In the intricate tapestry of Chinese employment law, a realm woven with nuances and regulations, understanding the dynamics of employer-employee relationships is paramount. China, with its rich legal framework, imposes certain obligations and rights on both employers and employees to ensure a fair and balanced workplace. Employment law in China not only safeguards the interests of the workforce but also provides a structured guide for employers navigating the delicate process of terminating employment contracts. As businesses evolve, the need for lawful and transparent termination procedures becomes increasingly vital. In this series of exploration, we delve into the general principles of Chinese employment law, unraveling the threads that govern employer-employee relationships.

In the grand scheme, China's employment landscape is governed by a comprehensive framework aimed at balancing the rights and responsibilities of both employers and employees. Central to this framework is the Labour Contract Law of the People’s Republic of China (the ‘Labour Contract Law’) of which delineates the circumstances under which an employer is entitled to rescind a labour contract. This pivotal law outlines several specific conditions, ranging from probationary period evaluations to instances of serious misconduct or breach of contract. Understanding the nuances of the Labour Contract Law is essential for employers and employees alike, as it not only safeguards the interests of both parties but also contributes to a harmonious and productive work environment. For the first article of the series, our focus narrows down to the specifics, elucidating the legal pathways that empower employers to terminate employment contracts while adhering to the statutory provisions and ensuring a harmonious departure for both parties involved.

In this essay specifically, we delve into the intricacies of Article 39 and its sub clauses of the Labour Contract Law, analyzing its implications, interpretations, and practical applications within the realm of Chinese employment law. Through this series of exploration, we aim to elucidate the legal framework governing employer-employee relationships in China and shed light on the complexities inherent in ensuring fair and equitable treatment for all stakeholders.

On March 1, 2021, Mr. Wu commenced employment with a certain trading limited company, specializing in e-commerce graphic design. The contractual arrangement between the parties stipulates a term of employment for one year while incorporating a mutually agreed-upon two-month probationary period. Subsequently, on April 30, 2022, the company served Mr. Wu a notice of termination, citing non-compliance with employment conditions during the probationary term as the basis. In response, Mr. Wu initiated arbitration, seeking acknowledgment of the company's alleged wrongful termination and compensation.

Throughout the arbitration proceedings, the company contends that Mr. Wu has taken multiple leaves since his commencement, his work outcomes fail to meet the company's standards, and the Company has received numerous unfavorable evaluations from his fellow team members about Mr. Wu. Drawing on these circumstances, the company concludes that Mr.Wu fails to meet the underlying employment conditions during the probationary period in accordance to his labour contract. On the other hand, the company fails to present any supporting evidence regarding the said above complaints and evaluations to Mr. Wu.

To his defense, Mr. Wu asserts that any of the leaves taken were in compliance with company procedures, and he challenges the subjective judgments of the then responsible manager regarding the negative evaluation results, while pointed out the fact that there is a lack of concrete evidence in support of the Company’s claims.

The Tribunal’s Decision:

The arbitration tribunal has found that Mr. Wu in fact adhered to appropriate leave procedures under company policy before taking leaves, rendering his actions valid. The company's failure to furnish conclusive evidence regarding employment conditions and the negative evaluation results with Mr. Wu is deemed a deficiency in proof, resulting in the adjudication of an illegal termination of the labour contract. Consequently, compensation is awarded to Mr. Wu.

The Relevant Provision:

Article 39(1) of the Labour Contract Law: … the employer may rescind the Labour contract…where it is proven during the probationary period that the worker does not satisfy the employment criteria.

Analysis:

The probationary period allows for termination under specific conditions outlined in Article 39, including a defined time period, clear employment conditions, and prompt communication regarding the termination decisions within the probation period between the parties. In common perception, the probationary period is often construed as a mutual evaluation phase between the employer and the employee, wherein the employer possesses the unilateral right to request the resignation of the employee if dissatisfied. This interpretation, however, contributes to a common misconception regarding the termination of labour contracts during the probationary period.

