I. Case Playback

In order to encourage technical development and train young technology experts, a company recruited a few undergraduates after a competitive selection process. All these students had attended famous colleges and universities in Shanghai, Jiangsu Province and Zhejiang Province. These recruited undergraduates were brilliant, with excellent university performance records which made them highly sought after in the labor market. Apart from that, they all had one thing in common; all of theses students were undergraduates from other parts of the country. Most importantly, they were eager to start their careers in the vast market of Shanghai. It was “love at first sight” during the recruitment meeting, and after the interview the company signed employment agreements with each student and their university for a five-year term. After their official graduation, formal labor contracts with a term of five years were quickly signed between the undergraduates and the enterprises, where rights and obligations, three-month Probation period and relevant liquidated damages were stipulated according to laws and regulations.
Housing registration in Shanghai, the most important issue for the employees, was soon resolved after they officially came to work in the company. Before long, housing registrations and their individual records had been successfully shifted to the Shanghai Undergraduate Employment Instruction Centre. Formal employment and benefits procedures were also conducted for these students by the company. After three months, during the National Holiday, the company president received “gifts” from two students, their resignation letters.
Representatives of the company knew that they could not refuse the resignation letters submitted by these two students because they were still within the probation period. However, they lamented the time they had dedicated to conducting the formalities needed for resettlement in Shanghai. They had been seeking the most qualified candidates, and it was unimaginable to the company to consider that the undergraduates were simply taking advantage of an opportunity to get a Shanghai housing registration, using the job as a springboard to gain residency. The President personally invited these two students for a consultation and asked them to reconsider. Nevertheless, these students had already made the decision to leave. The Personnel Manager claimed that the two students should compensate the company for conducting the resettlement registration procedures. The students did not yield to the company’s harsh request.
Without common ground, the two parties found it impossible to consult further. The company took the two university students to the Labor Dispute Arbitration Committee, demanding that they bear liability for liquidated damage, compensate the company for expenses to hire new employees, and pay the fees related to the census housing registration procedures.
According to what they had learned from Labor Law, these two students argued that laborers had the right to dissolve the labor relationship within the probation period. They claimed their actions conformed to the regulations of Labor Law and could not be regarded as a breach of contract. They should not bear liability for a breach of contract. Arranging resettlement in Shanghai was the company’s obligation and the students did not need to pay these expenses. During arbitration, the judge tried many times to ask the parties to negotiate, but they remained far apart on the issues and departed unhappy. Hearings and mediation meetings were held in this case and the arbitration procedures lasted for several months. Still, the case did not end with the arbitration judgment.
Finding the arbitration verdict unacceptable, the company brought action to Court. Another round of pleading, hearing and mediation took place. These two students had lost the spirit and vigor of the time when they had submitted their resignation letters. Their talents were frittered away during the repeated Court hearings. While at their new company jobs, the two students felt restless and could not concentrate as they prepared to take postgraduate entrance exams. As for the unit, personnel who had been coping with this affair also felt exhausted. Precious manpower and resources were spent on the lawsuit, and the personnel had difficulty accepting such a blatant insult.

