Asia-Pacific employment law bulletin 2024

China

Application of Law in Labour Dispute Cases

On 12 December 2023, China’s Supreme People’s Court (SPC) issued the draft of Interpretation on Issues Concerning the Application of Law in the Trial of Labour Dispute Cases II (Second Interpretation), seeking comments from the public.

While the Second Interpretation has not come into effect yet, the following aspects may be of interest to multinational employers:

• Disputes regarding employee equity-based incentives: Employee equity incentive schemes are becoming more popular in China, which means that disputes arising from such schemes are also becoming more prevalent. A key issue in such disputes often concerns the application of law: some Courts prefer applying employment laws as they deem such cases inseparable from the underlying employer-employee relationships, while some others prefer applying contract laws as they argue the ‘contracts’ binding employers to grant equity-based incentives to employees are, like commercial contracts, negotiated between parties of equal standing, and therefore fundamentally different in nature to employment agreements.

Clause 1 of the Second Interpretation sheds some light on this issue: a dispute in relation to equity incentives or compensation for loss related to the equity incentives where the equity incentive is granted (i) by an “employer”, (ii) on the basis of an “employer-employee relationship”, and (iii) as part of “remuneration”, should be viewed as employment dispute and heard by labour arbitration tribunals before being brought to the court. An exception would be disputes arising from exercising shareholder rights attaching to such equity interests or shares, such as voting rights in a shareholders’ meeting.

• Despite clarifying the applicable law in disputes over equity-based incentives, the Second Interpretation is silent on situations that multinational companies often face.  Multinational companies will often grant equity incentives to employees in China. The grantor (i.e. the entity which is issuing the equity incentives) is usually the offshore parent company (or an offshore group company), rather than the onshore Chinese company that directly employs the Chinese participants.  As such, the grantor is not an “employer” and the equity incentive is not based on a direct “employer-employee relationship”.

Another issue is the governing law of the underlying documents, which is often the law in which the grantor is based.  The recognition of foreign laws is likely to be problematic in China.

• Non-competes during the course of employment: Non-compete clauses have also become widely adopted in China in the past few years, and consequently, the number of disputes over non-compete clauses has also increased. It is clear that post-termination non-compete clauses can be binding under Chinese laws if there is a non-compete agreement between the parties and the employer pays monthly compensation to the employee during the non-compete period.  Although it may seem implied that employees should not engage in competitive activities during their employment from a fiduciary and loyalty perspective (and do so without extra compensation), the existing law does not explicitly uphold this view and the judicial practice varies by location in China due to inconsistent interpretation of law.

Clause 18 of the Second Interpretation confirms that an employer can require employees to stay away from competitive business or activities during their employment (i.e. before termination). It affirmatively states that employers may enter into non-compete clauses with senior management, senior technical personnel, or other personnel who have confidentiality obligation during the course of their employment, and employers are not required to pay additional compensation to enforce these restrictions. By such non-compete clauses, it would not a controversial issue that employers can enforce against breaching employees. However it remains unclear whether similar clauses with other employees who does not access to the company’s confidential information would be enforceable. In any event, it is advisable to include terms in employment contracts for non-compete during employment from the outset to the extent possible.

Looking ahead

On 29 December 2023, China’s Standing Committee of the National People’s Congress (NPCSC) passed the amended Company Law of China (new Company Law), which will come into effect on 1 July 2024.

One of the key changes is the requirement for employee representative director(s). The previous Company Law only required employee representative director(s) in certain state-owned enterprises.

The new Company Law now requires all companies in China with more than 300 employees to appoint employee representative director(s) to the board of directors, unless the company already has a supervisory board with an employee representative supervisor.

However, there are some ambiguities in how this might be implemented in practice. The new Company Law is silent on how such employee representative supervisor(s), or employee representative director(s) to the extent there is no employee representative in its supervisory board in place, should be elected. For example, it is not clear whether all employees need to elect the relevant employee representative director and if unanimous consent is required.  When the company files the details of the elected employee representative director(s) / supervisor(s) with commercial registry (which is a legal requirement), local practices will differ from city to city: some will require signatures from all employees on the relevant resolutions (which can be very difficult to obtain in companies with over 300 employees) while others will accept resolutions with only a few employees’ signatures (acting as representatives for other employees).

It remains to be seen how the practice will evolve in this regard after the new Company Law takes effect in July.