Key takeaways

While the "majority view" stated in the Opinions is not legally binding on Shanghai courts, as a practical matter, it is likely all courts in Shanghai will refer to the "majority view" stated in the Opinions when adjudicating relevant cases. The Opinions therefore will likely serve a crucial role when courts decide on the relevant issues covered. In particular, Shanghai employees will now have an easier time than before in demanding open-term (i.e., permanent) employment contracts, making it more difficult for employers to exit employees and generally reducing employers' flexibility in workforce management.

In more detail

The most important issue addressed is when employees become entitled to open-term/permanent employment contracts. Generally, employees on open-term contracts are more difficult to exit because early termination of employment by an employer may only be done on narrow statutory grounds. If an employee is on a fixed-term contract, employers can just let the fixed-term contract expire without the need for any justification, but if an employee is on an open-term contract, the employer no longer has the option of just letting the contract expire. Under the national Employment Contract Law, employees may demand an open-term contract at the end of the second consecutive fixed-term contract signed with an employer.

Previously, most Shanghai courts took the view that only if an employer agrees to renew employment for a third term would the employee then have the right to demand an open-term contract. In other words, the employer could still decide to let the contract expire at the end of the second fixed-term. Further, the employer could keep signing fixed-term contracts with the employee's agreement and just let any later fixed-term contracts expire if it so chooses (at least until the employee reaches 10 years of service). This was in contrast to the position taken in most other cities (such as Beijing), where the employee could unilaterally demand renewal on an open-term basis at the end of the second fixed-term, even if the company did not wish to renew the contract.

The Opinions now state that the official "majority view" on this issue is that employees may unilaterally demand renewal on an open-term basis at the end of the second fixed-term, bringing the Shanghai court's view on this issue in line with the view of other cities' courts. This represents a significant shift in position by the Shanghai High People's Court, which had previously issued a guiding opinion in 2009 taking the exact opposite view on this issue. Consequently, employers in Shanghai will now have reduced flexibility in managing their workforce and must decide at the end of an employee's first fixed-term contract whether to retain the employee on a long-term basis.

The Opinions also address the following significant issues:

• If an employee successfully sues for reinstatement as part of an unlawful dismissal claim, back wages should be calculated only from the date the employee applied for mediation or arbitration, not from the original date of dismissal.
• If an employer lets a contract expire without signing a new written agreement with the employee, the employer should have a one-month grace period to sign a written agreement before double wage penalties are applied.
• If an employee is unlawfully dismissed during their statutory medical treatment period, they should not be entitled to receive the medical subsidy payment that is applicable when an employee is lawfully terminated on the ground that they have used up their statutory medical treatment period and are still unable to come to work.
• If an employee transfers from one entity to another in the same location and continues in the same job position, their years of service can be recognized for purposes of severance calculation. However, these years of service should not be counted toward determining eligibility for an open-term contract (i.e., when they reach 10 years of service).

For more information, please contact jonathan.isaacs@bakermckenzie.com, zheng.lu@bakermckenziefenxun.com or bofu.an@bakermckenziefenxun.com.

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