II. Legal Background

The probation period is a time limitation in which the newly-recruited employees with labor contracts are further reviewed by the company. The probation period is included within the terms of a labor contract, and laborers can resign at any time during this period. The company can also directly dismiss laborers, if there is any convincing evidence that proves the laborers not conform to the employment conditions. Although it is generally regulated in the Labor Law that the probation period cannot exceed six months, in fact, this can also be exploited by the company to artificially suppress the wage levels of employees on long probation periods. The Notification about Several Problems on the Implementation of Labor Contract System issued by Ministry of Labor in 1996 specifies that the length of the probation period shall be in direct proportion with the length of a labor contract. This has gradually been adopted into local legislation. Some local legislation, such as in Shanghai, also regulated the minimum length of a labor contract that is eligible to enact a probation period provision.
What has been regulated in the Labor Contract Law builds upon provisions in local legislation (such as in Shanghai) and restricts the length of the probation period to a maximum of six months. It is regulated in Article 19 that “if a labor contract has a term of more than three months but less than one year, the probation period may not exceed one month; if a labor contract has a term of more than one year and less than three years, the probation period may not exceed two months; and if a labor contract has a term of no less than three years or is non-fixed, the probation period may not exceed six months.”
The laborer’s salary during the probation period is also included in the Labor Contract Law. It is regulated in Article 20 that “the wages of a laborer may not be less than the lowest wage paid for the equivalent job post within the Unit or less than 80 percent of the wage agreed upon in the labor contract, nor may it be lower than the minimum wage standard of the employing unit site.”
Another readjustment to the Labor Law can be found in Article 21 of the Labor Contract Law. It is regulated that “a Unit may not dissolve a labor contract unless there is evidence proving that the laborer meets any of the conditions specified in Article 39 or the first and second items of Article 40 of this Law and if a Unit dissolves a labor contract during the probation period, it shall explain the reasons to the laborer.” The main changes lie in the following two aspects: the burden of proof on the unit has been strengthened, and conversely, the unit’s right to dissolve the contract due to major objective changes or staff reduction has been restricted.
In addition, the legal consequences of an illegal probation period agreement to the unit have also been regulated in the Labor Contract Law. Article 83 states that “if the probation period stipulated by a Unit with a laborer violates this Law, the Labor Administration Department shall order the Unit to rectify the matter in accordance with this Law. If the illegally stipulated probation period has been performed, the Unit shall pay damage compensation to the laborer based on the laborer’s monthly post-probation period wage rate and the length of the illegally stipulated probation period.”

III. Lawyer Debate

It is unfair and inequitable if the laborers do not bear the compensation liabilities.
Lawyer Lu Yin from Shanghai Hui Ye Law Firm in support of the unit

Although what these university students have done does not violate the relevant regulations regarding the probation period in the Labor Law, the unit personnel have used manpower and material resources to conduct the resettlement procedures. Most importantly, the students were mostly concentrated on this local housing registration. Hence, the unit has extended special rights and interests to the laborers. Under this circumstance, the laborers should bear relevant compensation liabilities due to dissolution of the labor contract during the probation period. This has been specified legally. Such acts should also be condemned morally. In fact, the company has made a new decision that no university undergraduates will be employed. On the principles of honesty, fairness and equality, the laborers should pay relevant compensation to the unit as the costs have already been incurred.
Although the student’s resignation is not against the law, I think it is incorrect to regard the unit’s demands as illegal. Though it is not specified in the law, actions can also be instituted on the basis of fundamental law principles. The unit is in a relatively weak position during the probation period. The relevant procedures are required to be conducted by the unit within a limited time. The claims of the unit should be supported by the Court based on a principle of equity where rights and benefits can be balanced between the unit and the laborer.

It is legally groundless to claim compensation.
Lawyer Ping Hai Bing from Shanghai Zhi Jun Law Firm in support of the laborers

What the laborers have done is not against the law and the unit’s compensation request has no legal grounds. The acts by the university students are understandable in light of the current social situation. According to Article 19 of Some Suggestions about Problems of Enforcing the Labor Law, the probation period is an examination period of no more than six months during which the unit and the laborers can learn about each other. Both parties have the right to dissolve the labor contract, which is fair for the unit and the laborer. Not only has the unit incurred some losses but the laborers have sacrificed as well. The losses incurred by the unit are not substantial enough to be included in a compensation request.
Because both parties are legally allowed to dissolve the labor contract during the probation period, even if the contract specified damages, the contract itself is void. In a word, the university students do not have to bear liability for dissolving a labor contract during the probation period.

IV. Final Judgment

After unsuccessful mediation organized by the Arbitration Committee, it was ruled that claims for liquidated damages and the compensation for the re-employment expenses stipulated in the employment agreements were supported. The university students should bear the liability. However, the unit’s claim for compensation for the resettlement registration procedures in Shanghai was not supported. The unit registered an action in the Court. The unit finally withdrew the action due to an inability to produce adequate evidence.

