Insights from judicial interpretation of labour disputes (Part I)

Even though it is still at the draft stage, the recently issued Supreme People’s Court Interpretation II on Several Issues Concerning the Application of Law in the Trial of Labour Dispute Cases has significant ramifications for corporate compliance and HR management.

In the first of a two-part response to the 12 December 2023 draft, we provide recommendations for compliance by corporations based on a thorough analysis of the document. Comments on the draft may be submitted through the SPC administrative portal, chinacourt.org, and the People’s Court Daily.

Equity incentive disputes

Article 1 of the draft says: “Disputes arising from the employer’s payment of remuneration to workers by way of equity incentives based on the labour relationship, and the workers’ request for payment of equity incentives or compensation for the loss of equity incentives are labour disputes, except for those concerning the exercise of the equity rights.”

The article unifies the legal characterisation of equity incentive disputes, clarifying a longstanding confusion over whether they are to be considered labour or contractual disputes. For future compliance management, companies should note that to constitute as labour disputes, three conditions must be met: the dispute is based on a labour relationship, not a personal investment; the employer, based on the labour contract and the actual labour provided, pays the worker in the form of equity incentives; and that it occurs after the labourer requests the employer to pay the equity incentives, or compensate for losses from equity incentives, unless it concerns the exercise of equity rights.

In practice, many companies have designed their equity incentive structures as follows: the employee signs a labour contract with the domestic employer, as opposed to an equity incentive grant agreement, which is in turn entered into with an overseas incentive-granting entity, instead. In other words, there is an employer, and then there is a different incentive granter.

Under the circumstances, should the overseas incentive granter be excluded from the labour dispute? This has yet to be answered by the draft, so it is advisable to keep an eye on any subsequent legislative moves.

Untaken annual leave

Article 5 of the draft says that, “Where the labourer claims that the arbitration statute of limitations on payment of wages for untaken annual leave applies to article 27.4 of the Labour Dispute Mediation and Arbitration Law, the people’s court should support such a claim.” We believe this is significant.

The arbitration statute of limitations for annual leave is a special case, as annual leave may be arranged consecutively, in segments or across multiple years. In Beijing, for instance, the practical consensus is that, where the worker asks the employer to pay statutory compensation (200% bonus) for wages for untaken annual leave, the arbitration statute of limitations should follow article 27.1 of the law, which provides that arbitration of labour disputes should be applied within a year. The period is calculated from the date on which the party becomes aware or should become aware of its rights being infringed. Considering the special arrangement for annual leave mentioned above, the period for a labourer to receive pay for each year’s untaken annual leave should be calculated from 31 December of the following year.

For instance, if a worker initiates labour arbitration in December 2023, his or her annual leave entitlement will be the untaken leave for the years from 2021 to 2023.

If pay for unused annual leave is understood to be three times the full daily wage, comprising the wage itself and 200% statutory compensation, as provided by article 5 of the Regulations on Paid Annual Leave for Employees, it would materially change the statute of limitations for arbitration of untaken annual leave. All untaken annual leave pay and compensation may be claimed within one year after a worker leaves the company, and is no longer subject to the original limitation.

This would have a significant impact on both compliance and HR costs. If employees can claim for all untaken annual leave pay and compensation for their period of employment, it could impose a heavy economic burden on the company, especially with senior employees with long years of service and whose claims may be substantial. For companies going through operating difficulties, this may well lead to losses and even bankruptcy.

However, if annual leave pay only denotes the 100% wage, not the 200% statutory compensation, the pressure on HR costs would be considerably less.

If the 100% wage was not paid, the special statute of limitations would apply that allows employees to claim their rights within one year after departure. But if the employee was to claim for the 200% bonus, the original statute of limitations would prevail. This, to our understanding, is closer to the current practice, as well as how the concepts of untaken annual leave pay and statutory compensation are commonly interpretated.

No matter which way the final SPC interpretation leans, companies must expect a change in the manner of calculating unpaid annual leave pay and compensation. Therefore, it is imperative to stay tuned to legislative developments and, after the new law is promulgated, adjust payment and cost calculations accordingly.

Shaw Zhao is a partner and Mia Wang is an associate at Jingtian & Gongcheng