Pursuant to Article 39, the employer is entitled to terminate the labour contract if it is established that the employee fails to meet the stipulated employment requirements during the probationary period. To correctly apply this provision, several prerequisites must be satisfied:

Firstly, there must exist a clearly defined and legally recognized probationary period. Absence of an agreed-upon probationary period or the ineffectiveness of the probationary period specified in the labour contract precludes the application of the aforementioned legal provisions.

Secondly, the employment conditions must be clearly delineated, and be as objective, specific, and standardized as possible. For instance, employment conditions for sales staff should revolve around sales performance; for drivers, conditions on keeping traffic violations within a reasonable number may be stipulated; for product line workers, criteria such as product qualification rates should be established. At the same time, quantifiable benchmarks like performance evaluations should be implemented, and the relevant threshold for meeting employment condition must be explicitly communicated to the candidate on probationary period.

Thirdly, if termination of the Labour contract is predicated on failure to meet employment conditions, such a decision must be reached during the probationary period and promptly communicated to the employee. Doing so while the probationary period expires will likely render the termination invalid.

Ms. Liu, assuming the role of head manager at a car-manufacturing company in the city of Guangzhou, entered into a labour contract with the company upon commencement in May 2015. Alongside the labour contract, Ms. Liu acknowledged and agreed to abide by the company's rules and regulations, employee handbook, and other relevant documentations, all of which were established through legal procedures. Notably, the employee handbook explicitly prohibits employees from participating in engagements where personal or family interests conflict with those of the company.

On June 23, 2017, in her capacity as the de facto controller, Ms. Liu established a trading company that overlapped in business with the car-manufacturing company. The trading company initiated direct business transactions with the car-manufacturing company in 2020. Despite the car-manufacturing company's repeated statements through its internal management channels, emphasizing standardized and compliant management and strict adherence to the regulations outlined in the employee handbook, Ms. Liu continued in the operation of his trading company.

By the end of 2020, with the approval of the Labour union, the car-manufacturing company terminated its employment relationship with Ms. Liu, accusing her of serious violations of company regulations and the employee handbook. In her attempt to dispute the termination, Ms. Liu took legal actions, submitting that the car-manufacturing company unlawfully terminated the contract and should be held liable for compensation in relation to the termination.

The Court’s Decision:

The Court found that the employment rules and regulations established through democratic procedures and not contravening mandatory legal requirements, are binding upon both employer and employee once publicized. Should an employee seriously breaches the regulations, the employer reserves the right to terminate the labour contract. In this instance, the car-manufacturing company, in compliance of the said-above relevant requirements, crafted its internal rules tailored to its production, operation, and sales management exigencies, emphasizing adherence to proper professional ethics, lawful business conduct, and conflict avoidance. Ms. Liu, upon her commencement in 2015, had consented to these company regulations, which were reiterated in 2019. Her role as the head manager of the Guangzhou branch and actual controller of the other trading company, conducting direct business with the car-manufacturing company without declaring conflicts of interest as mandated, clearly violated company regulations, disrupted sales and management, and breached discipline. As a result, the car-manufacturing company's termination of Ms. Liu's labour contract on these grounds was deemed appropriate by the court, thereby rejecting Ms. Liu's compensation claim for the purported illegal termination.

The Relevant Provision: 

Article 39(2) of the Labour Contract Law: … the employer may rescind the labour contract…where the worker has committed a serious breach of the employer's rules and system.

Analysis:

Article 4 of the Labour Contract Law stipulates that employers should legally establish and improve labour rules and regulations to ensure that workers enjoy their labour rights and fulfill their labour obligations. When employers formulate, modify, or make decisions on rules and regulations related to labour compensation, working hours, rest and leave, occupational safety and health, insurance benefits, employee training, labour discipline, and Labour quota management that directly affect the vital interests of workers, they should submit proposals and opinions to the general assembly of workers or all workers for discussion, and negotiate on an equal footing with the trade union or workers' representatives. During the implementation of regulations and major decisions, if the trade union or employees feel inappropriate, they have the right to raise it to the employer and negotiate for modification and improvement. Employers should publicize regulations and major decisions directly related to the vital interests of workers or inform the employees. According to Article 39, paragraph 2 of the Labour Contract Law, if a serious violation of the employer's regulations occurs, the employer has the right to terminate the labour contract. In the comprehensive application of the provisions, employers often face considerable confusion. In this case, the car-manufacturing company not only formulated corresponding regulations in advance when signing the labour contract, but also complied with legal requirements for the termination process, thus a unilateral termination of the labour contract by the employer (termination for cause) can be established, effectively safeguarding the employer's legitimate cause for the termination and management, with significant reference value.

