suspension of probationary periods. We also recommend that disciplinary rules in the staff handbook are reviewed to ensure that they fully protect company interests and cover all potential types of misconduct for which the company may wish to dismiss an employee.