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Can I Press the "Pause Button" on the Labor Contract?

2020-05-19

Author: Liu Xiaoyan
Translator: Normand Gauthier

At present, the epidemic prevention and control is in motion, and the company's resumption of work is gradually carried out in an orderly manner. However, in order to stop the spread of the epidemic, isolation measures were adopted throughout the country to reduce the flow and concentration of people as much as possible. The decrease in the flow of people may not have an obvious impact on production-oriented enterprises, but it may bring about the "disaster of extinction" to industries such as tourism, accommodation and catering. These industries would never expect to lose countlessly because of COVID-19.  Many companies have announced collective salary cuts or even closed their doors due to the inability of funds to return or the rupture of capital chain. According to relevant reports, less than 10% of companies have enough funds to be maintained for more than half a year. When enterprises are caught in the epidemic and cannot extricate themselves, the central and local human resources and social security departments have launched stabilization policies. On the one hand, they restrict the unilateral right of enterprises to rescind the labor contract and, on the other hand, they implement social security reduction and exemption policies. But no matter what the final effect is, companies will have many difficulties and obstacles during the epidemic control and prevention period while also engaging in production.

1. Overview of the legalization on suspension of labor contracts
The COVID19 epidemic has caused many enterprises to press the "pause button" of production and operation. So, can enterprises themselves choose to temporarily "suspend" various civil activities and enter a relatively safe "sleep period"? From this question, we can easily consider the system of performance suspension of contract.

1.1 What is the suspension of labor contract
In the field of labor law in China, at legal level there is no clear provision for suspending the performance of labor contract[1], but there are special reasons in the performance of the labor contract for employers or employees that are temporarily unable to perform the labor contract, and  in judicial practice there are labor disputes caused by the suspension of a labor contract. In the field of civil contracts, when a party lacks the ability to perform a contract or loses its business reputation, the party that should perform first may advocate that the contractual performance be suspended to avoid loss. After the other party restores its performance capability or provides appropriate guarantees, the party that suspended the performance resumes the performance.[2]The suspension of performance of the civil contract is based on the principles of good faith and fairness, and aims to ensure the effective performance of the contract and protect the interests of the counterpart of the transaction.

In the field of labor contract law, when a specific situation occurs and the conditions for the termination or dissolution of the labor contract are not met, the employer or the worker may suspend the performance of the labor contract. During the suspension of the labor contract, the two parties retain the labor relationship, but do not assume each other rights and obligations stipulated in the labor contract. When the suspension of the labor contract disappears, the performance of the labor contract shall be resumed except if it is no longer possible to perform.

Although there is a lack of legal system for the suspension of the performance of a labor contract, the suspension of labor contracts is often specified at the level of local regulations on the basis of the possibility of suspension in the process of labor contract performance.

1.2 The suspension of the labor contract
In the relevant laws and regulations concerning the suspension of labor contracts, the situations in which the employer and the laborer can suspend the performance of the labor contract are different. It mainly includes the following situations: First, the suspension of personal freedom due to suspected violations of the law; such as the original Ministry of Labor's Opinions on the Implementation of the Labor Law of the People's Republic of China (Lao Fafa [1995] 309)[3]. Second, it was suspended due to illness or non-work-related injuries during the probation period; for example, the Tianjin Human Resources and Social Security Bureau issued a Notice on Tianjin’s Implementation Rules on Certain Issues of the Labor Contract Law (No. 14)[4]. Another example is the Notice of the First Tribunal of Civil Trial of the Zhejiang Provincial Higher People’s Court and the Zhejiang Provincial Labor and Personnel Dispute Arbitration Court on the Issuance of Answers on Several Issues Concerning the Trial of Labor Disputes (4) (Zhejiang High Law People I No. 3)[5] etc. Third, the labor contract was temporarily suspended due to force majeure. Fourth, it was suspended due to agreement between the parties. The above two situations are stipulated in the Shandong Province Labor Contract Regulations, Jiangsu Province Labor Contract Regulations, Anhui Province Labor Contract Regulations and Ningxia Hui Autonomous Region Labor Contract Regulations[6]. In addition to the above-mentioned circumstances, in some areas, if the laborer is recruited into the army[7], forced[8] drug rehabilitation, or the employer and the laborer do not find each other for a long period of time[9], the labor contract may be terminated.