To avoid risks and ensure that employers conduct necessary and legitimate personnel and post management in a standardized manner, the decision can reflect the following point for employers to consider: 1. Establish effective rules and regulations and communicate them to fellow employees; 2. Keep thorough records and preserve evidence when employees clearly violate the rules and regulations; 3. Ensure that any disciplinary actions towards employees adhere to both substantive and procedural norms.

Mr. Yao, a security guard of Company A, was instructed by the property management company he works for to supervise and ensure that homeowners do not install air conditioners onto the exterior walls of the building during renovations in the residential area managed by the company. However, during Yao's tenure, more than 15 homeowners in the community installed external air conditioners. Company A verified the situation and imposed a fine of 100 RMB on Yao during a meeting, instructing him to contact the homeowners for immediate rectification. Yao was dissatisfied with the fine, thus expressed his discontent by pounding on the table, making furious remarks to the general manager of Company A, and demonstrating passive resistance in his work.

Company A filed a lawsuit against Mr. Yao to the Court on the grounds that he had seriously neglected his duties during his employment, causing Company A significant losses, and demanded the termination of employment relations with Mr. Yao. The arbitration did not support this claim, and Company A consequently brought action to the Court.

The Court’s Decision:

The Court found that Company A unlawfully terminated the employment relationship with Mr. Yao and is obligated to provide economic compensation for the following reasons:

Firstly, Company A failed to submit substantiating evidence demonstrating that it unequivocally fell within Mr. Yao's clear responsibility to prevent the outdoor installation of air conditioning units in the residential area. Moreover, the company neglected to report the circumstances surrounding the installation of outdoor air conditioning units to Mr. Yao. Furthermore, Company A was unable to establish that the installation of more than 15 outdoor air conditioning units was attributable to Mr. Yao's fault.

Secondly, Company A asserted that Mr. Yao violated provisions outlined in the employee handbook, resulting in significant losses. However, the company did not provide sufficient factual support for these claims.

In contrast, it should be noted that in situations where the employee is found guilty of serious dereliction of duties and corruption, causing substantial damage to the employer, the legal implications and remedies may differ.

The Relevant Provision:

Article 39(3) of the Labour Contract Law: … the employer may rescind the Labour contract…where the worker is guilty of serious dereliction of duties and corruption and causes the employer to suffer significant damages.

Analysis:

To mitigate such situations, enterprises should adhere to the following six key points:

1. Precisely articulate "duty": Upon an employee's commencement, a "Job Responsibilities Book" must be signed to delineate specific work responsibilities. For pivotal roles, intricate work processes and management requirements should be established. Employ dynamic management to promptly update "Job Responsibilities Books" in alignment with changes in work arrangements, thereby providing a basis for the company in case of disputes.

2. Define "Serious Negligence" and "Significant Loss": Employers should contextualize their own unit's circumstances, considering factors such as company size, net assets, profitability, local economic development, and risk magnitude in employee positions. Clearly articulate definitions for "serious dereliction of duty" and standards for quantifying "significant losses" in rules and regulations.

3. Adhere to legal procedures: Ensure democratic formulation of rules and regulations, with reasonable and legal content. Publicly disclose or disseminate relevant rules and regulations to employees.

4. Assess "major loss consequences" accurately: Prior to assuming significant losses or adverse effects, employers must evaluate consequences meticulously, which includes assessing the damage caused, its certainty and irreversibly, alignment with normal business risks, potential negative impacts, associated costs, and direct relevance to employee behavior, to preempt unfavorable consequences due to inadequate evidence in the future.

