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Analysis of the Termination Rules in Virtue of Incompetence


Authors: Liu Lu, Richard Zhang
Translator: Summer Cao

Article 40 (2) of the Labor Contract Law stipulated that if “the Employee is incompetent and remains incompetent after training or adjustment of his position”, the employer may terminate the employment contract. However, it is found that in the judicial practice, the termination based on such article is in high possibility to be judged as illegal and thus the employer usually loses the cases in arbitration and labor tribunal.

We searched all the civil cases between Jan 1 of 2017 - July 11 of 2018 posted on the official website which collects the open orders and judgments issued by Chinese courts, by two sets of key words “Shanghai + incompetent + 2017” and “Shanghai + incompetent + 2018”, and got a result of 271 cases. After a further screening, there are 65 relevant cases, among which the employers only prevailed in 6 cases and were defeated in the rest 59 cases. Namely the rate of employers’ defeated lawsuits reached up to 91%.


Such high rate of defeated lawsuits is not an accidental phenomenon. In the speech “The Dilemma of Incompetence Termination: Death in Beijing and Struggling in Shanghai” delivered by Professor Dong Baohua in 2016, Professor Dong mentioned that in Beijing the rate of employers’ prevailing lawsuits reaches 0%, and that in Shanghai it is lower than 5%. Obviously, incompetence termination has become a dangerous minefield which employer tends to avoid in human resource management. The high loss rate, up to 91%, for employer also reflects employer’s current management predicament.

1.  The definition of incompetence.
The definition of incompetency is stipulated in article 26 of Explanation on Several Articles of Labor Law issued by the Administrative Office of Ministry of Labor:
“Incompetence, refers to failure to complete the work task stipulated in the employment contract or the same workload compared with the employees of same work type or post. The employer shall not deliberately raise the labor quota to make it impossible for the employees to complete.”
From our opinion, the regulation indicates that if the employer and the employee have reached agreement on the work content and performance appraisal criteria, the agreed standards shall prevail. If there is no agreement, the standards which most employees of the same post can commonly complete shall be taken as reference. However, the definition mentioned above is just a general explanation, which has not specified the concrete judging standards.

2.  Reasons to determine illegal termination
Since there is no specific stipulation on “incompetence” and judging standards in PRC Law, judicial authorities have more discretionary power. After analyzing the 65 cases (amongst which there are 59 employer’s loss cases), the reasons for judicial authorities to determine employers’ illegal termination mainly includes:
A. Employer could not approve "incompetence".
According to the statistics, there are 33 cases where failure to prove employees’ incompetence caused the employers’ loss. We can say that it is the main reason for employers’ loss in such cases.
For instance, in one case, the court considered the employer’s evidence is enough to prove employee’s receiving training after being adjusted post on Feb 14, 2017, and the employee was still incompetent in finishing tasks afterwards. However, employer lacked evidences to prove employee’s incompetency from June to Dec, 2016, thus employer lacked sufficient precondition for post adjustment or training. Therefore, employer’s termination is illegal.
About failure to prove “incompetence”, it may be because:
1.evidence is insufficient. Only performance evaluation form or the comments of supervisor can be provided, in lack of further concrete evidence to the objective facts of “incompetence”;
1.the employer could not prove the employees’ job content and job duties;
2.the employer could not provide the company rules for determining “unsatisfied performance”, or the rules are unreasonable.

B. Employer neither trained the employee nor adjusted the post.
According to the statistics, there are 16 cases where the employers failed to lawfully provide training or adjust the post for the employees and thus lost the cases. It may be because:
1.the employers did not train or adjust the post for the employees;
2.the training provided to the employees were not pertinent to their incompetency, but some regular training or on-job training applied to all employees;
3.the training did not conform to the legal requirement, e.g. employer only notified employee about the work methods through emails.

C. Employer did not set performance targets, targets were not reasonable, or the two parties could not reach a consensus on targets setting.
According to the statistics, there are 5 cases in which employers lost the cases based on this reason.
For instance, in one of these cases, the employer set an impossible performance target for its salesman. Though the employee could not complete the target, it is not the employee shall be blamed on and failure to complete such unreasonable performance target could not serve as evidences for employee’s incompetence.

D. Key Performance Indicators (KPIs) are unreasonable.
According to the statistics, there is 1 case where the employer lost for unreasonable KPIs setting. Hereby KPI mainly refers to the indicators for performance appraisal to the employee, also includes the indicators set by the employer during the performance improvement plan (PIP) period.

E. There was no negotiation before adjusting the position.
According to the statistics, there is only 1 case in which employer lost for such a reason.
Despite the fact that the employer has the right to unilaterally adjust the post of the employees in these circumstances, it does not mean that the employer can directly notify the adjustment. On the contrary, considering the rationality, the employer shall have sufficient communication and negotiation with the employees.

F. Employees under special protection were terminated.
According to the statistics, there are 2 cases where for this reason the employers lost the cases.
Labor Contract Law specifically stipulated that the employees under the circumstances specified in Article 42 could not be terminated in virtue of “incompetence”. So even with sufficient evidences the employer could not terminate such employees.

G. The performance appraisal period is unreasonable.
According to the statistics, there is 1 case where for unreasonable period of performance appraisal the employer lost the case.
In this case, after adjusting the post of the employees, the employer did not monitor and appraised employee’s performance timely, but terminated the employee in virtue of incompetence 2 years after the transfer, which was certainly irrational.

