Mr. Zhang and a foreign trade corporation concluded a non-fixed term labor contract. He was then dispatched to an investment corporation affiliated with the enterprise and concluded a “position agreement.” Afterwards the investment corporation was taken over by a supermarket company. At this time Mr. Zhang refused to conclude a new labor contract with the supermarket and demanded to continue fulfilling the non-fixed term labor contract with the foreign trade corporation. Are Mr. Zhang’s claims legal? The lawyer in support of Mr. Zhang holds that when Mr. Zhang was assigned to work in the investment corporation, it was a position transferal and his labor contract with the foreign trade corporation was still valid. However, the lawyer in support of the foreign trade corporation holds that Mr. Zhang had already formed a factual labor relationship with the investment corporation and terminated the labor relationship with the foreign trade corporation. Thus, Mr. Zhang had no right to claim for continued performance of the non-fixed term labor contract with the foreign trade corporation.

I. Case Playback
Originally, Mr. Zhang was the deputy general manager of a department in a foreign trade corporation and concluded a non-fixed term labor contract with the corporation. Then, the foreign trade corporation and another company jointly invested to establish a commercial investment and development limited company (hereinafter called Commercial Investment Ltd.), and prepared to open a timber supermarket. The foreign trade corporation decided to assign Mr. Zhang and twenty other employees to Commercial Investment Ltd. In the same year, the Human Resources Department in the Commercial Investment Ltd concluded a position agreement with Mr. Zhang. Mr. Zhang concluded the four-year position agreement thinking that he was simply assigned to a new position by his original employer, the Trade Corporation.
Afterwards, the shareholders decided to sell Commercial Investment Ltd. to a supermarket. After the takeover, the Human Resources Department of the supermarket negotiated with Mr. Zhang again and requested to conclude a new one-year labor contract. At this time, Mr. Zhang refused to conclude the new labor contract and demanded to continue performing the non-fixed term labor contract with the foreign trade corporation. The foreign trade corporation replied that Mr. Zhang had terminated his labor relationship with the foreign trade corporation when he concluded the position agreement with Commercial Investment Ltd. He had no right to continue performing the original non-fixed term labor contract. Failing to reach an agreement, Mr. Zhang resorted to the local Labor Dispute Arbitration Committee.
Mr. Zhang argued that the labor-using unit was changed several times, but mainly the working position had changed because the labor-using unit assumed its rights and obligations from the original employer. He had never agreed to dissolve his labor contract. The foreign trade corporation had not sent him a dissolution notice. He had not been informed that his personnel files were transferred to Commercial Investment Ltd. Therefore, the unilateral labor contract dissolution by the foreign trade corporation was invalid. Besides, a “position agreement” rather than a labor contract was signed between Mr. Zhang and Commercial Investment Ltd. He had not established a new labor relationship. The foreign trade corporation should continue performing the non-fixed term labor contract.
The foreign trade corporation argued that the position agreement concluded between Mr. Zhang and Commercial Investment Ltd was a labor contract in essence because the relationship between the two parties fit all the conditions of a labor relationship. The foreign trade corporation gave the Commercial Investment Ltd. Mr. Zhang’s personnel files which meant that the labor contract between the Trade Corporation and Mr. Zhang had been dissolved. After the take over, Commercial Investment Ltd. negotiated with Mr. Zhang about dissolution of the labor contract and paid him economic compensation corresponding to his working period in the Commercial Investment Ltd. Although Mr. Zhang did not sign a “labor contract termination notice” with the foreign trade corporation, his personnel files were already transferred to Commercial Investment Ltd. Moreover, he already worked in the Commercial Investment Ltd. In fact, the original labor contract with the foreign trade corporation could no longer be carried out. Mr. Zhang accepted one-time economic compensation for dissolution of the labor contract with Commercial Investment Ltd after Commercial Investment Ltd. was taken over by the supermarket which officially ended Mr. Zhang’s work with Commercial Investment Ltd. The labor contract between Mr. Zhang and Commercial Investment Ltd. was absolutely valid, and Mr. Zhang had no legal right to demand the foreign trade corporation continue performing the non-fixed term labor contract.
Which labor contract is valid? Can Mr. Zhang still return to the foreign trade corporation? What will the final judgment of the labor arbitration?

