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How to recognize the labor relationship between Chinese-foreign equity joint venture enterprise and

Date:2020-05-11 19:13:26

As China continues to develop and open up (especially with the establishment of free trade zones such as in Shanghai and Shenzhen Qianhai), there has been consistent growth in both the quantity and size of Chinese-foreign equity joint venture enterprises (“EJVs”). Given the ownership structure of EJVs and the requirements for operating and managing EJVs, senior executives, who can be both Chinese and foreign, are generally assigned by the investors. However, neither the Labor Law of the People's Republic of China (“Labor Law”) nor the Labor Contract Law of the People's Republic of China (“Labor Contract Law”) have provisions dealing with this type of relationship. As such, disputes relating to this type of relationship can be difficult to resolve.

This paper will discuss suitable criteria for the recognition of a labor relationship between EJVs and senior executives assigned by investors. Using these criteria, this paper will provide recommendations for the projection of EVJ’s legal rights and interests.

I.    Two Types of Relationships

As a preliminary matter, we must first discuss the two types of labor relationships: (a) dual (multiple) labor relationships; and (b) actual labor relationships.

A.    Dual (Multiple) Labor Relationships

The Labor Law and the Labor Contract Law do not forbid the existence of the “dual (multiple) labor relationships”. According to Article 69 of Labor Contract Law, a part-time employee may conclude multiple labor contracts with different employers. Article 30(4) provides that an employer may rescind a labor contract with an employee if the employee establishes a concurrent labor relationship with another employer which seriously impacts the employees ability to complete his/her work-related tasks and the employee refuses to make corrections after the employer informs him/her of the issue. Thus, an employee can establish a labor relationship with another employer as long as it does not seriously impact his work with either employer.
In conclusion, it is legal for an employee to establish dual (multiple) relationships with different employers.

B.    Constructive Labor Relationship

Article 16 of the Labor Law requires employers and employees to conclude a written labor contract defining each parties’ rights and obligations when they establish a labor relationship; Article 19 requires that it be in writing. This, then raises the question of what happens if no labor contract is concluded. Article 36 of Contract Law of the People's Republic of China provides that when: (1) a written contract is required but not concluded; but (2) one party has performed its principle obligations the contract shall be regarded as having been executed. Thus, to some extent, this Article allows for the possibility of constructive labor contracts. It could therefore also be applied to the recognition of labor relationships meaning that it is possible to establish a labor relationship without a formal written labor contract.

With respect to the criteria for the recognition constructive labor relationships, the Circular of the Ministry of Labor on Several Issues concerning the Establishment of Labor Relationship provides that even without a written labor contract a labor relationship shall be deemed to have been established if the following conditions are simultaneously met:

1.    the employers and employees qualify as such under the relevant laws and regulations;
2.    the labor management rules and systems used by the employee apply to the employer, the employee is subject to the labor management of the employer, and he/she is engaged in paid work arranged by the employer;
3.    the work provided by the employee is part of the business of the employer.

Thus, this Circular provides the direct criteria to determine whether the labor relationship is established.

From the perspective of legal theory, most scholars argue that there are objective and subjective criteria for recognizing the establishment of the labor relationship. The objective criteria include criteria that relate both to the relationship between the parties and the ownership of certain property. The general criteria are as follows:

1.    the labor management rules and systems used by the employee apply to the employer;
2.    the employee is subject to the management of the employer;
3.    the employee is subject to examination by the employer;
4.    the employer has right to determine rewards and punishment of the employee;
5.    the manufacturing systems and equipment belong to the employer;
6.    the manufacturing materials are supplied by the employer;
7.    the employer is responsible for possible risks and liabilities caused by the employee.

With regard to the subjective criteria, the main criterion whether or not there was any intention to establish a labor relationship. The intention could take the following forms: express intention, implied intention or intention based on legal fiction.