5. Stress the importance of preserving evidence: Cultivate awareness of evidence in daily employment management. In cases of employee "serious dereliction of duties," proactively collect and preserve evidence. Employ written evidences, such as interview records and inspection reports, to substantiate the existence of "serious dereliction of duties," leveraging materials confirmed by the employee themselves.

6. Consider Securing evidence: In the absence of defined criteria for "serious losses" in rules and regulations, employers can submit additional evidence during arbitration or litigation to bolster the rationale behind claimed "serious losses." This may involve combining the employee's subjective fault with other factors, extending beyond financial losses to include damage to management order, reputation, and other aspects.

In June 2023, Ms. Wen engaged in employment with a trading company and executed a written employment contract outlining the contract duration, base salary, performance bonuses, among other terms, designating his role as the regional manager. In October 2023, the trading company terminated Ms. Wen's employment contract, asserting that she failed to provide required work reports without justification on 26 occasions during her tenure. The company justified the termination by citing a provision in the "Employee Handbook," asserting that such conduct amounted to a serious violation occurring six times, thereby meeting the prescribed threshold. In response, Ms. Wen took legal actions regarding the termination decision.

Following the adjudication, the Arbitration rendered a decision, affirming the cessation of the employment relationship between Ms. Wen and the trading company. The committee mandated the trading company to remit outstanding performance wages and compensation for the unlawful termination of the employment relationship to Ms. Wen.

Subsequently, the trading company has instituted legal proceedings challenging the arbitration decision before the Court.

The Court’s Finding:

Following the trial, the Court found that the trading company had submitted Ms. Wen’s performance table for September 2023, indicating a performance score of "0" due to dismissal for violation of company policy. Given that Wen's submission in the "Employee Performance Management System" did not specify the corresponding score for this situation, she bears the adverse consequences of being unable to substantiate it. The court observed that the trading company's responsible employee fails to inform Ms. Wen of the violation when reminding her to submit daily reports. Consequently, the termination of employment relations by the trading company on this basis was deemed an unlawful termination by the Court.

The court's final verdict stipulated that the trading company terminated its Labour relations with Ms. Wen in October 2023. Accordingly, the trading company is obligated to remit a performance bonus of 5,500 yuan for October 2023 within ten days from the date of the judgment. Additionally, the trading company is directed to pay compensation for the termination of Labour relations.

Subsequently, the trading company, dissatisfied with the decision, lodged an appeal with the Court. Following a comprehensive review, the Court held to dismiss the appeal and uphold the original verdict.

The Relevant Provision:

Article 39(4) of the Labour Contract Law: … the employer may rescind the Labour contract…where the worker holds a Labour relationship with another employer concurrently which has a severe impact on his/her performance of work tasks assigned by the employer or refuses to make correction as demanded by the employer.

Analysis:

In cases where the employer unilaterally terminates the labour relationship with the worker, it is incumbent upon the employer to substantiate that the worker does not fulfill the conditions of the probationary period, committing serious violations of the employer's rules and regulations, entering into concurrent labour relationship with another employer, or incurring criminal liability. In the event that the employer is unable to furnish ample evidence, and the circumstances do not align with economic layoffs or the worker's incapacity to perform the job, the employer is liable to bear the legal consequences, which may include the obligation to continue the performance of the labour contract or paying compensation.

Article 39 of the Labour Contract Law serves as a pivotal provision in safeguarding the rights of employees in the event of unilateral termination by employers. By placing the burden of proof on employers to substantiate valid reasons for termination, such as probationary period non-compliance, serious rule violations, simultaneous employment with another entity, or criminal responsibility, the Article 39 establishes a framework that promotes fairness and protects employees from arbitrary dismissals. This provision underscores the significance of evidence in employment termination cases, ensuring that employers adhere to justifiable grounds and legal procedures. As a result, Article 39 contributes to a more equitable and transparent employment landscape, fostering a balance between the interests of employers and the rights of workers under the framework of Chinese Labour Contract Law.