II. Legal Background

In China, a non-fixed term labor contract refers to a labor contract in which the Unit and the laborer have agreed not to stipulate a termination date. Different from a non-fixed term labor contract prescribed in foreign legislation, a non-fixed term labor contract in China is a kind of a benefit contract which stipulates life-time employment. Under this non-fixed term labor contract, the Labor Law regulates that the unit may unilaterally dissolve the labor contract in only eight circumstances. Without unanimity through consultation between the two parties, the non-fixed term labor contract will be effective until the employee’s retirement.
Among the eight legal circumstances for unilateral dissolution, four are conditioned upon employees’ fault according to Article 25 of the Labor Law and four are not dependant on employee fault according to Article 26 and Article 27 of the Labor Law. Article 29 of the Labor Law stipulates the legal circumstances under which the unit shall not dissolve the labor contract which restricts the unit from misusing the non-fault dissolution conditions. The difficulties related to the dissolution of a non-fixed term labor contract have caused such a contract to be termed an “iron rice-bowl.”
When this case occurred, the fixed-term labor contract was dominant while the non-fixed term labor contract was auxiliary in the Labor Law system. These two kinds of labor contracts have different functions. The fixed-term labor contract applies to ‘new employees’ who flow with the demand and wage rates of the market. The non-fixed labor contract is used to help older less competitive employees retire completely or partially from the scope of market competition; this makes the non-fixed term labor contract is a kind of welfare contract.
The Labor Law requires higher standards to conclude a non-fixed term labor contract. Article 20 stipulates that if the laborer worked continuously in one unit for over 10 years and he/she is required to conclude a non-fixed term labor contract, then the two parties shall conclude a non-fixed labor contract if the contracting parties agree to extend the period of the labor contract. We can see that there are three conditions necessary to conclude a non-fixed term labor contract: the laborer’s ten years’ continuous work in one unit, the agreement regarding the renewal between the two parties and the proposal for conclusion of the non-fixed term labor contract by the laborer.
However, the Labor Contract Law has a different attitude towards non-fixed term labor relationships, moving away from the original restrictions toward a more encouraging attitude.
First, mandatory conditions for employing units to sign a non-fixed term labor contract have been increased and the threshold lowered. In the Labor Contract Law, Article 14 stipulates that, if a laborer proposes to or agrees to renew his labor contract, except when the laborer proposes to sign a fixed-term labor contract, a non-fixed term labor contract shall be concluded under three legal circumstances. The circumstances are: (1) the laborer has been working in the Unit for a consecutive period of no less than 10 years (2) when his Unit introduces the labor contract system or the state-owned enterprise that employs him re-concludes its labor contracts as a result of restructuring, the laborer has been working for the Unit for a consecutive period of no less than 10 years or is less than 10 years away from his statutory retirement age; or (3) the renewal occurs after the consecutive conclusion of two fixed-term labor contracts and the laborer does not fall under any of the circumstances specified in Article 39 or the first and second items of Article 40 of Labor Contract Law.
The first circumstance was developed from Article 20 of the Labor Law and cancels the condition requiring that ‘the two parties agree to conclude a non-fixed term labor relationship and reduces the three original requirements for the conclusion of the non-fixed term labor contract down to two requirements. The third circumstance stipulates that, after renewing the labor contract after two consecutive signings of a labor contract, the unit shall conclude the non-fixed term labor contract which is likely to turn the employment system toward regulation under the Labor Contract Law because the employment becomes increasingly dominated by non-fixed term labor contracts. Experts are divided concerning whether the employing units have the right to reject the request of the laborer to renew the labor contract at the expiration of the second labor contract.
Second, the Law adds the new concept of “non-fixed term labor contract signing presumption”. It is stipulated in Sub-Article 3 of Article 14 that. “if the Unit fails to sign a written labor contract with the laborer within one year of the establishment of the labor relationship, it will be considered that the Unit has already signed a non-fixed term contract with the laborer.” This mandatory creation of a long-term de facto labor relationship can be deemed as a serious punishment for the unit.
Furthermore, the Labor Contract Law stipulates more strict conditions for the dissolution of a labor contract and increases the legal circumstances under which the unit shall not dissolve the labor contract. This means more restrictions on the dissolution of a labor contract may have both positive and negative impacts. For the unit, it will be even harder to dissolve a labor relationship with laborers.
According to Article 82 in the Labor Contract Law, if the unit fails to enter a non-fixed term labor contract with the laborer according to the law, it is bound to pay the laborer double labor remuneration from the date it should have signed a non-fixed term labor contract. It is easy to see that the law harshly punishes illegal failure to sign a non-fixed term labor contract. In anticipation of the Labor Contract Law, units shall be cautious of such a high cost of non-fixed term labor relationship system.
Article 97 of the Labor Contract Law stipulates that those labor relationships that are established before the implementation of the Labor Contract Law and are continuing on the day the law is put into effect are still effective. The number of times a fixed-term labor contract is concluded in succession needed for the conclusion of non-fixed term labor contract as mentioned in Item 3, Section 2, Article 14 is calculated from the date of the first renewal of the labor contract after the implementation of this law. Through eliminating the binding power of this law over cases and contracts signed before the implementation date, this article will continue to provide some time for units to adapt to the new legal environment.

