Termination of Employment Agreement: Calculation of Compensation
On July 14, 2024, the Shanghai Second Intermediary People’s Court issued a significant ruling concerning the calculation of employee compensation. This case is particularly relevant for many small Chinese companies that utilize reimbursement practices, where employees submit invoices or fapiao to receive commissions. The implications of this ruling may be valuable for others in similar situations.
Case Background
The appellant, Shanghai Fanhao Building Materials Co., Ltd., was involved in an employment contract dispute with the respondent, Gong Jun. Gong Jun served as a salesperson for Fanhao from September 20, 2017, until July 14, 2023. His employment agreement was a fixed-term contract effective from September 20, 2022, to December 31, 2025. On July 15, 2023, Fanhao issued a termination notice citing "harsh economic conditions" and the need for operational restructuring, which resulted in the cancellation of Gong Jun's position. The notice stated that his responsibilities would be reassigned to other employees and that his employment was terminated immediately.
On August 3, 2023, Gong Jun filed for labor arbitration. The arbitration ruling included the following:
a. Fanhao was ordered to pay Gong Jun compensation of 334,319.40 CNY for the unlawful termination of his employment contract.
b. Fanhao was required to pay a commission of 135,004.95 CNY for the period from January 1, 2023, to July 14, 2023.
c. Fanhao was also ordered to compensate Gong Jun 6,404.60 CNY for five days of unused annual leave in 2023.
Dissatisfied with the arbitration outcome, Fanhao appealed, leading the case to the court of first instance.
Legal Issues
The court addressed two primary issues:
a. Can Fanhao terminate the employment agreement with Gong Jun due to internal restructuring resulting from economic stress?
b. How should the compensation be calculated?
Analysis
Termination of Employment Agreement: According to PRC labor law, if significant changes in the objective circumstances make it impossible to fulfill the employment contract, and the employer and employee cannot agree on modifications after negotiation, the employer may terminate the contract. This termination must be communicated in writing with a 30-day notice or accompanied by an additional month's salary. Due to Fanhao failed to prove that it had negotiated with the employee regarding changes to the employment contract, the Fanhao's termination of the employee's employment agreement is not recognized as an economic layoff. This is later upheld by the appellate court based on the principle of estoppel as well.
Calculation of Compensation: The compensation calculation involved summing Gong Jun's base salary and commissions earned over the past 12 months and dividing the total by 12 as his monthly salary, and years of service as the multiplier. A critical aspect of the case was whether the commissions were classified as reimbursements or legitimate commissions. Gong Jun presented the company policy titled "Employee Benefits and Compensation Matters," which included a formula for calculating employee commissions. The court found that the figures aligned with the reimbursements previously issued by the company, thereby supporting Gong Jun's claim.
Conclusion
This case progressed through labor arbitration, the court of first instance, and ultimately concluded with the appellate court's ruling. The evidence provided by Gong Jun was pivotal in the court's decision to uphold his claims. This ruling serves as a crucial reference for both employers and employees navigating similar employment disputes in the context of economic challenges and restructuring.