II.    The Recognition of a Labor Relationship Between an EJV And Its Senior Executives

Sometimes, senior executives are assigned by the EJV’s investors, work for the EJV, are subject to the management of EJV, and are paid by EJV but however his/her labor contract is signed with the investor who assigned him/her. In this situation, it is difficult to recognize the labor relationship between the senior executive and the EJV, because there is no relevant legislation or regulation concerning this issue. As a result, the legal interests of EJV are affected. Article 14 of Circular of the Ministry of Labor on Issuing and Distributing the Opinions on Several Issues concerning the Implementation of the Labor Law of the Peoples Republic of China (“Circular”) provides that if there is no labor contract between the employer and the employee and “if the employees dispatched to equity joint enterprises or shareholding enterprises still maintain labor relations with their original units, they shall conclude labor contracts with their original units. When the original units are concluding labor [dispatch] contracts with the equity joint enterprises or shareholding enterprises in respect of relevant contents of labor contracts, they shall clarify the wages, insurance, welfare, leave and other relevant treatment of the said employees”. Article 20 of Minutes of the Seminar of the Beijing Municipal High People's Court and the Beijing  Municipal Arbitration Committee of Labor Dispute on Issues concerning the Application of Laws for the Trial of Labor Dispute Cases (II) (“Minutes”) discusses how to deal with situations when an employee is dispatched by his/her employer to work in other units after a labor contract is entered into between both parties. It states that, “[a]lthough an employee is working in a unit which he or she is dispatched to, a labor relationship between the employee and the employer that has entered into a labor contract with the employee shall be determined to [continue to] exist. [In lawsuits,] [t]he constructive employer may be added to the lawsuit [at the appropriate stage of the lawsuit]. If a judgment that only the employer who has signed
the labor contract is liable might damage the interests of the employee, the relevant court shall rule that the constructive employer be joint liability.” According to these two articles, a labor relationship between senior executive and investors is established if they sign  a written labor contract, but the issue of the relationship between senior executives and EJVs is still unsolved. Based on the principle underlying Article 20 of the Minutes, this labor relationship is similar to the labor relationship of dispatched employees and the  EJV is similar to the constructive employer. However, the Interim Provisions on Labor Dispatch, which came into force from March 1 2014, makes it clear that EJV investors are not labor dispatch entities and the assigned senior executives are not in temporary, auxiliary or substitutable positions. As such, assigned senior executives are not deemed to be dispatched employees to EJVs.

In practice, judges have discretion in the determination as to whether there is a labor relationship between assigned senior executives and EJVs. This discretion has resulted in different judgments in similar cases and different recognition criteria have been established in different cases.

According to the relevant provisions and the two types of labor relationships discussed in Section I above, this paper comes to the conclusion that labor relationships between senior executives and EJVs should be permitted to coexist with labor relationship between the same senior executives and the EJVs investors. The reasons are as follows:

•    the EJVs and senior executives qualify as employers and employees (respectively) under the relevant laws and regulations;
•    the labor management rules and systems used by the EJVs apply to the senior executives and the senior executives is subject to the labor management of the EJVs for which they work;
•    the work provided by senior executives are part of the business of the EJVs for which they work;
•    senior executives are paid by the EJVs for which they work;
•    EJVs are responsible for the possible liabilities and risks caused by the work of their senior executives;

Thus, their relationship meets the requirements of constructive labor relationship.

III.    Conclusion
It is possible that an actual labor relationship is established between an EJV and its assigned senior executives even if there is no written labor contract. This labor relationship should be subject to Labor Law and other relevant regulations. Therefore, an EJV should avoid the possible employment risks that go along with these constructive  labor relationships such as the risk of failing to sign the written labor contract, failing to pay the social security, failing to apply for a working license; it should also go through the employment management procedure for foreign staff. According the principles underlying the Minutes, an EJV will be jointly responsible for the damage caused by assigned senior executives. Thus, in order to protect the legal rights and interests of EJVs, they could require senior executive to undertake sign both confidentiality and non-competition agreements. It is also advised that EJVs sign written labor contracts with assigned senior executives at the beginning of their employment. In this formal contract, the labor relationship and each party’s rights and obligations should be clarified so as to avoid possible disputes caused by constructive labor relationships.
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