III. Lawyer Debate

The labor relationship with the foreign trade corporation is still effective.
Lawyer Xu Yaoqi from Shanghai Li Guoji Law Firm in support of Mr. Zhang

First, Mr. Zhang concluded a non-fixed term labor contract with the foreign trade corporation. According to the provisions of the law, the unit shall not dissolve a non-fixed term labor contract with an exception made only for specified legal circumstances or mutual agreement for the dissolution. In this case, the non-fixed term labor contract between Mr. Zhang and the foreign trade corporation contained no clause for an agreement on dissolution of the labor contract. The contract had not expired, nor had any statutory conditions for dissolution occurred. Therefore, the non-fixed term labor contract is still effective.
Second, it was a labor dispatching situation when the foreign trade corporation sent Mr. Zhang to work in Commercial Investment Ltd. Commercial Investment Ltd. was established by the foreign trade corporation, and Mr. Zhang was dispatched by the foreign trade corporation to Commercial Investment Ltd., which is a position transferal. This transfer does not affect the performance of the non-fixed term labor contract.
Third, Mr. Zhang concluded a position agreement with Commercial Investment Ltd., not a labor contract. It can be inferred that Commercial Investment Ltd. knew about the standing labor contract between Mr. Zhang and the foreign trade corporation.
Fourth, the relevant employment and termination procedures were not carried out. As we all know, the unit has the responsibility to carry out employment and termination procedures for laborers. However, in this case the foreign trade corporation did not carry out these formalities for Mr. Zhang. Commercial Investment Ltd. also did not carry out the necessary formalities when recruiting Mr. Zhang. Instead, they just transferred Mr. Zhang's file. Therefore, we think that the non-fixed term labor contract between Mr. Zhang and the foreign trade corporation was not dissolved and remains valid.
To sum up, it is reasonable and legal for Mr. Zhang to demand the continuation of his non-fixed term labor contract. The foreign trade corporation should perform it. At the same time, since the original non-fixed term labor contract is valid, no labor legal relationship exists between Mr. Zhang and Commercial Investment Ltd.

