Is a clause deeming an employee to have resigned of his own accord valid?

The facts

Mr Zhao joined a consulting company on 18 September 2017 as marketing director under a three-year employment contract with a six-month probation period and a salary of RMB 12,000 a month. On 10 January 2019 the company told him to complete the handover formalities for leaving and issued him with a Shanghai certificate of termination of employment recording 14 January 2019 as the date of termination. In February 2019 Mr Zhao applied for arbitration, claiming RMB 36,000 in compensation for unlawful termination.

The parties' positions

The company relied on Article 12(5) of the employment contract, which provides that under the measures for the quarterly assessment of the sales performance of the marketing director the company assesses the previous quarter's sales in the first month of each quarter, and that a grade of D means the employee is deemed unable to perform the work and meet the requirements of the post and is deemed to have resigned, the contract being terminated accordingly. Mr Zhao's sales in the fourth quarter of 2018 were nil and his grade was D, which satisfied that clause; he was therefore deemed to have resigned, and the notice requiring him to complete the formalities involved no unlawful termination, so no compensation is payable.

Mr Zhao does not deny that his sales in the fourth quarter of 2018 were nil and his grade D. He argues, however, that under the Labor Contract Law an employee found unable to perform the work must first be redeployed or retrained and the contract cannot simply be terminated, and that he never tendered a resignation in any form; the company's demand that he complete the formalities and its issue of the termination certificate were therefore a unilateral and unlawful termination, and compensation should be paid.

The issue

Is the contractual clause deeming the employee to have resigned of his own accord valid?

The award

The arbitration commission held that a clause deeming an employee who is unable to perform the work to have resigned of his own accord breaches the statutory procedure in Article 40(2) of the Labor Contract Law of the People's Republic of China, under which an employee found unable to perform the work must first be redeployed or retrained. Being "deemed to have resigned" also does not satisfy Article 37 of the Law on unilateral termination by the employee, nor is it any other case of termination or expiry under Articles 37 to 44. The company's termination of the contract by notifying Mr Zhao that he was deemed to have resigned was therefore indeed unlawful, and compensation must be paid.

Commentary

Unilateral termination of an employment contract is a legal act by the employer or the employee, after the contract has taken effect and before it has been fully performed, which brings the employment relationship to an end in advance by a declaration of intention that requires no consent from the other side. The Labor Contract Law divides unilateral termination into four kinds: termination by the employee on notice (Article 37), immediate termination by the employee (Article 38), termination by the employer for fault (Article 39) and termination by the employer without fault (Articles 40 and 41). Termination by the employee on notice is one of the employee's important employment rights, a right of unilateral termination subject to no condition other than a 30-day notice period. It was established as long ago as the Labor Law of 1995 (Article 31) and is retained in the Labor Contract Law. The legislature accepts the lawfulness of an employee's terminating the contract without reason and without condition during its term in order to balance and restrain the employer's stronger position in the employment relationship, in the hope that an employer seeking the normal performance of the contract will take the employee's interests seriously, integrate its own business development with the realisation of the employee's individual value, and promote harmony and stability in the employment relationship.

In practice, however, some employers require employees by agreement to give up the right to terminate on notice, while others provide that in certain circumstances the employee is compelled to resign. Whether the employee is asked passively to waive the right or actively ordered to exercise it, both approaches risk being unlawful and void, or give rise to liability for unlawful termination. Article 13 of the Regulation on the Implementation of the Labor Contract Law provides that employer and employee may not agree on grounds for termination of the employment contract other than those in Article 44 of the Labor Contract Law, and Article 26 of the Labor Contract Law provides that a clause of a contract is void where the employer exempts itself from its statutory liability or excludes the employee's rights. Both provisions show that, compared with the Labor Law, the Labor Contract Law narrows and restricts the room for agreement on the ending of the employment relationship by excluding agreed grounds for termination, adding statutory grounds for termination and regulating the conditions an employer may impose.

In other words, since the Labor Contract Law came into force every unilateral termination must follow Articles 37 to 42 of the Law, and an employer that terminates outside the statutory grounds bears the liability under Article 87 of the Labor Contract Law to pay compensation for terminating or ending the contract in breach of the Law, while any agreement that alters the statutory grounds or adds extra conditions by increasing the employee's obligations or excluding the employee's rights is void for breach of the mandatory provision in Article 26.

Here the company agreed with Mr Zhao on a ground for termination outside the statute in the case of inability to perform the work. Compared with Article 40(2) of the Labor Contract Law, the consequence of being "deemed to have resigned" plainly excludes the employee's statutory right to retraining or redeployment, and correspondingly the company exempted itself from the duty to train the employee to improve his skills, or to redeploy him reasonably so that he can adapt to the post, before terminating the contract, and from the statutory procedure of one month's notice. All of this breaches Article 26 of the Labor Contract Law.

Although the clause uses the formula "deemed to have resigned of his own accord", it is in substance one of the conditions on which the company terminates the contract, and the company's active steps in requiring Mr Zhao to complete the formalities and in issuing the termination certificate confirm its intention to terminate. The purpose of the "deemed to have resigned" formula was to invoke Article 37 of the Labor Contract Law, on termination by the employee, and so avoid the two statutory obligations triggered by termination, namely economic compensation and pay in lieu of the notice period. Compelling Mr Zhao to exercise a right by imposing a condition not only disregards his real intention but runs counter to the legislative purpose of giving the employee a right of unilateral termination. A ground for termination created outside the statutory framework is therefore plainly a termination in breach of the Law within Article 87, and the company must pay Mr Zhao compensation for unlawful termination.

What the case shows

The Labor Contract Law imposes strict liability on an enterprise that terminates a contract in breach of the Law. In managing its workforce an enterprise should therefore concentrate on establishing clear rules and an operational system of assessment for the two open-textured statutory grounds of inability to perform the work and serious breach of internal rules, rather than seeking to end a contract by excluding or misusing the employee's right to terminate on notice.