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China Labor & Employment Law Update

Shanghai court wrestles with gig economy claims

The Shanghai Pudong People’s District Court recognized in a report issued in April that the growing

number of disputes involving workers engaged through internet-based companies are proving

difficult to resolve. Although the total number of employment disputes heard by the court fell

slightly in 2016 to 2,283 cases, disputes related to the technology and service-dominated Shanghai

Free Trade Zone rose sharply from 642 in 2015 to 923 in 2016.

The court stated that the use of the internet has challenged traditional employment relationships,

with workers signing up quickly and simply on digital platforms to create a more fluid and

decentralized workforce. The court wrote that it is hard to determine whether service or

employment relationships are created when companies operating on the basis of middlemen or

outsourcing.

Many of these workers are engaged in providing services through apps for ride-hailing, food

delivery, and on-call home maintenance and appliance repair. An increasing number of these

workers are claiming de facto employment relationships and compensation for failure to be

provided employment contracts. Companies are claiming that the workers should be classified as

contractors because they do not have fixed hours, little management, and compensation is often

paid directly by the end consumer.

The court also mentioned that fraudulent and illegal conduct by employees is leading to more

disputes. Examples cited were employees submitting fake application documents and employees

engaged in work slowdowns or work stoppages.

New rules impose job restrictions on former civil servants

Employers will find it more difficult to hire former civil servants under rules that supplement

restrictions in the Civil Servant Law and took effect on April 28. Under the new rules, former highranking

civil servants are prohibited from the following activities for three years after they resign:

 Being employed by an enterprise or other profit-making organization located in the same

geographical area they served as civil servants in the three years prior to their resignation;

and

 Being engaged in a business anywhere in China that has a direct relationship with a

business they were responsible for administrating during the three years prior to their

resignation.

Lower-ranking civil servants are now subject to the same restrictions for two years after they resign.

The new rules also require civil servants to report their intended future employers when applying

to resign as civil servants. Former civil servants are also subject to fulfilling confidentiality

obligations and reporting any change of employers during the restricted periods.

Former civil servants who violate the restrictions may be ordered to resign from their employment

or stop engaging in business. If the former civil servants fail to comply, their employers or

businesses could be ordered to dismiss the former civil servants, have the illegal proceeds

generated from their services confiscated, and be subject to fines.

These rules do not apply to future employment or business activities of civil servants after they

retire. Restrictions are limited to the Civil Servant Law.

Guidance issued on Beijing non-compete cases

The Beijing Haidian District People’s Court issued a set of recommended post-termination noncompete

cases on April 27, 2017. The key holdings from the cases are as follows:

 If the term of the non-compete obligation is longer than the statutory maximum of two

years, the non-compete obligation is enforceable for only two years. The portion of the

term exceeding two years is invalid, with the employer released from paying noncompete

compensation and the former employee released from the non-compete

obligation.

 A non-compete agreement creates contractual rights only between the former employee

and former employer; an agreement cannot be the basis for a lawsuit against a thirdparty

employer who employs a former employee who breaches a non-compete

obligation.

 If a non-compete agreement is silent on compensation owed to a former employee, the

employer must pay monthly compensation at the rate of 30 percent of the former

employee’s prior average salary.

 A former employer may claim liquidated damages from a former employee unless an

amount has been agreed to by both parties.

 A former employee may petition a court for a reduction in the amount of liquidated

damages; among the factors a court could consider in reducing liquidated damages are

the length of service of the former employee, the former employee’s compensation, the

amount of the non-compete compensation, and the damages to the former employer

resulting from the breach of the non-compete obligation.

 The unlawful termination of an employee does not affect the enforceability of a noncompete

agreement.

 If a former employer fails to pay the former employee non-compete compensation and

the employee has breached the non-compete obligation during the period of nonpayment,

then the former employee is not entitled to seek a court judgment releasing

the former employee from the non-compete obligation.