1.3 Rights and obligations during the suspension of the labor contract
According to the regulations on the suspension of labor contracts in various regions, during the period of suspension of performance, the employer and the laborer shall retain the labor relationship and suspend the performance of the obligations stipulated in the labor contract. Specifically: First, the laborer does not need to provide labor during the suspension period, and the employer may not pay the labor remuneration and stop paying social insurance premiums; second, the suspension period is not counted as the number of working years of the laborer for the employer. In addition, regarding the question of whether a laborer can establish a labor relationship with another employer during the suspension of the labor contract, only the Shanghai region clearly states that “the laborer shall not establish labor relations with other employers during the suspension of the performance of the labor contract”[10].

Based on the above analysis, due to the lack of legislation at the national level, labor contract suspension clauses vary by local legislation, making it difficult to form a system. Although the original Ministry of Labor began to try to implement the labor contract suspension system in 1995, however, because the application situation is very narrow, the possibility of suspension of the labor contract is extremely low. With the accumulation of local legislation and judicial practice, the application of labor contract suspension has become more complete. It can be said that the application of local laws has promoted the development of the labor contract suspension system.

2. Judicial judgment rules for suspension of labor contract
Although the suspension clause of the labor contract is not written into the labor laws, in practice, it is not uncommon for the labor contract to be temporarily suspended and the labor contract and labor relationship to be retained. Labor disputes related to the suspension of the performance of the labor contract do occur. Through case retrieval, more than 500 related cases have been retrieved in non-litigation cases. This section mainly sorts out the relevant ruling rules for labor contract suspension through cases, with a view to forming the operation guidelines for labor contract suspension.

2.1 Reasons for the suspension of labor contract and operation basis
2.1.1 The employer and the laborer may suspend the performance of the labor contract through consensus
Case One[11]: On March 3, 2009, Shi joined a bearing company as a workshop grinder. The two parties signed a three-year labor contract on March 3, 2009, and signed another labor contract on March 3, 2012, for the duration of March 4, 2012, to June 30, 2015. On April 26, 2012, Shi and the bearing company signed a "Labor Contract Suspension Agreement" stating: "Party B Shi  needs to participate in social studies for a long period to improve his skills, and now Party B is applying to Party A to suspend the labor contract and the labor relationship between both parties, after consensus has been reached this agreement is hereby concluded so as to abide by it.” Regarding the section on economic compensation for the termination of labor relations, the "Labor Contract Suspension Agreement" signed by Shi and the bearing company represent the true intention of both parties, and the court accepted the agreement.

2.1.2 Difficulty to determine the suspension of labor contract due to force majeure.
Case 2[12]: In July 1990, the appellee Huang worked in a plastic company of the appellant. On June 27, 2014, a fire broke out in the workshop of the plastic company, and the company ceased production. Since then, the plastic company did not arrange for Huang to work, nor did Huang work in other units. The court held that none of the reasons for the suspension of production advocated by the plastic company belonged to force majeure and did not comply with the suspension of the labor relationship. Therefore, during the suspension period, the plastic company should pay the basic living expenses to the employees. The plastic company argued that it arranged Huang to work at a new material company after the suspension of production, but Huang did not agree; and that Huang had already worked in another company, but the above argument cannot be confirmed by evidence. The plastics company claimed that Huang had been absent from work since February 2008, and did not provide evidence which contradicted with the proposal to arrange for Huang to work in a new materials company after the suspension of production.

2.1.3 Unilateral suspension of labor contract without negotiation and possibility to settle or agree shall be null and void.
Case 3[13]: The question of whether the suspension of the labor contract is legal and effective. First, the labor contract signed by a branch with Hu on December 10, 1999, did not stipulate the conditions and reasons for the suspension of the labor contract. On December 1, 2008, the branch issued the notice of suspension of the labor contract with Hu. Because the party unilaterally notified the suspension of the contract in accordance with internal regulations, and did not inform Hu on the remedy, the two parties did not agree to suspend the contract. Secondly, the branch has no evidence to prove that there is a situation in which Hu cannot perform the labor contract when they suspended the contract. Additionally, the condition to apply the branch's unilateral suspension of the labor contract in accordance with the internal labor contract system is a catch-all clause and is too large: "other circumstances where the performance of the labor contract can be suspended or partially suspended ". In summary, the branch, without legal reasons or mutual agreement, unilaterally suspended the labor contract with Hu. In fact, Hu has been engaged in the branch during the suspension, the branch’s suspension of the labor contract with Hu was invalid and the labor contract relationship between the two parties was not actually suspended.

