Determination of Employee's Incompetency
Author: Ma Xinli
As stipulated in Article 40, paragraph 2 of the Labor Contract Law: the employer may dissolve the labor contract if it a) notifies the employee in writing 30 days in advance or b) after it pays the employee an extra month's wages when the employee is found to be incompetent and remains so after training or after a change of position. However, the win-rate for employers in litigation remains at a low level where the employer terminates the labor contract through the “incompetency” clause. this article attempts to discuss and analyze the determination of “employee’s incompetency”.
1) Main issues
Although it is clearly stipulated in the Labor Contract Law that the employer may terminate the labor contract with the employee according to the “employee's incompetency", there is no further explanation and clarification of the essential elements of "incompetence" through the relevant laws. The former General Office of the Ministry of Labor once stated in the "Notes on Several Provisions of the Labor Law" [Lao ban Fa  No. 289] that "Incompetency means that the tasks agreed in the labor contract or the same workload cannot be completed as required or as people in the same position.” However, this is still a more broad and principled explanation. In court, such cases are always adjourned because of the enterprise’s failure to fully provide adequate evidence of employee’s incompetency, the ineffectiveness of the enterprise’s rules and regulations, and a defective termination procedure. However, the “Employee's incompetency" standard is seldom interpreted by the judiciary. Indeed, the factual identification and legal recognition of “Employee’s incompetency” has never been achieved.
Due to a lack of substantive examinations of “Employee’s incompetency” by the courts, to some extent, there is an absence of judicial guidance for enterprises. When drafting internal rules and regulations stipulation, enterprises cannot clearly define the boundaries between corporate autonomy and application of law. The result is that, if the company does need to terminate a labor contract because the employee is not qualified for the job, he has to make considerations to avoid losing the case, and choose other ways to terminate the labor contract with the employee.
2) Essential elements of incompetency in judicial practice
Through an analysis of “employee incompetency” cases in Beijing and Shanghai from 2017, the reasons for the company low win-rate are mostly due to “not fully proving that the employee was incompetent”, “there were no position adjustments or training before the unilateral release or failure to prove that enterprises conducted the above step", "the assessment results are invalid without the employee’s recognition", "the assessment regulations are invalid due to a failure to perform the statutory procedures at the time of enactment", "assessment regulations are improper", "no clear assessment regulations" and "failure to grant employee opportunities before the unilateral release", "no method provided for the employee to appeal the decision before the unilateral termination", "not notified 30 days prior to the release or provided a 1 month salary payment instead", "the two sides did not agree on the position adjustment, unreasonable position adjustment, and non-targeting of training”.
That the reasons for the failure of the enterprise to prove incompetency in court are mainly due to an inability to produce sufficient evidence, the effectiveness of the performance assessment system and a defective termination process. Since the enterprise assumes the burden of proof, as stipulated in Article 13 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Laws in the Trial of Labor Dispute Cases, the enterprise has responsibility to provide the evidence. That means, however, the essential recognition of whether the employee is incompetent or not remains unclear.
The author believes that, even in those cases where the "employee is not competent" has been substantively examined and judged, the judiciary tend to make decisions based on the facts without providing much detail on how they arrived at their conclusion or dismiss company’s claims outright. For example, in the No. 18 Guiding Case of the Supreme People's Court “ZTE (Hangzhou) Co., Ltd. v. Wang Peng Labor Contract Dispute Case”, the presiding judge said: “The “Employee Performance Management Measures” stipulates that: C2 level represents performance to be improved, the incompetent employee should be assessed as C2, so the C2 level is not exactly the same as “incompetency.” The judgment does not further elaborate on the logical process in the claim that the C2 level is not completely equivalent to the “incompetency” and fails to discuss the essential elements of “termination of the labor contract due to incompetence” according to the Article 40, paragraph 2 of the Labor Contract Law.
3) Criteria for employee incompetency
Due to no further explanation and clarification on the essential elements of “Employee incompetency” in the laws and regulations and a lack of judicial explanation and attribution to the essential elements of “employee incompetency”, deductible reasoning cannot be used to discuss the specific situation where it can be applicable. The author tries to enumerate a number of key points by analyzing several specific cases in the identification of “employee’s incompetency”:
a) Agreed reasonable responsibilities or goals
If the company can provide agreed or job responsibilities reasonable (the same type of work, the workload of the same position), assessment requirements, performance targets, sales data and competency standards, along with the fact of the employee’s incompetency, “Employee incompetency” will be identified by the court.
For example, in the case of Li Yanfang vs. Merck (China) Investment Co., Ltd. Labor Contract Dispute [(2017) Hu 01 Min Zhong 2066], in order to prove that Li Yanfang was incompetent, the company submitted Li Yanfang’s performance targets for 2014 and 2015, 2015 development plan, sales data from 2014 to 2016, Q3 sales performance in 2015, team members’ resignation letters, questionnaire and mails, performance improvement plan, etc. The judgment was based on the above-mentioned materials provided by Merck, and confirmed the fact that Li Yanfang was “incompetent”.
In the case of Siemens (China) Co., Ltd. Vs. Cao Limin's labor dispute case [(2017) Jing 03 Min Zhong 3302], the company lost the case because it failed to fully prove the claim of incompetency, but the court clearly listed a series of circumstances that needed to be proved: “if the company claims to terminate the labor contract based on employee incompetency, it should provide evidence of the employee’s duties, the company’s competency standards, the fact that the employee does not meet the relevant requirements, that training has been provided or there has been a position adjustment, the employee’s duties for his/her new position, the competency standards for the new position, and the fact of the employee's incompetence in the new position” in the judgment.
b) Appraisal system.
