China Employee Open-Term Contracts and Terminations

One of the most common questions our China employment lawyers get, both from current and potential clients is the following:

We have an employee on a fixed-term employment contract expiring in a month. We can simply not renew the employee’s contract when it ends, right?

Well, it’s not that simple or easy. Let me tell you why.

Consider this hypothetical. Employee and Employer have entered into five consecutive fixed-term employment contracts. Upon the expiration of the fifth term, Employee sends a notice to Employer of her intent to renew and Employer confirms receipt of that notice. Employer then decides not to renew her contract. The relevant law provides that an employee is entitled to an open-term contract after two consecutive fixed-term contracts unless the employer has a legal basis for termination. Employee brings a labor arbitration claim demanding damages for the alleged wrongful termination due to Employer’s failure to execute an open-term employment contract with her upon the expiration of her fixed-term contract. Will Employee prevail on this claim?

In a recent case with very similar facts, the employer lost big time at all levels: labor arbitration, trial, appeal and reconsideration. At the final stage, Beijing High People’s Court ruled that Employer’s decision to terminate the employment relationship constituted wrongful termination and ordered Employer to pay Employee double statutory severance as damages. The court’s reasoning is quite simple: it cited the applicable Article 14 of the PRC Employment Contract Law (which deals with the circumstances under which an employee is legally entitled to an open-term contract). It noted that as Employee informed Employer that she wanted to renew the contract before the end of the-then current term, Employer should have renewed her contract and by failing to renew here contract, Employer violated the law. Employer tried arguing that there were other reasons that led to the non-renewal, including Employee’s poor performance, the difficulties in Employer’s business operation, and job redundancy, but the court rejected all of these arguments.

Here are the key takeaways from this case.

First, you as the employer need to know when you are legally required to use a non-fixed term (aka open-term) contract. Our general advice is that as long as an employee meets the applicable legal conditions for an open-term contract and the employer wants to retain the employee, the employer will usually be better off just proposing to renew on an open-term basis. It almost always makes sense to “err” on the side of using an open-term contract no matter how “appealing” the fixed-term approach may seem. Remember that you can still terminate an open-term employee for cause. Though you may proceed with signing a fixed-term contract if your employee explicitly requests this, you need to make sure you document the employee request in a clear writing. Note also that many localities do not permit this even if your employee has requested it.

Second, if you want to terminate an employee entitled to an open-term contract, you must be able to show cause for the termination. For example, if the employer in the above case had hard evidence, proving that its employee had committed a material breach of the employer’s rules and regulations, the employer could have not renewed the employee’s contract without having to pay severance. This though is usually very tough to prove.

This is very different from the renewal/non-renewal at the end of the first contract term. Generally speaking, before the end of an initial fixed term, the employer can simply provide a non-renewal notice to the employee without any explanation for its non-renewal decision so long as it pays the employee statutory severance. But this is pretty much the only time when an employer can terminate an employee for “no reason” at all. Renewals down the road are more complicated. When there is no strong basis for a unilateral termination (which is often the case), it usually makes sense to settle with the employee via a mutual termination agreement. Paying a generous severance usually beats undergoing multiple lengthy, costly, and risky proceedings like the employer did in the above case.

In practice, some employers “force” the employee to agree to a contract for a short fixed-term (usually one year or less), no matter how many consecutive fixed-term contracts the parties have signed, and no matter what the employee requests. This arguably abuses fixed-term contracts in an attempt to avoid using open-term contracts and if an employer gets caught doing this (and they usually do), there will be consequences.

I should also note that we are still seeing local differences in court decisions on this sort of issue, so you (as always) need to act according to your own local requirements. That being said, Beijing, like many other cities in China, remains very pro-employee. So you need to keep that in mind as well.