Terminating A China Employee Without Severance: It Can Be Done

I am constantly writing about how China’s labor laws generally favor employees and how Chinese arbitrators and courts also favor employees. However, employers who do all the right things can prevail against their employees, or at least create enough of a chance for prevailing to greatly reduce the severance they need to pay their departing employee to get that employee to agree not to sue. China’s courts will side with employers that make termination decisions pursuant to a set of enforceable employer’s rules and regulations/employment contract.

Let’s take a look at a recent case (only a few months old) in Shanghai, with its facts simplified a bit for this post. The employee was hired to work as the business development department manager. The parties executed a written employment contract. The employer unilaterally terminated the employee in the beginning of 2016 because the employee had formed two companies that competed with the employer during the employee’s employment term. The employee had formed and was the shareholder and director in two companies with business scopes that overlapped with the business scope of the employer business.

Despite all this, the employee brought a labor arbitration claim against his former employer, alleging unlawful termination. The employer lost and was ordered to pay the employee double statutory severance. The employer then filed a lawsuit against the employee. The employee lost at trial and then lost again on appeal.

The employee put forth two main arguments: (1) he established his two companies before he received his employer’s rules and regulations so they should have no legal effect on him; (2) his companies were flagged as “abnormal” by the relevant authorities and therefore they are not in business, and therefore his companies never adversely affected his former employer. The Shanghai People’s Second Intermediate Court rejected both arguments.

The employer argued that the employer’s rules and regulations explicitly prohibited the employee from taking a position outside his work and from establishing companies in competition with the employer. Moreover, his employment contract expressly listed the employer’s rules and regulations as an exhibit to the contract. The employee did not dispute having signed the contract.

The court noted that an employment contract governs both parties’ rights and obligations and is binding on both parties and both parties should act in good faith in the course of the employment relationship. Though it was disputed as to whether whether the employee’s two companies were ever actually in business, this does not change that the employee did breach the employer’s rules and regulations by opening them at all. The employment contract also expressly prohibited the employee from taking any outside job. So even if the employee did not receive the employer’s rules and regulations before he formed the two companies, his failure to report his activities to his employer after he received the rules and regulations justified his employer in terminating him pursuant to the employee pursuant to the employment contract and the employer’s rules and regulations. The employee’s failure to alert his employer violated his duty of good faith to his employer and justified his termination. The primary takeaway from this case is that employers benefit from having enforceable rules and regulations to which they can cite to when disciplining or dismissing an employee.

Bottom line: One of the best grounds for terminating an employee without having to pay severance (or if you want to be safe, you pay a relatively low severance and you get your employee to sign a settlement agreement) is serious breach of employer’s rules and regulations. We regularly receive inquiries from foreign company employers who want to terminate their employees for misconduct, but have no enforceable rules and regulations. To quote Confucius, “to do a good job, one must first sharpen one’s tools.” To be able to terminate an employee for violating your rules and regulations, you need to have the right “tools”: an enforceable employment contract and enforceable rules and regulations.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.