China Employment Law Update: Labor Dispatch Arrangements Struck Down

By Joseph Deng, Jonathan Isaacs and Andreas Lauffs Nov 10, 2014

Various Courts Rule Labor Dispatch Arrangements Invalid

In June 2014 alone, three different courts showed stricter scrutiny of the use of labor dispatch arrangements, when companies contract for temporary workers. The courts ruled in favor of contract employees who sued for direct hire or equal treatment.

The Binhu District People’s Court in Wuxi, Jiangsu Province, ruled against an employer that hired an employee through a labor dispatch agreement. The individual had worked at the company for one year without an employment contract before the company formally hired him through a third-party staffing agency. After being terminated, the employee sued the company and the court ruled that because the company had failed to enter into an employment contract with him within a year of his commencement of work, an open-term employment had been formed between the parties. In addition, the employee’s job position did not fall within the temporary, auxiliary or substitute job-position categories for which labor dispatch was allowed.

In a similar case, the Xintian County People’s Court in Hunan Province ruled that a labor dispatch arrangement was invalid and ordered the company to reinstate the employee to direct employment. In that case, the company had originally directly employed the employee on an open-term contract. The company then undertook a corporate restructuring. After the spin-off, the successor employer put the employee on a labor dispatch arrangement for one year. The court ruled that the original open-term contract was still binding on the successor company, that the switch to a labor dispatch arrangement was invalid, and therefore that the termination upon expiration was unlawful.

Finally, the Shimen County People’s Court in Hunan Province upheld the claims of 12 dispatched employees for “equal pay for equal work.” The employees worked for a local tobacco company that hired them through an agency. These employees later found out that their salary was substantially lower than those of directly hired employees in equal or similar positions. The company argued that these 12 employees were not company employees and not even dispatched employees, because this was an outsourcing arrangement with a vendor. The court, however, ruled against the company, because the employees were under the direction and management of the company during their work, and they therefore should be deemed as dispatched employees. The court ordered the company to compensate the employees for their underpaid salaries on the ground of “equal pay for equal work.”

Social Media Accepted as Evidence in Employment Disputes

Shanghai Courts recently appear to have become more willing to accept information posted on social media as evidence in employment disputes, as reflected in several recently reported employment cases decided by the Shanghai Huangpu District People’s Court.

In one case, an employee was terminated for unexcused absence from work totaling more than eight days within a half-year period. To prove the employee’s absenteeism, the company produced several pieces of evidence, including the employee’s travel photos she posted on her Weibo account (a social media platform, similar to Twitter) showing her traveling dates and locations. The court accepted such evidence and ruled in favor of the company.

In another case, an employee filed a claim against the company after it refused to sign a written employment contract with her. She provided evidence to prove her employment relationship with the company, including her company badge, her bank remittance records, and a record of her conversation with her supervisor on Wechat (another social media platform similar to WhatsApp), in which they discussed business expense reimbursements. The court admitted the evidence produced by the employee and ruled in her favor.

Under the Civil Procedure Law, electronic data was specifically added as one type of admissible evidence in the most recent series of amendments made in 2012. The above cases demonstrate that electronic information on social media platforms may be recognized as evidence in an employment dispute by at least some courts. It should be noted that the authenticity of electronic data evidence can still be challenged by the opposing party in a dispute, in which case, special preservation procedures for electronic evidence (such as notarization) may be necessary.

Greater Enforcement of Noncompete Restrictions Shown

In a recent noncompete dispute, the Shanghai Employment Arbitration Commission issued an “injunction” in an arbitral award requiring the ex-employee to end the employment relationship with the competitor, and perform the two-year noncompetition obligation owed to the ex-employer. The employee later failed to terminate the employment relationship with the competitor. Upon the request of the ex-employer, the Pudong District People’s Court issued an order to mandatorily enforce the Shanghai Employment Arbitration Commission’s arbitral award. The ex-employee finally complied and terminated the employment with the new employer.

This case shows that arbitration commissions and courts in Shanghai have become willing to grant and enforce injunctive relief in noncompetition cases. In the past, Chinese courts and arbitration tribunals rarely issued any injunctive orders to force the employee to terminate the employment with the existing employer, and only issued monetary damages awards. It still remains to be seen whether courts are willing to issue preliminary injunctive orders before the final judgment in a noncompetition case, based on the amended Civil Procedure Law, so that the ex-employer does not have to wait until the end of the arbitration/judicial proceeding to receive a favorable ruling. This would be more helpful to companies, because by the time of final judgment, the noncompetition period may have lapsed and at that point the issue becomes moot.

In another recent noncompetition case in Shanghai, the Xuhui District People’s Court granted damages of RMB 150,000 in favor of an ex-employer that sued an ex-employee for violation of the post-termination noncompetition obligation. In that case, the court denied the employee’s argument that the company waived the noncompetition obligation by failing to timely pay the noncompetition compensation. The company paid the noncompetition consideration on the 47th day after the termination of employment (i.e., on the regular payroll day the month after the employee’s employment was terminated), and at that time found that the employee had canceled his bank account registered with the company. This case shows that payment of the noncompetition compensation in reasonable arrears would likely not cause the noncompetition obligation to become ineffective, and that courts may interpret the employee’s attempt to obstruct the payment of the noncompetition consideration as not undermining the company’s fulfillment of its payment obligation (special consideration is required to be paid to render a post-termination noncompete restriction enforceable).

Joseph Deng is an attorney based in Southern California, representing multinational employers in all aspects of labor and employment law in China for Baker & McKenzie. Jonathan Isaacs is a partner based in Baker & McKenzie’s Hong Kong office and Andreas Lauffs is head of the firm’s China Employment Law Group, based in Beijing, Hong Kong and Shanghai.

Copyright 2014 © Baker & McKenzie LLP. All rights reserved.

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