3.  Measures for termination in virtue of incompetence
On account of the reasons for illegal termination mentioned above, I provide some response measures:

I. How to confirm the job content and duties?
1. Request the employees to sign the job description when on board to confirm the job content. Some employer will attach the job description as the appendix to the employment contract, which is also a recommended solution. However, in practice, most of the job descriptions are just general statements and could not specify concrete job content of the employees. In terms of this problem, we would suggest the employer to specify the concrete job content and duties in yearly or quarterly performance evaluation form as a supplement to the job description. Once dispute occurs, the job description and the performance evaluation form can jointly prove the job content and duties of the employee.
Please be noted that, if the position of the employee has been changed during the employment, the employee shall sign the job description for his new post. And the content of the performance evaluation form shall also be adjusted accordingly to align with the job description.

2. Some employers have not made job description or have not requested the employees to sign. It may set some obstacles for the employers to prove the job content and duties. However, the employers still can prove the job content and duties through performance evaluation form, the work results and products delivered by the employees, the communication mail with the supervisors, and some written documents. Compared with above item 1, this condition adds employers’ burden of proof to some extent.

II. How to make performance appraisal?
Performance appraisal is the key factor for the determination of “incompetence”, the employer shall be noted on the following issues:
1. Reasonable performance targets and KPIs setting. Performance targets and KPIs are based on the job content and shall have the same goals. Take salesperson as an example, the targets of previous year and business characteristics shall be taken into consideration when determining this year’s performance targets, and the employers shall also negotiate and reach consensus with the employees. The employer shall preserve the proofs of the consensus with employees, or otherwise the judicial authorities may deem the performance targets setting unreasonable and thus illegal termination.

2. Improve the performance appraisal policies. The policies of performance appraisal are a key factor when determining if the employer has sufficient basis for performance appraisal. Therefore, the policies of performance appraisal shall specify the judging standards, the appraisal cycle, the appraisal method and the response measures and steps under the situation of incompetence.

3. Employer shall notify the employees of the results after the appraisal. If the notification is done in written form, the employers shall request the employees to sign, and if is done via electronic form, the employers may request for an electronic receipt to have employees’ confirmation.

III. How to adjust the post or provide training?
When adjusting the post of the employees, the employers shall be noted on the following issues:
1. The relevance between the original and the new position shall be noted. The employer shall take the previous working experiences, capacity, and the previous job content into consideration. For example, it is unreasonable to transfer an accountant to a logistic transportation post.

2.  Before the adjustment, the employer shall deliver the notice of adjustment to the employee, and have the employees’ signature on the notice.

3. During the process of adjustment, the employer shall have full communication and negotiation with the employee, such as arranging a meeting to communicate with the employee, notify the reason for adjustment, the new job content and the appraisal period after adjustment. If the employee refuses to accept, the employer may invite the member of trade union to assist in the communication. Meanwhile, the employer shall pay attention to the evidence preservation, such as meeting invitation, meeting memo, voice record if necessary, and request the employee to sign on the memo or send it to him for confirmation via email.

4. Employer shall set a reasonable appraisal period after adjustment. The duration is suggested not to be too short, for example 1 month, since the employee needs time to adapt to the new post. However, it is suggested not to be too long either. As the case mentioned in point G of reasons for employer’s defeated cases, it is quite unreasonable that the employer makes performance appraisal 2 years later than the adjustment. In some occasions, we suggest the employer may provide on-job training for the new post to the employee, to hence the rationality of termination further.

When providing training, the employers shall be noted on the following issues:
1. The way and content of training. The training may be carried out by the supervisor, or employer could arrange for external organizations’ training. But please be noted that the training shall focus on the employee’s work deficiencies. Common on-job training and regular training would not be recognized by the judicial authorities.
2. The preservation of the training record. The employer shall keep the meeting invitation, memo for training, and sign-in sheet or photos if the employee participates in some external training.

IV. How to prove incompetency?
When involved in labor disputes, how to prove employee’s incompetence is a key and a difficult point. To prove incompetence, the employer shall provide not only the performance evaluation form which reflects employee’s performance result, but also the evidences for the objective facts that the employee was incompetent, corresponding to the evaluation form.
1. Providing performance evaluation form. The employer shall provide performance evaluation form as evidence. However, nowadays lots of employers adopt paperless office set-up and all the performance appraisal is done within the electronic system, where the employee and his supervisor put in self- assessment and evaluation, and the supervisor gives out the final results. In this situation the evaluation form will be in electronic form and it will be most important for proving employee’s performance results, job content and supervisor’s comments, therefore I would suggest the employer to make notarization on the form. Certainly, if the form is a written one, it can be directly submitted as written evidence.

2. Providing the objective facts of incompetence. The incompetence and deficiencies in working specified in the performance evaluation form shall all be proved. Taking salesman as an example, if determined as incompetent due to the low performance, the employer shall prove the performance targets and the actual achievements made by the employee to prove “low” performance. Please also be note that the evidences for objective facts of incompetence shall be gathered in the daily work, which requests that the supervisor shall better put forward employees’ incompetence and corresponding improvement requirements via email or written documents. The supervisor may also choose to proceed in the way of face-to-face interview, sending the memo via email to the employee and making voice memos if necessary. Those can serve as effective evidences for incompetence.


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