Because XiaoGu was the boss of his own self-supporting company outside of regular working hours, he irritated his regular employing unit and they dissolved the labor contract with him claiming that he violated the discipline rules. Was the action of the unit lawful? What does China’s legislation stipulate regarding this kind of part-time job where a worker holds two positions concurrently? 

I. Case Playback

XiaoGu, the valued technical employee in a telecommunications bureau (called ‘unit’ hereinafter), had been working for this unit for over ten years. Then, XiaoGu signed a non-fixed term labor contract with the unit. Three years later XiaoGu, together with other people, established and registered an information technology limited liability company. He held the positions of legal representative, executive director and general manager concurrently. After the IT company formally opened for business, XiaoGu sent an introduction invitation to his original unit, namely the telecommunication bureau. The business scope of the IT company included: international internet service provision (ISP), hardware and software development, etc. Before establishing the IT company, XiaoGu had established and led a computer communications technology research center and registered a website.
After receiving the invitation, the unit claimed that XiaoGu established a company and assumed the positions of executive director and general manager concurrently without the unit’s prior permission. He had also failed to complete the procedures for dissolving his labor contract with the unit, which violated both the labor regulations and the unit’s internal rules. Therefore, the unit worked out a Decision on Rule Violation regarding XiaoGu’s actions and required him to suspend his work and submit a report upon receiving the notice. Meanwhile, the unit demanded that XiaoGu dissolve his labor relationship with the new IT company and return to normal work in his original unit.
Later, XiaoGu provided a written reply responding to the unit’s decision which stated that he had resigned from the positions of executive director and general manager, but refused to accept the other order in the decision. After checking with the District Bureau of Industry and Commerce, the unit discovered that XiaoGu was still the legal representative of the IT company. Therefore, the unit decided to dissolve the labor contract with XiaoGu.
XiaoGu disagreed with the unit’s decision to dissolve the labor contract and sent an application to the Labor Dispute Arbitration Committee claiming that the unit should continue performing the labor contract, pay him his back wages and bonuses and compensate him for other relevant fees and the damage to his reputation.
XiaoGu argued that he did not violate the unit’s labor rules. The unit could not thereby dissolve the labor contract and should bear the liability for breaching the labor contract and should continue to fulfill the contract. In addition, he argued that he had no record of coming to work late, leaving early or being absent from work without reason which showed that he had fulfilled his duty as an employee for the unit in good faith.
Second, taking on a part-time job was permitted and encouraged by the government in accordance with China’s rules and regulations expressly regulated in relevant documents of the State Council which state that technicians undertaking a part-time job is an encouraged activity. His participation in the operation of the IT company during his off-work hours was just a service relationship rather than a labor relationship. There was no existence of the so-called “dual labor relationship”. Therefore, in this respect, the unit was not justified in dissolving the labor contract.
The unit argued that, without prior dissolution of the labor contract with the original unit, XiaoGu’s establishment of a company and his position as chairman of the board are proof of his factual labor relationship with the IT company. This proves that a dual labor relationship existed and proves that he violated provisions of the Labor Law. Meanwhile, this kind of disloyal behavior seriously violated the unit’s internal rules and regulations. After many attempts to persuade him, XiaoGu remained unrepentant and the unit eventually dissolved the labor contract.

II. Legal Background

Historically, state legislation’s approach towards part-time jobs, particularly part-time jobs undertaken by high-level professionals have evolved, trending from encouragement to restriction.   
As early as 1987, the Commission on Science and Technology stated in Opinions of the Commission of Science and Technology on Several Issues Concerning Part-time Job of Employees in Science and Technology Fields that, “After fulfilling all work-related duties, employees in science and technology fields are permitted to undertake science and technology-related part-time jobs without infringing on the technological and economic rights and interests of their original unit. Undertaking part-time jobs exploits these technological professionals’ potential, facilitates exchange of knowledge and people with expertise, and promotes science and technology to serve economic construction and social development. The overall situation is positive.” At that time, except for people in special positions (such as positions involved in national classified secrets and major national tasks), China’s legislation held an affirmative attitude towards those employees undertaking part-time jobs.
Article 61, Sub-Article 1 in the 1994 Company Law stated, “Directors and managers shall not operate their own business if it may cause harm to the rights and interests of the original company or engage in any business venture similar to the original company in their own interest or the interests of others. Income received by directors and managers in violation of the aforesaid provisions shall belong to the original company.” Hence, the Company Law first introduced the theory of “Restriction of Business” for senior management personnel. “Restriction of Business” provisions limit the rights of senior management personnel to undertake part-time jobs in a similar business. Most recently, Article 149 in the 2006 Company Law also stipulates that senior management personnel engaging in similar business in their own interest or the interests of others is prohibited.
In the Labor Contract Law, the scope of employees who are restricted from taking part-time job is extended from exclusively senior management personnel to all employees. Article 39 of the Labor Law stipulates, “A unit may dissolve a labor contract if the laborer has additionally established a labor relationship with another Unit which materially affects the completion of his tasks or refuses to rectify the matter when brought to his attention by the Unit.” It is obvious that, according to the provisions in the Labor Law, there is little room for employees to undertake part-time jobs.

