On 12 December 2023, the Supreme People’s Court (SPC) released a draft Interpretation on Issues Concerning the Application of Law in Employment Disputes (II) (the Draft), seeking public consultation. Although the Draft is not final, it reflects the SPC’s views on relevant employment issues and the judicial trends in China. In this update, we highlight the key points.
The nature of share incentive disputes
The classification of share incentive disputes has been a contentious issue among courts across various regions. Some consider these disputes as employment-related, while others categorise them as contractual disputes.
The Draft appears to lean towards recognising share incentives as a form of remuneration, thus categorising disputes related to the grant of share incentives as employment disputes. In particular, the Draft stipulates that when an employer offers share incentives as a form of remuneration to an employee, any dispute that arises from the employee’s request for the employer to make payment under the share incentive or to compensate the employee for any loss related to the share incentive can be classified as an employment dispute. However, a dispute that arises from the exercise of shareholding rights will not be considered as an employment dispute, though the scope of such disputes is not clearly defined.
Limitation period for double salary claims due to failure to execute employment contract
If an employer neglects to establish a written employment contract with an employee for more than a month, the employee has the right to file a claim against the employer for double their salary for each month of employment. However, this claim is capped at a year from the start of employment.
Under PRC law, the limitation period to bring an employment claim depends on whether the claim constitutes a claim involving underpaid remuneration. Where the claim does not involve underpaid remuneration, a ‘general’ one-year limitation period applies which starts from the date a party becomes aware or should have become aware of their rights being infringed.
Where the claim involves underpaid remuneration, a ‘special’ statute of limitations applies such that the claim is not bound by the one-year limitation period; however, if the employment relationship ends, a one-year limitation period applies from the cessation of the employment.
The Draft now clearly provides that a claim for double salary due to the employer’s failure to establish a written employment contract does not constitute a claim for underpaid remuneration and therefore the general limitation period applies.
Apart from clarifying the nature of the claim and whether the general one-year limitation period applies, the Draft also provides clarity on when the one-year limitation period begins given that there are differing judicial views on the matter.
Courts in several regions tend to view the entirety of the payment owed to an employee as a single claim when calculating the limitation period, and consider the limitation period to run from the day the employee is no longer entitled to the double salary (i.e., the day after the conclusion of a written employment contract, or the day after one full year’s service). For example, if no written employment contract is concluded for more than one year, the limitation period begins to run the day after the first year of service is completed and an employee may bring a claim for a maximum of 11 months of double salary (from the second month up to one year’s service).
However, another view is that the limitation period begins the day after one full month from when the employer was supposed to conclude a written employment contract.
The Draft provides that the latter view prevails. This means it will no longer be possible to treat the entirety of the claim as a single claim. For any portion of the claim that has already exceeded the one-year general limitation period, the employee’s claim will be time barred.
Limitation period for unpaid overtime pay and compensation for untaken annual leave
While courts across various regions consider a claim for unpaid overtime pay as a claim for employment remuneration subject to the special limitation period, compensation for untaken annual leave is not usually viewed in the same way. Most courts tend to apply the general limitation period for compensation for untaken annual leave. As a result, many employers only need to compensate employees for untaken annual leave within the past two years, or three years in cases where the untaken annual leave can be carried over to the next year.
The Draft provides that if an employee asserts that the special limitation period for untaken annual leave and overtime should be applied, the court should support this claim. This indicates that both compensation for untaken annual leave and overtime pay will be considered as employment remuneration and, therefore, subject to the special limitation period. Since the compensation for each year’s untaken annual leave is no longer subject to a one-year limitation period, employers will therefore likely need to compensate employees for all untaken statutory annual leave accrued during their employment period.
Employment protection for employees who have reached retirement age
The prevailing view is that an employer can end the employment contract with an employee once the employee reaches the statutory retirement age, even if they have not started receiving pension insurance benefits, so long as the employer has complied with their obligations to make social insurance contributions. If the employee wishes to continue to work for the employer after they reach the statutory retirement age, parties may enter into a service agreement which is not governed by employment law, and can be freely negotiated.
The Draft now stipulates that if an employee has reached the statutory retirement age but has not yet started receiving basic pension insurance benefits and continues to work for an employer, the employee may continue to bring a claim over employment remuneration, working hours, rest and holiday, employment protection, occupational hazard prevention, and work injury insurance benefits in accordance with employment laws and regulations, and the court should support the employee’s claim.
In other words, the Draft strengthens the protection of employee rights in that employees who have reached retirement age but have not yet received pension insurance will continue to receive some key protections under employment law. If the Draft is implemented, employers will need to assess their approach as regards employees who have reached their retirement age.
Lawful unilateral adjustments to job positions
The Draft outlines a list of criteria for assessing whether an employer’s unilateral adjustments to job positions and work locations are lawful. In particular, any adjustment to a job position or work location is considered unlawful where it:
- violates the employment contract or the employer’s policies;
- is not driven by the employer’s objective needs for business and operation;
- results in unfavourable changes to the employee’s salary or other employment conditions without providing necessary assistance or compensation to the employee;
- results in a change to the job position which the employee objectively will be unable to fulfil;
- involves discriminatory or insulting circumstances; or
- violates laws or regulations.
The Draft further provides that if an employer unlawfully adjusts the job position or work location, the employee can request to terminate the employment contract and seek economic compensation, on the grounds of the employer’s failure to provide the necessary employment conditions.
The judicial interpretations issued by the SPC carry legal effect and can directly serve as the basis for court judgments, ensuring nationwide uniformity in court decisions on similar cases. Although the current Draft may undergo further revisions before it becomes effective, it provides employers with insight into the direction of judicial trends. Employers should continue to watch this space for amendments and updates to the Draft.