Mr. Zhang formed a labor relationship with the commercial firm.
Lawyer Hang Peiming from Shanghai HuZhong Law Firm in support of the corporation

I think that a labor relationship exists between Mr. Zhang and Commercial Investment Ltd.
First, Commercial Investment Ltd. had the independent corporation qualifications and qualifications to conclude a labor contract. Although Commercial Investment Ltd. was established by the foreign trade corporation, the company did not assume the rights and obligations from the foreign trade corporation. The foreign trade corporation was not responsible for Commercial Investment Ltd. Commercial Investment Ltd. must conclude labor contracts with its own employees.
Second, a new legal labor relationship was formed when Mr. Zhang went to work in Commercial Investment Ltd. There was no labor dispatching agreement between the foreign trade corporation and the Commercial Investment Ltd. Company. Nor was there a special agreement with Mr. Zhang about working in Commercial Investment Ltd. Mr. Zhang and Commercial Investment Ltd. had an independent labor contract relationship.
Third, the relationship between Mr. Zhang and Commercial Investment Ltd. corresponded with the conditions of a de facto labor relationship. Mr. Zhang offered labor, accepted the management of the company and earned wages; this forms a labor relationship.
Fourth, Mr. Zhang had received economic compensation. Economic compensation is compensation for early dissolution of a labor contract. Mr. Zhang received this compensation which shows that he knew that he had a labor contract relationship with Commercial Investment Ltd. Therefore, he also should have known that the relationship with the original foreign trade corporation had been terminated.
To sum up, I think Mr. Zhang worked in Commercial Investment Ltd, concluded a position agreement which was comparable to his labor contract, and received economic compensation for early contract dissolution. Both parties established the legal labor relationship, and there was no legal labor relationship still existing between Mr. Zhang and the original foreign trade corporation.

IV. Final Judgment

After the trial, the Labor Dispute Arbitration Committee ruled that the non-fixed term labor contract between Mr. Zhang and the foreign trade corporation was still valid. The Arbitration Committee determined that the unit could dissolve a labor contract with employees only after they unanimously agreed and reached a negotiated consensus. The unit that dissolves a labor contract shall pay economic compensation to the laborer. It is unreasonable and invalid that a unit can unilaterally dissolve a labor contract without any legal reason. In addition, a unit must notify employees when transferring personnel files. If employees are not informed, the transferal infringes upon the citizen’s right to know. The non-fixed term labor contract between Mr. Zhang and the foreign trade corporation was ruled to be still valid, and the foreign trade corporation shall continue performing the labor contract with Mr. Zhang.

V. Expert Evaluation

A labor contract is a significant indicator needed to identify a labor relationship.
Professor Dong Baohua from East China University of Political Science and Law