2.2 Rights and obligations during the suspension of the labor contract
2.2.1 The employer does not need to pay the worker's living expenses during the suspension of the labor contract
Case 4[14]: Chen signed a labor contract with a textile company in 2010. In 2012, Chen left the textile company for self-employment. The textile company no longer paid Chen Mou labor compensation but has not formally terminated the labor relation and always paid social insurance for Chen. The court of first instance determined that the labor relationship between the two parties was factually suspended. Because Chen was not paid for any labor during this period, he requested the textile company to pay the minimum living expenses from 2012 to January 2018, which was not supported by the court of first instance. Article 30 of the Labor Contract Regulations of Jiangsu Province stipulates that during the suspension of the labor contract, the labor relationship shall be retained and the performance of the labor contract shall be suspended. There is nothing improper.

2.2.2 The period of suspension of the labor contract is not included in the working years, and should be deducted when calculating the economic compensation
Case 5[15]: Wu and a service center have successively signed three leave-of-service suspension agreements. The agreement is actually an agreement between the two parties on the related rights and obligations after the suspension of labor relations from July 1, 2007, to June 30, 2015. Therefore, this period should not be counted as Wu's working years. Moreover, Wu confirmed that the economic compensation he claimed was CNY 92,400 in the first-instance trial on November 7, 2017, which was a six-year period after deduction of the suspension. In the second instance, he also requested payment of financial compensation for the period of suspension from 2008 to 2015. The economic compensation amount obviously exceeded the first-instance litigation request, and also contradicted the above regulations. Therefore, Wu claim that the period of suspension of pay should be included in the calculation period of economic compensation is without facts and legal basis.

2.3 Legal issues regarding the resumption of performance of labor contracts
2.3.1 It is not necessary to enter a new written labor contract if the labor contract is resumed within the validity period of the labor contract.
Case 6[16]: Zhang and a lighting company entered into a labor contract from January 1, 2012, to December 31, 2014. From October 28, 2012, to April 30, 2013, Zhang left the lighting company to work in other units. Neither side made an intention to terminate the labor contract, and the lighting company still paid the social insurance premium of the defendant Zhang since he left in 2012. During the validity period of the labor contract signed by the two parties, from May 2013 Zhang returned to the original work position of the lighting company. The two parties had reached an agreement to resume the original labor contract and the two parties did not need to sign a separate labor contract. Therefore, Zhang's argument that the lighting company in Chongqing did not sign a written labor contract with him and should pay double the wage difference after May 1, 2013, was not accepted.

2.3.2 The labor relationship continues during the suspension of the labor contract and so does the special arbitration time limit to the recovery of labor remuneration.
Case 7[17]: The question of whether Hu's application for labor arbitration has exceeded the time limit for arbitration. The provisions of the first and fourth paragraphs of Article 27 of the Labor Dispute Mediation and Arbitration Law of the People ’s Republic of China: "The time limitation period for application for arbitration of a labor dispute shall be one year. The time limitation period for arbitration shall be counted as of the date when a party knows or should know that its right has been violated. (…) Where a dispute arises from the delayed payment of labor remunerations during the period of existence of a labor relationship, an employee's application for arbitration shall not be subject to the time limitation period for arbitration prescribed in the first paragraph hereof" The labor relationship between the branch and Hu has not been effectively suspended. Even if it is suspended, the labor relationship between the two parties still exists. Therefore, the application for arbitration for the recovery of labor compensation is not limited by the one-year limitation period and its application for arbitration do not exceed the limitation period.

Conclusion
Due to the lack of a systematic legal design for the suspension of labor contracts, there are differences in the legal circumstances in which judicial labor practices are determined in various jurisdictions. For example, there is great disagreement on whether the stopping the production and production of enterprises constitutes force majeure and thus can suspend labor contract. According to Article 12 of the Interim Provisions on Wage Payments issued by the former Ministry of Labor[18], as long as the halt to production is not caused by a worker, the employer must pay a huge amount of labor costs during the shutdown, which the author believes it is unfair to the employer. Affected by the COVID-19, many enterprises, including the catering, hotel, and tourism industries, are unable to operate and employees are unable to provide labor. The enterprise is on the verge of closing down, but still has to bear the living expenses and social security expenses of employees. Labor law is a social security law that protects the legitimate rights and interests of workers; but if the enterprise is gone, the labor relationship is gone.
 

