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Good Faith and Chinese Labor Contract Termination

2019-09-20

Authors: Gu Lifei, Angela Xiang
 

As one of the fundamental principles of Civil Law, in recent years the principle of good faith is often cited when dealing with civil relationship. The principle of good faith can be found in Article 7 of Civil Law: “The parties in civil legal relations shall conduct civil activities under the principle of good faith, adhere to honesty, and fulfill their promises”, as well as in Article 6 of PRC Contract Law that “The parties shall observe the principle of honesty and good faith in exercising their rights and performing their obligations”.

Putting our sights on labor relationships, since labor contracts are one type of contract in nature, companies and employees should also abide by the principle of good faith during the performance of labor contracts. Article 3 of the PRC Labor Contract Law stipulates that Labor contracts should be concluded in adherence to the principles of lawfulness, fairness, equality, voluntariness, consensus through consultation, and good faith. However, owing to the labor relationship’s feature that employees are managed and are under the control of the company and it is relevant to employee’s personal interests, applying the principle of good faith in legal practice actually meets numerous difficulties.

In labor disputes, the principle of good faith mainly appears during the labor contract’s signing and performance. At the state’s department law level, analyzing Article 26 and 39 of PRC Labor Contract Law would bring us the message that under the circumstances that employees have committed fraud when signing the labor contract, the contract will be deemed as totally or partially invalid, and the company can proceed with immediate termination. However, there are no provisions on employee’ dishonesty during the phase of performing the labor contract. This essay is a look into employee’ obligations of good faith, and to analyze the application of the principle for the purposes of termination.

 

First, two practical cases in Shanghai - handled by the writer - will be introduced.

Case 1: Company A terminates employee Mr. Wang due to his fabrication of client visit reports.

Mr. Wang is a salesperson for Company A. Since 2016, Wang declared client-visits and rejected to participate in all group meetings arranged by Company A. Wang has not appeared in office for nearly one year. Through investigation, Company A found that, even though Wang had filled in and submitted many client visit reports in the system, Wang had never actually visited the mentioned clients or partner agencies. Thus, Company A recognized Wang as submitting false information based on his conduct of submitting one client visit report, and immediately terminated Wang due to a disciplinary violation.

In this case, Company A’s regulatory basis is a provision in their Employee Handbook that states that “providing false, spurious or maliciously modified materials which is relevant to the company or personal information to the company or the company’s partner could be recognized as a severe disciplinary violation”, and the general requirement for honesty in the Code of Conduct. Company A’s risk falls in the following three scenarios:

1. The listed circumstances in the provision of Employee Handbook only includes providing false financial data, fabricating contracts, etc., which are not similar with Wang’s behavior;

2. The requirement of good faith in the Code of Conduct is a broad expression with no specific liability;

3. Company A only listed one report on the termination notice.

Based on these factors, the writer utilized the principle of good faith as an associated rule base and emphasized that employee’s cheating for an extended period severely violated the employees’ obligation of honesty and good work ethics. What was highly noted is that, even though the company only provided one false report as evidence of the employee’s cheating, the company stipulated that it had a zero-tolerance policy to any dishonesty.

The judge of the first trial stated that the employee shall finish his labor tasks, improve professional skills, execute labor, safety and health codes, and observe labor discipline and work ethics. Mr. Wang’s client visit report did not correspond with these criteria, providing false information. Thus, Wang violated the principle of good faith in the signed Code of Conduct.

 

Case 2: Company B terminates employee Mr. Li due to his installation of unknown routers, risking internet security.

Employee Mr. Li was the head of the IT department for Company B. With no applications to Company B’s overseas headquarters, Mr. Li privately bypassed the secure firewall and established some unknown routers, which led to great internet security problems for Company B and its global website. Nearly 120 of the group’s factories all around the world were in severe danger.

Company B’s risk falls in the following factors:

1. There are no similar applicable provisions in the Employee Handbook;

2. IT Regulations only stipulate that only equipment within Company B’s IT catalog could be set, but there are no regulations on liability;

3. There are no clear rules dictating that a violation of the IT system would lead to termination.

When the company seems to lack the rule base for employee termination, the writer emphasized on IT Regulation’s effect force: IT Regulation made it clear on the applicable equipment model. Violating the IT Regulation shall be recognized as violating the company’s rules and regulations. The company’s termination on the basis of the IT regulation should be supported. What’s more, the principle of good faith and work ethics are the fundamental requirements that dictate an employees’ quality, which shall be the basic principle in dealing with a labor relationship. What shall be emphasized is that the employee shall also conform to the notice obligation accompanying the principle of good faith, i.e. dealing with rationality and discretion.

The judge of the first trial considered that Mr. Li, as the head of the IT department, violated the company’s IT regulations and failed in protecting the company’s internet security. In our opinion, there is nothing wrong Company B’s termination of Mr. Li. The second trial confirmed the first trial which considered that, with regard to the background of the frequent severe internet infringement, internet security directly influences the company’s normal and stable operation. Mr. Li is the one in charge of Company B’s IT department, and Li should have strictly observed the company’s IT rules and protected internet security. However, Li privately established unknown routers which were out of the Company’s IT catalog. Therefore, the first trial’s judgment as legal termination shall be supported.

