Insights from judicial interpretation of labour disputes (Part II)

In the preceding article of this series, we discussed the unified legal characteristics of equity incentive disputes and the innovative special arrangement for untaken annual leave under the draft Interpretation II on Several Issues Concerning the Application of Law in the Trial of Labour Dispute Cases of the Supreme People’s Court (SPC).

This second article will continue to analyse the draft’s practical guidance, outlining compliance recommendations with practical relevance from an employer’s perspective.

Extension of contracts

Under article 14 of the Labour Contract Law, where an employer and an employee have concluded two consecutive fixed-term labour contracts, an open-ended contract without a fixed term should be entered into. In practice, some employers avoid signing open-ended labour contracts by continually extending the original term through supplementary agreements or changing the employer entity in the contract.

Articles 17.1 and 17.2 of the SPC draft clarify that under certain circumstances an employer’s action to extend the duration of a labour contract may be deemed as having signed a second fixed-term employment contract with the employee, including: (1) where the employer and the employee have negotiated an extension of the contract period that cumulatively reaches more than one year, and the extended period has expired; and (2) where the employer and the employee have agreed that the contract will automatically renew upon its expiration, and the renewal period has expired.

This provision curtails employers’ ability to indefinitely extend contract durations, closing legal loopholes, while safeguarding their right to manage contract terms autonomously, thus avoiding brief extensions being misconstrued as second fixed-term contracts.

In light of these points, contract term extensions can affect the count of contract signings. Companies should establish appropriate contract durations based on employment needs, anticipate the necessity for continued employment, and strategically plan for extensions during contract formulation and before expiry.

If an extension is essential, it is recommended that companies pay attention to the differing standards for determining contract signing counts in various scenarios of extension and automatic renewal. When conditions align with article 14 of the Labour Contract Law, companies should expediently execute open-ended employment contracts.

Continuation after expiry

Article 24.1 of the draft states that if an employee continues to work after contract expiration without the employer’s objection for more than a month, it may be considered a renewal of the contract on original terms by the court, obligating the employer to formalise a written contract.

This clause, alongside article 34 of the SPC’s Interpretation I on Several Issues Concerning the Application of Law in the Trial of Labour Dispute Cases, standardises the legal liability for continued employment after a labour contract expires. The draft further clarifies the timeframe for employer objections and establishes the legal effect that failing to object within this period may result in the de facto signing of a new labour contract.

It also imposes a legal obligation on an employer to formalise a written contract with the employee. In conjunction with article 14 of the Labour Contract Law, continued employment after contract expiration may, in certain situations, lead to the legal effect of having established an open-ended employment contract.

In light of the above-mentioned section on the extension and automatic renewal of fixed-term labour contracts, it is recommended that companies pay attention to the management of contract terms and proactively discuss termination and renewal with employees before contracts expire to avoid any unfavourable situations resulting from passivity.

In-service non-compete agreements

Within China’s labour law system, non-compete clauses between employers and employees refer to the period after termination of employment. For non-compete agreements during employment, the Company Law only prescribes non-compete obligations for directors and senior management during their tenure, but this does not apply to other personnel bound by confidentiality obligations.

Article 18 of the draft affirms the validity of in-service non-compete agreements between employers and employees, addressing the previous legal void and ensuring the company’s right to prevent staff from harming its competitive interests during their tenure.

However, there are no explicit regulations regarding the legal consequences of employees violating non-compete obligations during their employment. In practice, courts tend to view the fulfilment of non-compete duties by employees as part of their duty of loyalty, with the consideration already included in their compensation, negating the need for separate non-compete compensation from the employer.

Therefore, if employees breach their non-compete obligations while employed, businesses can typically claim damages, but whether they can demand the return of a portion of the remuneration or payment of a penalty may become a new point of contention.

From a practical standpoint, it is advisable for businesses to sign non-compete agreements with employees upon their commencement of employment, effectively establishing a comprehensive non-compete protection mechanism for periods both during and after the term of employment. Should an employee breach the non-compete obligations while in service and cause losses to the business, it is recommended to seek reparation via damages compensation, and to be cautious about deducting wages on the grounds of returning non-compete compensation or paying penalties.

Shaw Zhao is a partner and He Yanling is an associate at Jingtian & Gongcheng