V. Expert Evaluation

No winners come out of this case.
Professor Dong Baohua from East China University of Political Science and Law
The Labor Law is generally tilted in favor of laborers; this is reflected in the regulations on the probation period. It is legal that laborers can dissolve the labor contract at any time during the probation period. But if unit wants to dissolve the labor contract, the unit must produce evidence and prove that the laborer has failed to meet the employment conditions. The university students in this case have fully carried out their rights. Nevertheless, will laborers have to bear liability for relevant compensation or liquidated damages if the dissolution of a labor contract by the laborer has caused losses to the unit?
Current local legislation has answered the question. It is regulated in the Shanghai Labor Contract Regulation that liquidated damages can be stipulated in the labor contract if the company has recruited laborers with financial incentives, has provided special treatment and benefits, or has offered training with capital incentives. The special benefit or treatment mentioned is composed of three parts. First, it is a kind of benefit and advantage which can be presented as both material, such as money or property and intangible such as training and study-work trips. Second, this special benefit should not be included within the salary. If the benefit is part of the salary then it is included in the basic pay and is not related to compensation for breach of contract. Last, due to its particularity, such benefits are not enjoyed by every staff member. Therefore, some special agreements will sometimes be established between the unit and the laborers who enjoy the particular benefits.
If the unit manages to solve the resettlement and housing registration problems for newly recruited students, or if the student receives the right to resettlement through signing a labor contract or employment agreement, is this kind of resettlement procedure considered a special benefit for the newly-recruited laborers? Under the current employment situation, the regional economic development disparity and the housing registration (hukou) policy, working and settling in Shanghai have become the primary targets of quite a few undergraduates from other regions in China. If these university students missed the chance to stay in Shanghai after graduation, they would find it difficult to work in Shanghai as a person from another part of China.
However, official settlement in Shanghai means that they will have different employment prospects compared to their peers from other parts and regions in China. This official settlement is quite sustainable and will be established over time. It is obvious that many undergraduates have a specific goal: to sign employment agreements or labor contracts. If their aims are realized, they certainly reap the benefits. Naturally, the unit believed that the employees had gained the benefits that ordinary employees could not enjoy and, therefore, these employees should make contributions to the enterprise. Of course, generally speaking, employees will not be given special benefits during the probation period, but the reality is that the enterprise will sometimes be required by regulation to conduct the relevant procedures for the university students during the probation period. Hence, I personally consider that procedures for resettlement in Shanghai should be regarded as “a special benefit.”

Thus, the university students should pay the liquidated damages stipulated in the labor contract when they leave the company. However, the stipulation of liquidated damages should also abide by a standard of fairness which cannot be excessively high. Liquidated damages differ conceptually from indemnity. Indemnity is based on the existence of factual damages, and the amount of compensation is limited to the actual value of loss. Liquidated damages, with a goal of punishment for contract breach for example, are based upon the agreement by the parties, and it is improper for the Court to intervene as long as the amount is not excessively high.
Meanwhile, both parties in this case fully fulfilled their own obligations, but unfortunately the result was undesirable for both sides. Both the company and these university students have not fully considered their long-run interests. For the university students, their behavior will have a negative impact on their future employment, while, for the company, it is not worth spending so much time in litigation only to vent anger. Naturally, under such circumstance, laborers will be placed at a disadvantage. After all, the company owns more resources and it is unwise for the laborers “to use eggs to fight stones.” At first, the resolution of such problems calls for good faith. It is inappropriate for the company to restrict the laborers by means of resettlement in Shanghai, and it is also unwise for the laborers to expect quick success and instant benefits when they are hunting for jobs. Of course, such “Settlement in Shanghai” is obviously a reflection of the times, a brand of the current labor market. Labor disputes caused by these reasons will surely become history as reforms of the registration system are undertaken in China.
It should be noted that the use of probation period and liquidated damage provisions have been restricted in the Labor Contract Law. A term of service can be agreed upon only if the unit provides for vocational training expenses and provide professional training for the laborers. Liquidated damages are limited to stipulations regarding breach of service term obligation and non-competition provisions. It can be seen from such regulations that liquidated damages and terms of service cannot be stipulated even though certain special benefits have been provided for the laborers by the unit (excepting the additional professional training). As in this case, the employee can resign at any time during the probation period, and they do not have to bear any subsequent obligation. Even if it were stipulated in the labor contract, such an agreement would also be proven invalid. Faced with such risks, the unit will not generally provide more benefits for the laborers any longer. This contradicts the intention of the legislation and is harmful to laborers. In fact, in this case, the company is not actively recruiting university undergraduates any more. This has undoubtedly cast a shadow over the employment prospects of university undergraduates from other parts and regions in China.

From LexisNexis