[1] In addition to the current regulations, the Labor Contract Law and the Regulation on the Implementation Regulations of the Labor Contract Law had labor contract suspension clauses in their drafts for consultation, but unfortunately, they were ultimately not retained.

 

[2] Contract Law of the People’s Republic of China Article 68 and 69: the right to suspend performance of contract.

 

[3] Article 28 If a laborer is suspected of committing an illegal or criminal act and is under custody, investigated, detained or arrested by the relevant authority, the employer may temporarily suspend the performance of the labor contract with the laborer during the period when the laborer’s personal freedom is restricted.  During the suspension period of the labor contract, the employer does not assume the corresponding obligations stipulated in the labor contract.

 

[4] Article 13 If a worker is found to be in eligible for employment during the probationary period, the employer shall make a decision to terminate the labor contract within the probationary period. If a worker becomes ill or is not injured by work during the probationary period, the probationary period may be suspended by consensus between the two parties to the labor relationship. "

 

[5] If workers take sick leave during the probation period, can the sick period be deducted from the probation period? Answer: The probationary period is the period of mutual inspection between the employer and the laborer. Workers taking sick leave during this period may not meet the inspection purpose, so the sick leave can be deducted from the probation period.

 

[6] Article 26 of the Regulations on Labor Contracts in Shandong Province; Article 30 of the Regulations on Labor Contracts in Jiangsu Province; Article 22 of the Regulations on Labor Contracts in Anhui Province; and Article 24 of the Regulations on Labor Contracts of Ningxia Hui Autonomous Region.

 

[7] Regulations on Labor Contracts in Shanghai, Article 26: During the term of the labor contract, the labor contract shall be suspended under one of the following circumstances: (1) if the worker is conscripted into the army or performs other legal obligations stipulated by the State.

 

[8] Tianjin City Implementation on a Number of Issues of the Labor Contract Law, Article 12: If a worker has one of the following circumstances, the employer may temporarily suspend the performance of the labor contract: (2) during the period of compulsory drug rehabilitation treatment.

 

[9] Beijing Higher People's Court's Seminar on the Application of Law in Labor Dispute Cases (200-08-17), Article 14: The laborer has not provided labor to the employing unit for a long period of time, and the employing unit also no longer pays the laborer for a long period of time, and if the two sides do not seek it for a long period of time, they may be found to not enjoy and assume the rights and obligations of the labor law during this period.

 

[10] Notice of the Shanghai Municipal Labor and Social Security Bureau on the Implementation of the Regulations on the Employment Contracts of Shanghai (Shanghai Labor Protection and Guanfa (2002) No. 13).

 

[11] 北京市大兴区人民法院(2013)大民初字第4343号。

Beijing Daxing District People's Court (2013) Damin Chu No. 4343.
 

[12] 济宁市中级人民法院(2017)鲁08民终1244号。

Jining Intermediate People's Court (2017) Lu 08 Min Zhong No. 1244.
 

[13] 孝感市中级人民法院(2017)鄂09民终245号。

Xiaogan Intermediate People's Court (2017) E09 Min Zhong No. 245.
 

[14] 南通市中级人民法院(2019)苏06民终318号。

Nantong Intermediate People's Court (2019) Su 06 Min end 318.
 

[15] 江苏省高级人民法院(2019)苏民申364号。

Jiangsu Provincial High People's Court (2019) Su Minshen No. 364.
 

[16] 重庆市第二中级人民法院(2015)渝二中法民终字第01195号。

Chongqing Second Intermediate People's Court (2015) Yu II, Final instance no. 01195.
 

[17] 孝感市中级人民法院(2017)鄂09民终245号。

Xiaoxian Intermediate People's Court (2017) E09 People's End 245.
 

[18] Interim Provision on Payment of Wages, Article 12: Where an employer stops his or her work or production due to factors other than the employees within a period of wage payment, the until shall pay wages to the employees according to the standards prescribed in the labor contracts. Where an employer stops its work or production for a duration exceeding a period of wage payment, it shall pay the employees remuneration not less than the local standard for minimum wages given the employees have provided normal labor; or otherwise the cases shall be dealt with according to the relevant State Provision.

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