China Employment Law Update - May 2017

The General Rules will be effective from 1 October 2017. These General Rules are seen as an amendment to the General Principles of the Civil Law (the "General Principles"), which took effect in 1986 and were amended on 27 August 2009. The General Rules signify the first step for China in establishing the Civil Code. In addition to its evidently profound impact on the civil law landscape, the General Rules will bring certain implications for the employment law regime, which are discussed in more detail below.

1. The consequence of the divided legal person

Unlike the original provision in the General Principles, according to Article 67 of the General Rules, when a legal person is divided, its original rights and obligations are enjoyed and assumed jointly and severally with the divided legal person. This position is now consistent with Article 90 of the Labour Contract Law of the PRC ("Labour Contract Law").

However on reading the Labour Contract Law, we find that the consequence of the divided legal person is stipulated in Article 34 as follows: “Where an employer undergoes a merger or division, the original labour contract shall continue to be valid and the succeeding employer which succeeds the rights and obligations of the predecessor employer shall continue to perform the labour contract.” The original labour contract will be succeeded by the new divided employer, but since there are more than two legal persons after the division, and the labour contract will be assumed jointly and severally between them, which one shall continue the labour contract with the employee? Will the Labour Contract Law be revised accordingly with the General Rules? This in fact remains to be seen.

2. The protection of personal information

With the development of information technology, the leakage of personal data is becoming increasingly serious in China. Given the critical situation, Article 111 of the General Rules underlines the importance of the protection of personal information by stipulating that “The personal information of a natural person shall be protected by the law. Any organization or individual shall legally obtain the personal information of others when necessary and ensure the safety of such personal information, and shall not illegally collect, use, process or transmit the personal information of others, or illegally buy or sell, provide or make public the personal information of others.”

It is common that an employer will need to obtain and keep the personal data of its employees or candidates for management, human resources or regulatory purposes. With the introduction of the General Rules, employers in China should be more prudent regarding the handling of personal information of employees; otherwise they may be subject to legal proceedings. The newly issued PRC Cyber Security Law, which touches heavily on the subject of personal data, will be effective from 1 June 2017 and will hopefully be followed by implementing rules. It is therefore advisable to keep a close eye on any further developments in this respect.

3. The validity of false expression of intent

It is provided in Article 146 of the General Rules that “Where an actor and another party perform a civil juristic act by making a false expression of intent, such act shall be deemed null and void.” This provision specifies the commonly known situation of "two-faced contracts". In this situation, the parties sign two versions of a contract; one for internal use and the other for external use. The version for external use does not reflect the real intention of both parties and is usually used to gain illegal outside interest, such as tax avoidance. For example, to ease the tax pressure, the employer and employee may conclude one version of the contract specifying a lower wage, but conclude another version of the contract specifying a higher payment which actually regulates the parties' relationship. In that case the "internal-use contract" shall be deemed as invalid and the validity of the "external-use contract" shall be dealt with according to the relevant provisions of the law.

4. The consequence of substantial misunderstanding

What remedies can employers and employees seek when a labour contract is signed based on substantial misunderstanding? In contrast with Labour Contract Law, where the parties have the right to request the people's court or an arbitration committee to alter or revoke a contract concluded as a result of a serious misunderstanding, Article 147 of the General Rules only specifies the right of revocation.

Given that free will is a principle of civil law, participants of a civil action can alter the content of a contract based on their own consensus. This may be the reason that the right of alteration is not included in the General Rules. While an employer or an employee may believe that the labour contract is made due to substantial misunderstanding, either party may negotiate with the other to modify or revoke the contract.

Although Labour Contract Law is silent on this issue, it does not mean that people cannot obtain a legal remedy under such circumstance; they can simply alter the contract by agreement between both parties or request to revoke the contract in accordance with the General Rules.

5. The consequence of fraud, coercion or exploitation of the other party's disadvantageous position

In spite of substantial misunderstanding, it is common that fraud, coercion or exploitation of the other party's disadvantageous position will exist during the conclusion of a labour contract. Contracts under such circumstance are deemed as wholly or partially invalid, as stated in Article 26 under Labour Contract Law, while Articles 150 and 151 of the new General Rules treat these contracts as revocable, which is also a significant change of the General Rules. We shall wait and see if the corresponding provisions of the Labour Contract Law will also be revised.

6. The extension of statute of limitations

When parties are in conflict, they are entitled to bring a lawsuit or claim regarding the relevant issue in front of the court, but after a specific time they cannot enjoy this right of action; this period is known as the statute of limitations. According to Article 188 of the General Rules, “The statute of limitations regarding applications to a people's court for protection of civil rights shall be three years.” This rule extends the time limit from the existing two years to three years, which runs from the date when the party bringing the claim knows or should have known: (i) that their rights have been infringed; and (ii) who the party they are bringing their claim against is.

According to Article 27 of Law of the PRC on Mediation and Arbitration of Labor Disputes, the statute of limitation for labor disputes is one year, which is calculated from the date the parties know or should have known the infringement of their rights. Therefore, the time limit for an employee to apply for labour arbitration is still one year after the termination date. But in daily HR options, some cases do not fall within the scope of labour disputes, for example defamation, return of company property, breach of confidentiality obligation, etc. These cases are subject to a 3 year time limit. On this basis, the extension of the limitation period gives the parties more time to resolve their conflict by legal means.