Under China’s labor laws, most employees can only be terminated with cause and a severance payment. But what about terminating a general manager? Pursuant to China’s Company Law, the board of directors may terminate a general manager in accordance with the relevant procedures without cause. Based on this provision, many companies assume that the Company Law, not the Labor Contract Law, controls a general manager’s termination, and therefore all they need to fire a general manager is a board resolution. But it’s not nearly that simple.
The basic question is whether a general manager is treated just like every other employee under China’s Labor Contract Law. On the one hand, a general manager is different from other employees: the general manager is in charge of the company’s business operations, manages all of the other employees, and answers only to the company’s directors. In some cities, the general manager must be formally identified during the company formation process. And there’s that provision in the Company Law about termination. On the other hand, China’s Labor Contract Law has no provisions that distinguish general managers from other employees.
Some practitioners believe that even if a company dismisses its general manager in accordance with the Company Law, the labor relationship between the parties continues until the company also dismisses the general manager in accordance with the Labor Contract Law. And at least some courts agree.
Consider the facts of a recent case (simplified a bit for purposes of this post). A company’s board of directors formally terminated the general manager, in accordance with the Company Law, and immediately stopped paying his salary. The company did not assign him to any other position. Subsequently, the former general manager filed for labor arbitration. The arbitration commission ruled that while the board’s decision to terminate the general manager was legal, such decision had not terminated the contractual labor relationship. As a result, the company was required to pay back wages for the period between when the general manager was fired and when he submitted the dispute for arbitration. The commission further ruled that because the general manager had not provided any services after being terminated, the amount of back wages owed would be those of the average wage at the office (and not, as the general manager had argued, his previous salary). The company appealed, and a court upheld the arbitration commission’s decision.
Although this case has no value as precedent, employers should take note. Until Chinese courts provide clearer guidance on this issue, the safest path for companies is to treat their general managers just like other employees, and terminate them in accordance with both the Company Law and the Labor Contract Law. Failure to do so could be disastrous for the company, because if the termination of a general manager is deemed wrongful under the Labor Contract Law, the employer could be forced to hire back the general manager and pay back wages to boot.
When terminating a general manager in China, make sure you know what you’re doing.