 

In fact, Shanghai has issued the relevant local practice guideline on applying the principle of good faith in 2009. Article 11 of Circular on Printing and Distributing the Opinions on Several Issues on the Application of the Labor Contract Law (Hu Gao Fa [2009] No. 73) states that “The performance of an employment contract shall follow the principles of legality and good faith.” In addition to the obligations under work rules, the parties to an employment contract are actually subject to many agreed obligations as well as contractual obligations that shall be borne by the parties in accordance with the principles of good faith. For instance, the provision that "an employee shall comply with labor disciplines and professional ethics", which is provided for under Paragraph Two of Article 3 of the Labor Law, is the legal basis for such obligations. Therefore, even if work rules are invalid, an employer can subject an employee to liabilities if the employee breaches his/her contractual obligations that he/she shall abide by. If the employee defends based on absence of work rules of the employer, such defense shall not be supported. However, in regulating such conduct, reviews shall only be conducted on major circumstances affecting employment relationships, in order to avoid excessive interference with an employer's independent management rights.”

 

From the above two cases, we could also see that Shanghai’s recent legal practices take a relatively looser attitude and a higher flexibility towards the application of the principle of good faith. In case one, with applicable provisions in the Employee Handbook, general requirements in the Code of Conduct and the principle of good faith could be recognized as a rule base for supplementary termination. Under the circumstances that there are no suitable regulations, such as in case two, the court’s attitude also reflected their admittance of the significance of applying the principle in labor relationship settlements.

Looking back on the ten years succeeding the issuing of the PRC Labor Contract Law, it is noted that, according to a gross count by a public website, there are only an average of 200 labor dispute cases a year relevant to the use of the principle of good faith all around the state from 2008 to 2012, among which, few companies were supported when dismissing employees based on these general principles instead of concrete regulations. However, since 2014, there are almost 2000 relevant cases on average. Taking Shanghai as an example, there are few cases about dismissal based on a violation of the principle of good faith before 2009 and still few cases were supported even after the issuing of Shanghai High Court’s Opinions on Several Issues on the Application of the Labor Contract Law. However, in these years, the court’s attitude tends to loosen and more and more companies are getting support in practice. The situation is also similar in Beijing. Beijing No.2 Intermedium People’s Court mentioned in White Paper on Labor Dispute Judgment in April 27,2018 that “Employee’s failure reasons in labor dispute cases include (…) violation of principle of good faith, work ethics and labor discipline”, which also reflects the wide use of the principle of good faith.

However, taking the initiative to a larger scale, since there are no rules in national law, there are discrepancies in the application of the principle of good faith in different regions. Similar to Shanghai, Beijing mentioned in Reply to law application matters in judging labor dispute cases by Beijing High People’s Court and Beijing Labor and Personnel Disputes Arbitration Committee in 2017 that “Article 3(2) of PRC Labor Law stipulates that employees shall obey labor discipline and work ethics. The provision shows a basic requirement for employees. Even if there are no clear rules in the company’s regulations or labor contracts, when employees severely violate labor discipline or work ethics, companies could terminate labor contracts based on Article 3(2) of PRC Labor Law.”

On the contrary, Tianjin states its opinion in the recent document Tianjin’s Implementing Regulations on Several Matters about Labor Contract Law (effective on Aug 1, 2018) that “Employers shall establish and improve labor regulations according to legal requirements. Employer shall make the circumstances that lead to severe violations clear. With no clear rules, employers shall not terminate employees based on Article 39(2) of Labor Contract Law.”

Of course, the local judicial attitude is closely related to the local economic development, enterprise forms and regional culture, but regarding the application of some general principles, the writer considers that a united opinion should be taken, i.e. the principle of good faith shall be considered with a positive attitude, and the flexible application of the principle shall be supported in labor contract termination.

Hysteresis often happens in law. Law’s social role is not only to specify rights and obligations through legislation, but should also be utilized in guiding social values and promoting positive development. Some local practices limit termination conditions within a company’s regulations. From my point of view, the company cannot be feasibly expected to list all the conditions in their regulations and, even if a company fails in providing strong management for its employees, burdening the company with the managing costs would not help company’s development. With a failure to meet a balance with regard to the employees’ and the company’s co-development would be to cause too heavy of a burden on the company and lead to other social problems. When look back on the principle of good faith, the principle has the fundamental function of ruling action, filling in legal and contractual loopholes, and taking an interest in finding a balance. Also, the principle provides discretion to the judge to some extent and leaves space for adjusting for the interests of the employee and the company, and between the company and society.

From the global perspective of China’s implementation of the Belt and Road strategy, encouraging enterprises to go overseas, the principle of good faith and work ethics are applicable basic rules in all regions all around the world. Guiding employees to improve personal qualities is beneficial to the strength of our employees’ competitiveness in a global market and to show our enterprise’s image of voluntarily bearing social obligations. From the perspective of globalization, employee’s moral ethics are appreciated by each country. Limiting a company’s personal management and overlooking outside change is one type of close system. Taking positive attitudes does well in protecting the national labor market order and forms a free and open market with fair competition.

Therefore, applying the principle of good faith with rationality and flexibility shall be the trend of judicial practice. Considering the differing opinions of different regions, currently, it is suggested that, in a region whose local judicial practice is relatively strict, such as Tianjin, a company could add provisions encompassing morality, work ethics and good faith in the Employee Handbook and other regulations. Also, dishonest behavior shall be listed clearly in such provisions, such as false reimbursement, providing false information, and the general provision of “others” (which could be interpreted as accounting for situations not considered) shall also be added. By improving company regulations and augmenting grounds for termination, companies would be able to protect their interests more effectively. 

      

Since the implementation of the PRC Labor Contract Law, the application and interpretation of many provisions vary greatly in accordance with societal development. Nowadays, the greater discretion and flexibility associated with handling labor relationships is replacing a more conservative attitude. With China’s strategy policy and the resultant development of enterprises overseas, it is expected that flexibility and humanity will achieve greater development in the future.

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