Recently, the Shanghai No.1 Intermediate People’s Court ordered a company to pay maternity benefits to a female employee for whom the company ceased making social insurance contributions before her delivery date, due to its bankruptcy. In this case, the employee was hired by a staffing agency and dispatched to work for the company. The employee became pregnant in August 2017, commenced long-term sick leave in September 2017 due to severe symptoms associated with pregnancy, and delivered her baby in April 2018.
The company made social insurance contributions for her through February 2018 and ceased making such contributions from March 2018, as its company social insurance account was closed as part of the bankruptcy process.
The employee therefore lost the eligibility to apply for maternity benefits (including maternity pay and medical subsidy) from the social insurance fund. The employee then filed a labour arbitration claim against the company for these benefits.
The company refused to bear the maternity benefits on the basis that the employee’s employment relationship with the company should have been terminated in December 2017, when the company suspended its business. The first instance court and the appellant court did not support the company’s position on the basis that the company could not provide evidence of the termination of the employee’s employment.
The courts therefore ruled that the employee’s employment with the company continued, and ordered the company to bear the maternity benefits that otherwise would have been paid by the social insurance fund if the company had made social insurance contributions for her continuously through the delivery date.
Under PRC law, an employment contract can be treated as automatically ending when the employer is lawfully declared bankrupt. There is no protection in the law for specific categories of employees (such as pregnant employees) in the event of a bankruptcy. This means that in a bankruptcy, all employees, including protected employees such as pregnant employees, can be let go.
In the above-mentioned case, it is unclear when the employer was lawfully declared bankrupt, and the company likely did not provide the employee with a formal notice of termination of her employment. Therefore, due to the lack of evidence, the company’s argument that the contract of employment had terminated ultimately failed, and the company was ordered to pay maternity benefits on the basis that her employment continued.
As a takeaway, companies should remember to issue in a timely manner written termination notices to employees during the bankruptcy process, to preserve evidence, or try to reach a mutual termination with employees to settle any and all of their employment claims against the company.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at email@example.com