Improving termination of employment contracts

By Chen Yu, W&H Law Firm
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The mechanism for terminating employment contracts has much room for optimisation in terms of legislative support

In the 15 years since enactment and implementation of the Labour Contract Law, an amendment to provisions on labour dispatch was made only once, in 2012. Some provisions are now no longer suitable for handling current labour disputes.

As termination of labour contracts has become the most likely cause of labour disputes, further clarification of provisions relating to the right to terminate may help to reduce disputes and divisions in adjudication. The following suggestions are made.

Increasing period for exercising right to unilateral termination of an employment contract. Article 20 of the repealed Regulations on Rewards and Punishments for Employees of Enterprises clearly stipulated the time limit for employers to punish their employees, while chapter 4 of the Labour Contract Law – entitled “Dissolution and Termination of Labour Contracts” – contains no similar provisions.

Chen Yu, W&H Law Firm
Chen Yu
Director of the Management Committee, Senior Partner
W&H Law Firm
Tel: +86 138 0832 8777
E-mail: chenyu@weihenglaw.com

A search of local normative documents and judicial precedents shows that only some provinces and cities have adopted local normative documents and other means to unify decision-making on the issue of the time limit to exercise an employer’s right to terminate a labour contract.

For example, article 12 of the Detailed Rules for the Implementation of Certain Issues Concerning the Labour Contract Law in Tianjin stipulates that the time limit is six months. But most provinces and cities do not provide a specific time limit, resulting in inconsistent judicial practice across the country, with the existence of time limits for exercising the termination right depending solely on the judge’s discretion.

If an employee commits an act that triggers the termination right according to the employer’s rules and regulations, and the employer fails to exercise this right within a reasonable period of time after confirming the violation, it can be assumed that the employer no longer exercises their unilateral termination right. Where the law does not specify a time limit for exercising this right, the employer may be able to exercise it indefinitely, leaving the employee in a state of uncertainty and hindering the establishment of harmonious labour relations.

On the other hand, if an employer once violated the law, such as failing to pay social insurance premiums for an employee, but has since corrected it, and the employee did not object, the employee may still use the employer’s previous violation to delay exercise of the employer’s termination right when the employee commits a violation. This could be considered a malicious exercise of the statutory termination right in violation of good faith and credit.

Article 564 of the Civil Code provides that the termination right shall lapse if the parties fail to exercise it after the expiry of the period prescribed by law, or agreed by the parties.

In the author’s opinion, the period for the exercise of the termination right provided for in the Civil Code should be aligned with the Labour Contract Law; clearly stipulating that parties have the right to exercise termination right in a timely manner when conditions for unilateral termination have been met by the other party, with the right annulled if the time limit is exceeded.

Extending scope of employee liability for breach of contract to alleviate the burden on companies. Since implementation of the Labour Contract Law, adjudicating authorities have tended to prioritise protecting the rights and interests of employees.

However, most enterprises have been hit by the three-year-long pandemic, and their business situation will take a long time to recover. Others have suffered severe setbacks in a short period, and even shut down outright.

In the post-pandemic era, business survival and optimising the business environment, among other things, have become the focus of the country’s attention, and preserving businesses is the only way to preserve employment. Therefore, labour disputes are no longer an individual issue but a matter of livelihoods. Avoiding malicious rights claims by employees, such as habitual fraudulent claims, needs to be addressed through legislation.

The author believes that circumstances under which employees are liable for breach of contract can be appropriately expanded through legislation. The Labour Contract Law only provides for two situations in which employees are liable for breach of contract – namely breach of the provisions on training service period, and non-competition – and clearly stipulates that no other liability for breach of contract may be agreed.

In view of provisions on the recovery of the employee’s fault liability under the Civil Code, allowing employers and employees to agree on the fault liability for breach of contract for termination of the employment contract, while limiting maximum liability for breach of contract, will discourage bad faith conduct by both parties.

Clarifying definition of unilateral dismissal of an employee “incompetent for the job”. Termination of an employment contract due to an employee’s incompetence is one of the legal grounds for unilateral termination by employers, but it can be challenging to implement in practice.

Although employers and employees often agree on a probationary period, it is a relatively short period and does not allow for a full assessment of the employee’s ability to work. Typically, employers may not ascertain the actual competence of an employee until after the probationary period has already ended. If employees are found to be incompetent in their work performance, employers not only have to carry out complicated training and job transfer procedures, but also pay monetary compensation for termination of the contract.

The author suggests revising the regulation on terminating labour contracts due to an employee’s incompetence for work and refining the definition of the term.

Employers should be allowed to exercise their termination right if they have sufficient evidence that an employee is incompetent for work, and should only be required to pay economic compensation.

Additionally, employers should not bear the consequences of alleged unlawful termination of employment contracts for any procedural defects. However, this does not apply to cases where employers are willing to train and transfer incompetent employees to another post.

RECOMMENDATION

In conclusion, labour relations, as social relations with specific civil legal characteristics, should align with the times. Revision of the Labour Contract Law in conjunction with the Civil Code and improvement of the national labour law legislative system should be put on the agenda as early as possible.


Chen Yu is a director of the management committee and senior partner at W&H Law Firm. He can be contacted at +86 138 1041 7260 or by e-mail at chenzhuo@tylaw.com.cn

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W&H Law Firm

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