III. Lawyer Debate

XiaoGu can legally undertake a second job, and the unit’s dismissal was illegal.
Lawyer Cao Guohua from Shanghai Shenzhong Law Firm in support of XiaoGu

XiaoGu, a senior technician in the unit, is allowed to undertake a second occupation according to the law. It was not justified for the unit to dissolve the labor contract because XiaoGu established an IT company. The term labor relationship refers to a relationship in which a laborer works for the unit while the unit pays corresponding wages to the laborer. Thus, establishing a company did not constitute a labor relationship. Also, according to Article 99 of the Labor Law, “a unit that recruits laborers whose labor contracts have not yet been dissolved shall, according to law, assume joint responsibility for any damage compensation if economic losses have been incurred by the original unit.” In this case, the unit could not dissolve the labor relation with XiaoGu because he did not cause any damage to his original unit.
Second, XiaoGu had concluded a non-fixed term labor contract and had no record of violating working rules such as coming late or leaving early etc. Therefore, there was no reason for the unit to dissolve the labor contract simply because XiaoGu established his own IT company. Besides, according to the Social Insurance Regulation, the unit actually assumed the social insurance expenses, thus there is a definite labor relation between the two parties. However, there was no social insurance relationship between XiaoGu and his IT company. In conclusion, the reason given for the dissolution of the labor contract should not be supported.

Xiao Gu violated the unit’s interior rules, and the unit had the right to dissolve the contract.
Lawyer Chenrui from Shanghai ShiDai Law Firm in support of the unit

 First, it was lawful for the unit to dissolve the labor contract. Article 25 of the Labor Law stipulates that, “The unit may dissolve the labor contract if the laborer seriously violates the work rules or the internal rules or regulations of the unit.” There was legal reason for the unit to dissolve the labor contract with XiaoGu; he violated the internal posted rules of the unit. With reference to this issue, the internal regulations of the Shanghai telecommunication bureau also expressly stipulate that employees can only form a labor relationship with a single unit at a time.
Second, personnel in state-owned companies and enterprises are expressly prohibited from undertaking any job which is competitive with the business operated by their original units and may even be punished according to the Criminal Law. Besides, if the company that XiaoGu established had any competitive business with his original unit and caused damage to the original unit, then XiaoGu should assume the corresponding damage compensation liability.

IV. Final Judgment

After the Labor Arbitration Committee rejected XiaoGu’s claim, he resorted to litigation. The Court held that XiaoGu had formed a factual labor relationship with the IT company he established and in which he assumed the positions of executive director and general manager. His behavior violated Article 14 of the Rules for the Implementation of Labor Contract System issued by the Telecommunication Bureau “Employees shall conclude a labor contract and form a labor relationship with one single unit at a time.”
According to Article 25, Sub-Article 2 in the Labor Law and the unit’s Temporary Regulation Concerning Labor Contract Management, the application of law is correct and the facts are clear; the unit’s dissolution of the labor contract was in accordance with the relevant laws and regulations. Based on the above reason, the Court confirmed the arbitration’s judgment.
XiaoGu’s claim for RMB 50,000 in compensation for the damage to his reputation was not accepted because this was not a labor dispute. The plaintiff may resort to another lawsuit.

V. Expert Evaluation

For the diversification of the labor relationship, we should institute mandatory legal agreements to avoid disputes.
Judge Guo Wenlong from the First Intermediate People’s Court in Shanghai

First, we may well say that this case has some common features with many others. According to Article 99 of the Labor Law, “a Unit that recruits laborers whose labor contracts have not yet been dissolved shall, according to law, assume joint responsibility for any damage compensation if economic losses have been incurred by the original Unit.” The literal interpretation of this article is that it is prohibited for a unit to form a labor relationship with a laborer who has not dissolved his prior labor relationship. Due to the early promulgation of the Labor Law and the resulting simplification of the labor relationship, certain relevant regulations of the Labor Law are relatively principle-based and should be made more specific through legislation and judicial interpretation.
Second, according to the judicial interpretation of the Supreme People’s Court, internal rules and regulations that have been publicly announced may be used as evidence in labor disputes. According to Article 3 of the Labor Law, abiding by the labor rules and regulations is a laborer’s obligation. According to Article 25, a unit can dissolve the labor contract with laborers who violate labor rules and regulations. Therefore, if the actions of XiaoGu indeed violated the unit’s regulations, then it was right that the unit dissolved the labor contract.
Third, if there is one, a set agreement shall prevail. Statutory regulations are categorized into mandatory regulations and optional regulations. Mandatory regulations concern behaviors prohibited by the law while optional regulations concern mutual agreements. Suppose that the unit had agreed during the conclusion of the labor contract that holding an external part-time job was prohibited. Then XiaoGu’s undertaking of the part-time job would be a severe breach of the agreement.
In addition, a part-time job should not harm the laborer’s original unit or violate any conditions of Non-Competition. Regarding this, both the Labor Law and the Anti-Unfair Competition Law have relevant regulations forbidding such actions. Moreover, laborers should not undertake any part-time job in units which compete with the laborer’s original unit if such issues are expressly agreed upon in the labor contract.
The aforesaid statements are just some issues worth considering and discussing; I do not mean to second guess the judgment of the Court.

VI. Editor Evaluation

If this case occurred after the implementation of the Labor Contract Law, then the unit’s dismissal of XiaoGu would be irrefutable. Article 39 of the Labor Contract Law stipulates, ‘A unit may dissolve a labor contract if the laborer has additionally established a labor relationship with another Unit which materially affects the completion of his tasks or refuses to rectify the matter when brought to his attention by the Unit.’ In this case, it was right for the unit to deem XiaoGu’s behavior as a violation of the labor rules and require him to go back to normal work after discovering that XiaoGu had established his own IT company and assumed the positions of director and manager concurrently. XiaoGu not only refused to dissolve the labor relationship with his new company, but he also deceived the unit. These are the exact behaviors cited in Article 39, namely “the laborer refuses to rectify the matter when brought to his attention by the unit.” Therefore, the unit had the legal right to dissolve the labor contract.   

From LexisNexis