Since 2008, the Labour Contract Law has been in force, providing more rights and guarantees for employees in professional life in China. Companies prefer to remain silent where difficulties with legal proceedings are concerned. However, the same does not hold true for our author, who talks about his experiences during a litigation case in an employment court in Taicang.
In 2008, China adopted the current Labour Contract Law and significantly increased the number of hurdles involved in dismissing employees. The legislation was initially intended to counteract the practice customary at that time of “hiring and firing” staff at will. However, both jurisprudence and the practices of labour arbitrators, who are primarily lay judges without any legal training, have made it difficult for companies to give notice of dismissal in a legally effective way. For instance, companies’ work regulations and disciplinary rules were frequently interpreted painstakingly in favour of employees, or indeed their very validity would be called into question. In addition, the jurisdictions of different labour courts in different locations varies considerably. There are courts where employees essentially always win in cases of complaints of unfair dismissal, and then there are locations where employees typically lose their lawsuits. Since the legal costs incurred by employers in China are considerable, the question of whether local labour court judges are more pro- or anti-foreign employers has now become a crucial location factor for medium-sized German companies. German companies are understandably reluctant to go public about their negative experiences with Chinese labour courts, as they fear the consequences of doing do.
My own experience with labour courts
Within the scope of a project in Taicang – a popular location among German SMEs, close to Shanghai – a company wished to acquire a factory from a mid-sized German customer and subsequently renovate the production facility at its own expense and risk. Through various measures, such as a voluntary change from hourly wages to piecework wages, in combination with a flexible work-time model, productivity could be increased by more than 20%. This resulted in the need to dismiss part of the existing workforce. As some of the employees opposed the instructions laid down by the management, the local management had been instructed by the owners to strictly penalize any infringement of work regulations and disciplinary rules, with sanctions including dismissal without notice, as long as these measures were in compliance with Chinese law.
In this particular case, the management had decided to publish the names of employees who arrived to work late or left work early on the bulletin board. One factory employee who was late for work became agitated about this public disclosure and tore down the bulletin board by force in front of his colleagues and threw it on to the floor. When the HR manager learnt about this, he dismissed this employee without notice, as it was explicitly stated in the company’s employee handbook that employees may be dismissed without notice and without the statutory redundancy compensation (a month’s salary per year of employment) if they “intentionally damage or destroy company property”. The employee went to the labour arbitration court in Taicang and took legal action against the dismissal without notice. In the case of an unfair dismissal, the employee may demand either re‑employment or the payment of twice the statutory redundancy compensation. In this case, the employee requested payment, amounting to some 134,000 yuan, or about €20,000.
Massive pressure to obtain a settlement
Upon receiving notice of the legal action brought by the employee, the arbitrator contacted the company and urged them to pay the employee a major part of the compensation requested. On the one hand, the arbitrator appealed the management’s “compassion” – the undertone being “the German boss is so rich – why is the company creating so many problems for the ‘poor’ Chinese employee?”
On the other hand, the arbitrator warned the company that it would almost certainly lose the court case. When the company enquired what legal justification she had used as the basis for her assessment, it was found that, at that time, the arbitrator had not even read the files thoroughly and did not know anything at all about the detailed facts – with the exception of the amount of money requested. The massive pressure to come to a settlement and pay the majority of the sum requested seemed to be a common and systematic practice.
It is, however, always advisable to reject a settlement if, from the employer’s point of view, the dismissal was valid (i.e. in compliance with the law). The reason is obvious: if the employer agrees to a monetary settlement even once, this fact gets passed on immediately and every subsequent dismissal will end up before a labour court, as employees will believe or hope they can make easy money in the form of twice the statutory redundancy compensation. What is more, labour-court proceedings are free of charge for employees, and so present no financial risk for the plaintiff.
Experience backs up the idea that this course of action is to be actively discouraged: for example, a company in Shanghai went against this explicit recommendation and ended up paying three months’ salary to an employee as compensation, as the labour-court proceedings seemed too troublesome for the German managing director and the amount of money was small from the company’s point of view. However, he bitterly regretted this decision in hindsight, as every dismissal ever since has been negotiated before the labour courts.
