Misconceptions with changing employment contracts by consultation

By Shen Minquan and Gu Lingni, Jingtian & Gongcheng
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In practice, when making adjustment to the organizational structures, consolidating business or making changes to the business model, the employer may terminate an employment relationship, citing article 40.1(3) of the Law on Employment Contracts.

probationary period
Shen Minquan
Partner
Jingtian & Gongcheng

When terminating the employment relation as per article 40.1(3), in addition to the condition of “a major change in the objective circumstances”, the requirement of “change the employment contract in consultation with the employee” shall also be complied with.

Although there is no law or regulation setting out how to “change the employment contract in consultation with the employee” in detail, that doesn’t give employers the right to terminate the contract at their discretion. On the contrary, the employer may be deemed by the court to have illegally terminated an employment contract without reasonably consulting with the employee. In view of this, it is essential for the employer to have a good understanding of, and avoid, the black spots in changing the employment contract by consultation.

Gu Lingni Jingtian & Gongcheng employment contract
Gu Lingni
Paralegal
Jingtian & Gongcheng

Terminating a contract

The original intent of article 40.1(3) of the Law on Employment Contracts is that the employer and the employee keep performing the employment contract through reasonable consultation when there is a major change in the objective circumstances. Thus, the employer is going against this original intent in directly terminating the contract through consultation.

The court will tend to disapprove “changing the contract by consultation” if the employer directly negotiates with the employee to terminate the contract. In SAP China v Li Zhe, the Jing An District People’s Court of Shanghai ruled that since the employer consulted with the employee only regarding the issue of the termination of the contract, the termination by citing a major change to the objective circumstances under which the employment contract was concluded is illegal.

Changing working place, salary

In a situation where the employer changes the employee’s working place and salary through consultation, the court will review whether such a decision is reasonable from the perspective of the employee, that is, whether the employer is putting the employee in a reasonable new post in good faith.

In the second instance of a labour dispute in Han Xu, the Third Intermediate People’s Court of Beijing held that the underlying mission of article 40.1(3) of the Law on Employment Contracts is to uphold the stability of the employment contracts. To explain this specifically, when there is a major change in the objective circumstances under which the contract is concluded, rendering the contract unperformable, the employer and the employee shall consult with each other in good faith and make every effort to maintain the validity of the contract, so as to safeguard the stability of the employment relationship.

From the interpretation of the purpose of the legislation, it can be inferred that such a consultation shall be positive rather than negative. It shall facilitate the maintenance of the contract, rather than accelerate its termination, the consultation shall be reasonable and in good faith, with realistic content, and the employer is obliged to keep the consultation rigorous and efficient.

Similarly, in Aecom Design & Consulting (Shenzhen) Co. Ltd. v Zang Da, the Nanshan District People’s Court of Shenzhen ruled that the content of the consultation was not feasible since the consultation letter on the adjustment of the job post placed the respondent in Shanghai instead of Shenzhen, where the respondent resides.

The salary conferred by a new post being not lower than the original one is another key consideration when the court determines whether the consultation is reasonable. In Mindray (Shenzhen) v Luo Lingquan, the Shenzhen Intermediate People’s court ruled that the appellant illegally terminated the employment contract, since the appellant reduced the salary of the appellee when consulting with the appellee to change the contract.

By contrast, in the cases of Li Xuelian v Aeon, and Yang Chang’an v Best A Knitwear (Shanghai), and Yang Guangzhan v Mondelēz (Shanghai), the courts ruled in favour of the employers, since the employers had maintained the original levels of salary for the employees in the new posts, and thus performed their obligation of consulting in good faith.

Change of party to contract

Following the principle of privity, it shall be the original employer, not a new employer, to offer a new post when consulting on the changes to the contract. In Shanghai Rainboway Heavy Vehicle Service v Zhang Zoufang, the Second Intermediate People’s Court of Shanghai held that the employment contract bound only the parties to it. Rainboway should have obtained the approval of the employee when it intended to change the party to the contract, and since Zhang explicitly refused the proposal, it was inappropriate for Rainboway to terminate the employment relationship.

In light of the above-mentioned judgments, the tips for an employer to perform the obligation of “changing the contract by consultation” are as follows. First, the employer shall keep in mind that the consultation is about “changes” to the employment contract, meaning that the employer shall not directly consult with the employee on the termination of the contract. Second, the solution formulated after consultation shall be adequate and reasonable. The employer shall offer a certain and reasonable new post for the employee’s consideration, taking into account the realities of both the employer and the employee.

Shen Minquan is a partner, and Gu Lingni is a paralegal at Jingtian & Gongcheng

Shen Minquan Gu Lingni Jingtian & Gongcheng employment contract

Jingtian & Gongcheng

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shen.minquan@jingtian.com

gu.lingni@jingtian.com

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