HMT residents may be exempt from mainland China social insurance

The Ministry of Human Resources and Social Security (MOHRSS) and the State Council are

reportedly planning to enter into arrangements with Hong Kong, Macau, and Taiwan authorities

regarding the exemption of Hong Kong, Macau and Taiwan residents (HMT Residents) from

participation in mainland China’s statutory social insurance programs. The arrangements are

expected to clarify that HMT Residents who participate in mandatory social insurance programs in

their home areas would not need to participate in mainland programs. The arrangements would

also address the exemption of mainland China residents working in the three areas.

The MOHRSS and the State Council indicated in a press release that HMT Residents employed

directly by mainland Chinese employers should participate in PRC statutory insurance. While 2005

national regulations state that HMT Residents employed by mainland Chinese employers are

required to participate in PRC social insurance, mainland employers in some jurisdictions have not

been required to enroll locally hired HMT Residents in social insurance and make contributions.

The MOHRSS and the State Council also announced that they are drafting rules that would allow

HMT Residents living but not working in mainland China to participate in statutory social insurance.

This development is apparently aimed primarily at providing medical and pension benefits to nonworking

relatives of individuals who are employed in mainland China. The rules were reportedly

prompted by demands from HMT Residents, particularly Taiwan residents seeking benefits in the

mainland.

Shenzhen allows foreigners and HMT residents to participate in housing fund

Foreign nationals as well as Hong Kong, Macau, and Taiwan residents (HMT Residents) employed

in Shenzhen may participate in the statutory housing fund effective July 1, 2017 according to a

local government regulation. In January 2017, the Guangdong provincial government issued a

notice encouraging local governments to allow these employees to participate in housing fund

programs on a voluntary basis. Foshan, Dongguan and Zhongshan are also reportedly drafting local

regulations on how foreign nationals and HMT Residents may participate in the housing fund.

The Shenzhen rules provide that foreign nationals and HMT Residents enjoy the same rights and

would be subject to the same contribution requirements as PRC nationals. As a voluntary program,

the agreement of both the employee and employer would be required for the employee to

participate, with the employer responsible for registered employees and transferring contributions.

Employees who leave mainland China on a permanent basis would be permitted to withdraw the

balance of deposits in their housing fund accounts.

Shanghai has allowed foreign nationals and HMT Residents with work permits to participate in the

housing fund since 2015. Taiwan residents have also been permitted since 2015 to participate in

the housing fund when working in Fuzhou and Quanzhou, Fujian province.

China, Switzerland social insurance agreement takes effect

A social insurance bilateral agreement between China and Switzerland entered into force on June

19, 2017 exempting Chinese and Swiss nationals, who are assigned to work in the other country,

from participation in statutory social insurance programs of pension and unemployment (pensions

and survivors’ and invalidity insurance in Switzerland). Employees remain obligated to participate

in other types of social insurance programs.

In a related development, China and Luxembourg signed a memorandum of understanding on June

12, 2017 to enter into a similar bilateral social insurance agreement.

The PRC Social Insurance Law requires that foreign nationals working in China to participate in the

statutory social insurance programs unless there is an applicable treaty exempting participation.

China has entered into treaties with eight countries.

Terminated transgender employee wins emotional distress claim

A terminated transgender employee was awarded RMB 2,000 for emotional distress on July 26,

2017 in the latest development in a ground-breaking case from Guiyang in southwestern Guizhou

province. This case is believed to be the first time a district court has applied gender discrimination

laws to a transgender employee.

The employee, referred to publically as Mr. C, was born as a woman but identifies as a man. He

was dismissed after seven days of work as a sales consultant for the Ciming Health Examination

Center in Guiyang. The Yunyan People’s District Court last December found that there was

insufficient evidence for his termination and awarded Mr. C statutory damages for unlawful

termination. However, the sole judge hearing the case did not address the issue of unlawful

discrimination.

Mr. C then filed a separate civil action for emotional distress, claiming RMB 50,000 and a written

apology from the former employer. A three-judge panel of the same district court heard the case.