The appraisal system is the institutional basis for determining whether employees are competent. An effective and reasonable appraisal system is an institutional guarantee of “employee incompetency”. An effective appraisal system means that the formulation and publication of the appraisal system must meet the requirements of legal procedures, such as an extensive solicitation of opinions, approval of the workers' congress, and notification of trade unions, publicity, and the employees’ acceptance. The rationality of the appraisal system refers to the assessment procedures. The target standards should be in accordance with that of the same industry and the same position. In some cases, employees do not recognize the results of the assessment result according to the assessment system. The author believes that, whether the employee accepts the assessment based on the effective and accepted assessment system results or not, this should not form a part of the court's consideration of whether the employee is qualified for the job. As long as the establishment of the assessment system is reasonable, effective, and accepted by the employees, the results of the assessment should not be questioned by the employees. Otherwise, it will fall into an infinite loop of “negative rejection of the appraisal system from the beginning” only because the employees do not recognize the assessment results. The significance of setting this unilateral termination clause will also be seriously questioned.
In the case of Guangzhou Bo Guan Information Technology Co., Ltd. and Yao Sailan Labor Dispute 2017 [(2017) Guangdong 01 Minquan 2161], the reasonable and effective appraisal system made the company win the case. The court held that: “The employee handbook clearly states that the company implements a strict performance appraisal system...” The performance appraisal is completed together by the employees and their direct supervisors, and the performance of the employees is effectively evaluated through self-evaluation and the evaluation of their peers. The assessment indicators are derived from the requirements of the company and the department's strategy for individual job performance, responsibilities and abilities. The assessment will be conducted regularly and irregularly within the department's performance appraisal as a judgement of the performance, ability and competence of the employee. "The company has a specific evaluation basis for the employee’s assessment”, therefore, it can be seen that through a specific, effective and reasonable assessment system, employees have a sufficient institutional basis to be considered "competent" or not.
c) Incompetency procedures
After the company first determines that employees are incompetent according to the appraisal system, “position adjustment or training” is a necessary step stipulated in the Labor Contract Law. Is it necessary to obtain the employee’s agreement when adjusting their position? In judicial practice, there are certain differences in different cities. In recent years, the judicial practice in Beijing, Shanghai, Guangzhou and other places has given the “enterprise unilateral transfer of power”, which also means that judicial practice respects the company’s autonomy to a certain extent.
There are no clear laws or regulations stipulated as to whether the targeted training should be carried out corresponding to the employee’s position or not, but the author believes that targeted training corresponding to their positions is necessary, otherwise, it is easy to raise unreasonable doubts about the training in judicial practice if the company provides training that has nothing to do with the relevant ability on purpose. It will reduce the persuasiveness of the termination and will be not conducive to success in the courts.
Although there is no legally mandated provision on providing employees with channels for appeals, it can show that the company has a reasonable system in the process of management, highlighting the rationality to make any decision, and enhancing the win rate in such cases.
In Guangzhou Bo Guan Information Technology Co., Ltd. and Yao Sailan Labor Dispute 2017 [(2017) Guangdong 01 Minsheng 2161], due to incompetence, the company adjusted Yao’s position in March 22, 2013. It has been clearly defined as “downgrade”, also clearly defined as “incompetency” which was recognized by Yao. Yao’s performance after the adjustment was still unable to meet the relevant requirements. The retrial court held that: “The training records submitted by the company from March 2013 to April 2015 shows that Yao participated in advanced training, the content of the training including “Learning Original Design Experience Sharing”, “Proper Original Painting Training”, “CC Group Training – Role Original Painting”, etc. The above training content is closely related to the original ‘painting character design’ position of Yao. The purpose is also to improve the ability to engage in this position." Moreover, the company has a reasonable appeal approach. All the above-mentioned related procedures are designed to ensure the process and standards for helping to identify the criteria of “employee incompetency”.
d) Termination procedures
As stipulated in Article 40, paragraph 2 of the Labor Contract Law, the employer may terminate the labor contract after notifying the employee in writing 30 days in advance or paying the employee one month's salary. Stipulated in Article 43, if the employer unilaterally terminates the labor contract, it shall notify the trade union in advance. Should the enterprise bear the responsibility of paying an additional one-month payment or that of illegally dismissing due to “Employee’s incompetency”, If the enterprise fails to notify the laborer in writing 30 days in advance? The author tends to assume that it is proper for the company to bear the former responsibility.
In the case of Guangzhou Bo Guan Information Technology Co., Ltd. and Yao Sailan Labor Dispute Case, sufficient evidence played a very important role in the company’s success. As mentioned above, the reason for many companies losing their cases are due to insufficient evidence.
On the occasion of the tenth anniversary of the implementation of the Labor Contract Law, the success rate of the employer in the termination of the labor contract due to Article 40, paragraph 2, has maintained a low level. Although enterprises have the so-called natural "capital advantage" and "proofing advantage", the company still cannot use this clause to terminate the labor contract without clear guidance. On the one hand, due to the objective reasons stated in the article, the judiciary habitually supports employees when conducting factual and legal judgments. On the other hand, this clause has not been able to play its regulatory role between employers and workers in a neutral manner, and has to face constant doubts about its original intention and role.
Despite this, the employer must formulate internal systems such as job responsibilities, goal setting, and assessment systems with rigor, and comply with the due process requirements of the Labor Contract Law, such as the extensive solicitation of opinions, approval of the workers' congress, notification of trade unions, publicity, the employee's receipt and other procedures. Pay much attention to the preservation of evidence. Through the improvement of the employee-management this clause may play a more active role, increasing employer autonomy through success in ‘employee incompetency’ trials.