The key point of this case lies in the standards for recognizing whether the labor relationship was between Mr. Zhang and the foreign trade corporation or Commercial Investment Ltd. The evidence for the labor relationship can be found in two ways: look for the “object” or the “shadow.” In a labor relationship, the “object” refers to evidence of personal attachment between laborers and the units. The major evidence of personal attachment is a labor contract. Without a labor contract, we should look for evidence showing the unit’s active management of the laborers. The “shadow” refers to the auxiliary materials documenting the labor relationship, such as evidence of an agreement on a position, archival materials and documents related to social security and wage payment. The “object” is the substance while the ‘shadow ’is just the appearance of the substance. If the object and the shadow are separate in real-life situations, we should focus on the “object” (the labor contract), identify the “shadow” (auxiliary materials) and finally integrate the “object” and “shadow.”
In this case, Mr. Zhang concluded a non-fixed term labor relationship with the foreign trade corporation long before, which remained valid unless specific legal situations occurred. To end the labor relationship, the parties must fulfill certain procedures including the fulfillment of termination formalities within seven days of the unit’s decision to dissolve the labor contract. The formalities include: filling in the notice of a vacating position; recording, sealing off and handing over the Labor Manual and the Labor Force Registration Form which records the date of dissolution or termination; mailing or directly delivering the vacation position notice; and transferring personal profiles and the Labor Force Registration Form to the place of the laborer’s hukou housing registration location and the local employment agency at the county level.
In this case, the foreign trade corporation never followed these procedures to legally dissolve the non-fixed term labor contract, and there were no legal circumstances to end this contract which means that this labor contract is valid. We can know that the “object” of the labor relationship with Mr. Zhang lies with the foreign trade corporation. Later, Mr. Zhang went to the foreign trade corporation’s affiliated company, Commercial Investment Ltd, and signed the position agreement. Thus, the “shadow” of Mr. Zhang’s labor relationship, namely the agreement to take the position, was separated from the “object” and was transferred to Commercial Investment Ltd.. Finally, Mr. Zhang’s personal archives, a part of the “shadow” in the labor relationship, were also transferred to Commercial Investment Ltd.
We can see that several indicators in Mr. Zhang’s labor relationship were separated from each other, which created the key points of contention in this dispute. Traditionally, the labor contract, salary relationship, personal files relationship and management relationship are all indicators which indicate a labor relationship. Generally, these indicators are integrated in one unit. But, due to the foreign trade corporation’s improper operation, Mr. Zhang’s files were transferred to Commercial Investment Ltd. Coincidently, Mr. Zhang was sent to work at Commercial Investment Ltd., and he had a specific position. However, Mr. Zhang’s labor relationship was still between him and the foreign trade corporation. As the indicators change, if we continue to identify a labor relationship by one single indicator, then it is hard to reach a conclusion in this case. The unit argued that through the position agreement, personal files and other documents, Mr. Zhang’s labor relationship was with Commercial Investment Ltd. Mr. Zhang insisted that the valid non-fixed term labor contract was concluded between him and the foreign trade corporation, so the real labor relationship was still with the foreign trade corporation.
Facing inconsistencies between the “objects” and “shadows” of the labor relationship, we must find the real situation of Mr. Zhang’s labor relationship according to the principles of “focusing on the object to identify the shadow” and “integrate the object and shadow.” Finally, the Arbitration Committee ruled that the foreign trade corporation must continue to fulfill the non-fixed term labor contract. I personally think that this ruling was correct. 
There are good examples in local rules and regulations about how to properly handle the situation of this kind of “separated” labor contract. Take the Shanghai Labor Contract Regulation for example. Article 25 stipulates that, if the unit concluding the labor contract is not the same as the factual labor-using unit, the employing unit may reach an agreement with the factual labor-using unit that the factual labor-using unit take on all or part of the obligations related to the dispatched laborer. If the factual labor-using unit and the employing unit reach no agreement on taking on the obligations for the dispatched laborer, the employing unit shall take on the obligation.
For Mr. Zhang in this case, there were two units, namely the foreign trade corporation as the contracting party and the real labor-using unit, namely Commercial Investment Ltd. If Commercial Investment Ltd failed to continue the labor contract, the laborer has the right to require the contracting unit to fulfill the contract. Moreover, despite the fact that Commercial Investment Ltd paid Mr. Zhang early dissolution economic compensation when the labor relationship was terminated, it simply covered the work period at Commercial Investment Ltd instead of covering the whole working period of Mr. Zhang in both units. Therefore, Mr. Zhang had the right to ask the foreign trade corporation to continue to fulfill the non-fixed term labor relationship.
Under the regulations of the Labor Contract Law, the unit may be punished more seriously.
First, compared to the Labor Law, the Labor Contract Law stipulates stricter conditions for dissolution of the labor contract. So, as in this case, the unit had no legal reason to dissolve the labor contract, then it also had no reason to dissolve this non-fixed term labor contract in the Labor Contract Law context.
Second, Article 50 of the Labor Contract Law stipulates that if the unit terminates or dissolves the labor contract but it fails to prove that it has completed the legal formalities including filing a termination or dissolution certificate, then the labor contract between Mr. Zhang and the unit is still valid. Thus, the unit’s argument that it had dissolved the labor relationship with Mr. Zhang would not be supported.
Finally, if the unit unilaterally dissolves the labor contract without any legal reason or agreement between the two parties, Mr. Zhang has the right to ask the original unit to continue to fulfill the contract or pay him double economic compensation according to Article 48 of the Labor Contract Law.  

From LexisNexis