According to the district court’s written decision, the panel based its ruling on the Employment

Promotion Law and the Labor Law, which both prohibit employment discrimination on the basis of

gender, as well as Tort Law and a 2001 Supreme People’s Court opinion that allows for damages

for emotional distress.

The panel found that the termination was unlawful, rejecting the company’s defense that Mr. C

had violated the company’s dress code by insisting on wearing men’s rather than women’s clothing.

The panel found that Mr. C had not committed a violation because he had not been provided a

company uniform before he was terminated. Moreover, the panel found that the termination was

a violation of Mr. C’s equal right of employment and constituted gender discrimination. Although

unstated in the decision, the panel appears to have accepted Mr. C’s claimed gender identity. The

panel, however, did not elaborate on how transgender discrimination fits within traditional

concepts of gender discrimination.

Mr. C had introduced into evidence audio recordings of his supervisor telling the media that Mr. C

was terminated because Mr. C violated the company’s dress code by wearing clothing designated

for men. The panel stated that negative and superficial comments about Mr. C infringed upon his

right of reputation. The panel also found the former employer had committed torts for damage to

Mr. C’s self-esteem and infringement of his equal right of employment. The panel compensated

Mr. C for all three torts by awarding him RMB 2,000 for emotional distress.

HIV-positive employee wins discrimination case in Guangdong

The Guangzhou Intermediate Court on June 19, 2017 issued a landmark decision holding that it is

illegal for an employer to force an employee to take long-term paid leave based on HIV-positive

status. This case is believed to be the first instance of a Chinese court recognizing the employment

rights of HIV carriers.

The plaintiff in the case was a 28-year-old man, publically identified only as “Ming”. He was

required to take indefinite leave by his former employer, a quasi-governmental food inspection

company, after being diagnosed with HIV during a medical exam in 2015 as part of an application

for a civil service position. The employer based its action on 1991 rules governing the prevention

and control of infectious diseases that required employers to cooperate with government orders

to isolate AIDS patients and HIV carriers.

An arbitration tribunal and district court rejected claims by Ming seeking to return to work, finding

that he that he had not suffered any financial losses during his leave because he was still paid full

salary and that such a leave was beyond the court’s discretion to review.

The intermediate court reversed the district court, relying on a 2004 amendment to the Law on

Prevention and Control of Infectious Diseases that had removed the mandatory isolation of AIDS

patients and HIV carriers for treatment. The intermediate court held that the change in law had

left employers without a legal basis to exclude HIV carriers from the workplace.

The intermediate court also based its decision on the failure of the company to obtain Ming’s

consent to the paid leave. This ruling implies that employer could not unilaterally put employees

on long-term paid leave in the absence of reasonable grounds. The intermediate court also found

that the company had breached Ming’s employment contract by changing his work location and

employment conditions through the forced leave.

The intermediate court also ruled that Ming’s unlawful suspension resulted in his illegal

termination because the company refused to honor Ming’s statutory right to an open-term

contract after having completed two-fixed term contracts. The intermediate court, however,

rejected Ming’s demand for reinstatement on the basis that his contract with the company had

expired during the litigation and he had already found alternative employment. His remedy would

instead be statutory damages.

Foreign tennis coach ruled out of bounds

A foreign tennis coach who lost a claim for constructive termination was named as one of the 10

typical employment dispute cases for 2017 by the Beijing Human Resource and Social Security

Bureau.

The coach, identified only as “John” with his nationality not disclosed, signed an employment

contract with a tennis club in Shanghai. The contract provided that John would work as a tennis

coach in Beijing and that his monthly salary would be paid by a Beijing sports company. The

Shanghai tennis club sponsored a work permit for him. After 14 months of working in Beijing, the

Beijing company refused to pay his salary. John then resigned and sued the Shanghai tennis club

for statutory damages on the basis that he was constructively terminated.

The arbitrator rejected John’s claim for statutory damages, finding that the protections of the Labor

Contract Law should not apply because he was working illegally in Beijing. His work permit

authorized him to work only in Shanghai.