— Interpretations on the Focus of Labor Contract Law Series I

Author: Yang Jie

If there are “two chances”, enterprises may review the performance of employees through two contracts, and terminate the contract if employees are not considered suitable to be engaged on non-fixed term contract. If it is a “one-off chance”, enterprises simply have a single chance to review the performance of employees, it means that they can only conclude non-fixed term contract from the second contract onwards.

The most controversial provision of the Labor Contract Law is Article 14 which provides for non-fixed term labor contracts. Article 14 expands the scope of mandatory conclusion of non-fixed term labor contract, in which employees serving for 10 full years should be engaged on non-fixed term contract in addition to the creation of provisions under which employees who have been engaged on two contracts should be given non-fixed term contract upon renewal. Article 14 of the Law provides that: “under any of the following circumstances, workers who propose or agree to the renewal or formation of labor contracts shall conclude non-fixed term labor contract unless workers propose otherwise: … (3) Where a fixed term labor contract is concluded for the second time consecutively, and workers do not fall under the circumstances specified in Article 39 and Items 1 and 2 of Article 40 for renewal of labor contracts. ”Although the law is promulgated, there are two completely different interpretations on this clause. The focus lies in whether after two consecutive fixed-term contracts, employing units can terminate the labor contract upon the expiry of the term of the second contract. One interpretation is that employing units may terminate the labor contract, however if the labor contract is not terminated but is renewed with the worker, non-fixed term labor contract should then be concluded, i.e. “two chances”. Another interpretation is that if employing units cannot terminate the labor contract, it follows that non-fixed term labor contract should be concluded. If so, in fact it means once employing units conclude a contract once, the moment the contract is renewed it means the right to terminate the labor has been lost, i.e. “one-off chance”.

Four Essential Elements for Conclusion of Non-fixed Term Labor Contracts

From the wordings of the law, four essential elements have to be satisfied for conclusion of non-fixed term labor contracts:

The first element is that workers have concluded two consecutive fixed-term labor contracts. Article 97 of the Labor Contract Law states that the number of times of consecutive conclusion of fixed-term labor contracts shall be calculated from the renewal of the fixed-term labor contracts after the Labor Contract Law was implemented on 1 January 2008. If fixed-term contracts have been concluded many times prior to the implementation of the law, the number of times of conclusion should not be counted into the “two chances”.

The second element is that workers do not fall under the circumstances of Article 39 and Items 1 and 2 of Article 40 of the Labor Contract Law. Article 39 provides for the circumstances in which a labor contract is rescinded, including the worker is proved not to satisfy the employment conditions during probationary period; serious violation of the rules and systems of the employing unit, serious derelict of duty and practising graft, bringing about significant loss to the employing unit; the worker establishes labor relationship with another employing unit at the same time which brings about significant impact on the completion of the tasks of the unit, or failure in rectification despite the demand of the employing unit; the contract is concluded by coercion or taking advantage of another party leading to void of labor contract; and criminal liability is pursued in accordance with the law. Items 1 and 2 of Article 40 lay down the circumstances for rescission of labor contract other than for reason of fault: the worker is ill or suffers from injury other than for work-related purposes, and he cannot assume the original duty upon the expiry of the prescribed medical treatment period or take up other duties assigned by the employing unit; he is not competent for the job even after training or adjustment of job position. Under these eight types of circumstances, non-fixed term contract may be concluded. The problem is, if the employing unit can rescind labor contract under these circumstances even within the validity period of labor contract, isn’t it necessary to conclude non-fixed term contract? This condition does not carry any substantive meaning but rather an expression of attitude.

The third element is the renewal of labor contracts. Article 3 of the Labor Contract Law specifies that “the formation of labor contracts shall follow the principles of legality, fairness, equality, voluntary participation, consensus after negotiation, and honesty and creditworthiness”. The renewal of labor contracts shall also comply with such fundamental principles and the employing unit and workers may renew the contract or otherwise based on equality, voluntary participation, and consensus after negotiation.

The fourth element is that workers propose or agree to the renewal of labor contracts without proposing a fixed-term labor contract. If the previous three elements have been established, “where workers propose or agree to the renewal of labor contracts”, non-fixed term labor contracts can then be formed and the employing unit should renew non-fixed term labor contracts. The Labor Contract Law places the situation that “workers propose concluding non-fixed term contracts under “exception”. If such “exception” arises, both parties do not have to conclude non-fixed term labor contracts but rather fixed term labor contracts.

From the wordings of the law, non-fixed term labor contracts should be concluded if the four essential elements have been fulfilled. Upon the expiry of two contracts, the employing unit still enjoys the autonomy in concluding or terminating the contract. If the contract is decided to be terminated by the employing unit, the non-existence of the third essential element “renewal of labor contracts” means that no labor contract has to be formed. “Two chances” is an interpretation that fits the meaning of the law.

“One-off Chance”, “Two Chances” – What they mean to enterprises and employees?

The interpretation of “one-off chance” ignores the third essential element. If the first, second and fourth essential elements have been fulfilled, the employing unit should conclude non-fixed term labor contracts irrespective of its willingness of renewal. This interpretation is not rigid but matches the attitude of some legislators who enlarge the scope of non-fixed term contracts.

It was said that the draft implementing rules contain the provisions on “one-off chance” in many versions but attract criticism. The Implementing Regulations on Labor Contract Law promulgated in September avoid such sensitive topics. While the implementing rules can avoid touching on this issue, the labor departments, courts, enterprises and workers have no means to avoid it.

For labor departments and courts, they must face a large number of labor disputes arising therefrom and must give a definite reply.

For enterprises, “one-off chance” or “two chances” is of vital importance because it means two types of mechanism in terms of the employment system.

If there are “two chances”, enterprises may review the performance of employees through two contracts, and terminate the contract of employees who are found not suitable for concluding non-fixed term labor contracts. To avoid the termination of contracts, employees may propose concluding fixed-term contracts and enterprises have the flexibility to do so.

If there is “one-off chance”, enterprises only have the period of a single contract to review the performance of their employees and the second contract can only be a non-fixed term labor contract. Since enterprises do not have the right to terminate the contract upon expiry of the second contract, employees will not propose concluding a fixed-term contract in general. If this interpretation is adopted, enterprises will encounter difficulty in their choice, either terminating the contracts of employees upon expiry of the first contract, or concluding non-fixed term contract for permanent employment. The employment system, performance appraisal system and remuneration system require to be adjusted.

For employees, if there is “one-off chance”, some employees at the middle and senior levels will find it easier to conclude non-fixed term contracts while workers at the lower rank may only conclude one contract with one unit forever. The frequent change of job means it’s harder to achieve job stability.