Obvious bias in favour of employees
The real surprise, however, was that the arbitrator did not just give the plaintiff the benefit of the doubt but actively took his side! This was evident, for example, in the way she asked the plaintiff leading questions from the outset: “Think about it again carefully. Did you really tear the bulletin board off the wall intentionally, or did you maybe only want to remove the announcement regarding your late arrival from the board and, in the process, accidentally tore the board off as well?”
Subsequently, the arbitrator questioned the validity of the employee handbook and requested evidence from the company that the handbook had actually undergone the so-called “democratic process”. According to the jurisprudence in China, it is not sufficient that all employees accept the handbook and approve it by signing it: individual approval by each employee cannot replace the “democratic process” required by law, as employees might have been placed under pressure to sign the handbook. The company must therefore prove that:
- a general meeting or conference of a democratically elected works council has taken place, during which the contents of the handbook were discussed and voted, in accordance with protocols including the signatures of the employees present or the elected works council;
- a public announcement of the rules has been made;
- all employees were given the opportunity to study the contents.
As proof for the first item on this list, the company was able to produce the protocol from 2008. This protocol was even signed personally at that time by the plaintiff, as he was then one of the three democratically elected works-council representatives. As proof for the third item, the signatures and test results of all employees could be produced, as all employees of the company are required to read the handbook upon commencing employment and sit a short test to prove they have actually read it. As proof with regard to the second item was inadequate, the arbitrator ruled that the company had to submit suitable evidence within five days.
Various tricks to put employers at a disadvantage
What was most surprising, however, was that the arbitrator actually tried to disadvantage the defendant company using a variety of tricks. According to Chinese law, the company had five days to submit the required evidence. However, the arbitrator scheduled the second hearing to verify the evidence just two days after the first hearing, which meant that the employer, in reality, had less than two days to submit the necessary proof. And when the employer made a written request to postpone the second hearing, the request was rejected.
One day after the first hearing, the employer was able to submit evidence for the announcement in 2008, as well as photos from 2015 proving that the company had once again put the rules up on the bulletin board.
Next, the arbitrator called the company’s procedural representative and informed her she was not authorized to represent the company in the second hearing, as she was neither the company’s lawyer nor an employee. The defendant company therefore had to find a new representative just one day before the second hearing, and familiarize her with all the facts in the space of 24 hours. An application made repeatedly to obtain a postponement of the second hearing was once again rejected. The managing director therefore attended the second hearing alone as the legal representative of the company and had to argue without the assistance of a procedural representative against the employee, the employee’s lawyer and the arbitrator.
The outcome of the process and lessons learned
It will probably come as no surprise to learn that the company lost the arbitration proceedings. What was interesting, however, was the justification: the arbitrator argued that the company handbook still had another penalty clause that would fit the situation being negotiated. It was furthermore argued that in the case of two equally applicable penalty clauses being available in the handbook, the company was only authorized to apply the less severe of the two penalties. In this particular case, this meant that the company would only be allowed to issue a warning, rather than a dismissal without notice.
Alarmed by this argumentation, the management immediately amended all the regulations in the handbook, as there were many clauses that could be considered to overlap with others. For instance, there was a clause allowing for dismissal if employees harmed the company causing damage of more than 10,000 yuan, but this clause overlapped with almost all regulations concerning the issue of warnings for certain behaviours, such as the regulation whereby employees could receive a warning if they wilfully infringed the instructions of a superior. With this in mind, the second regulation was revised as follows: “Employees will receive a warning if they wilfully infringe any instruction given by a superior AND if the damage caused amounts to less than 10,000 yuan.” Extensive revisions of the employee handbook were necessary to avoid any potential overlapping of regulations.
What will happen next in this specific case? Since the defendant company still feels it is in the right regarding the employee’s dismissal, it has appealed and will now go to the civil court to have the arbitration judgement reviewed. However, if this first instance upholds the judgement, the company will lodge an appeal with the next-highest authority. The entire process may drag on in this way for one to two years. Such efforts have become necessary in order to ensure that staff still employed by the company do not gain the false impression that it is easy to be able to make money quickly by going to the labour courts.
Although labour-court proceedings in China can be extremely lengthy, foreign companies should not act hastily by automatically seeking to placate suing employees with money in order to avoid legal action, as this kind of behaviour carries too great a risk of encouraging copycats in the workforce, which could in turn lead to the company being swamped by a wave of compensation claims. This case also shows how increasingly important the employee handbook has become for companies in defining an in-house code of conduct and setting clearly defined rules.