Can labor contract be performed after directorship is removed?

  • 29 Aug 2019 4:10 PM
    Message # 7854662

    On 29 April, 2019, the Supreme People's Court issued Provisions on the Application of Certain Issues in the Company Law of the People's Republic of China (V) (Hereinafter referred to as "Judicial Interpretation (V)”). The article 3 of the Judicial Interpretation (V) regarding the handling mechanism for the removal from directorship has caused heated discussions.

    Where the directorship is effectively removed by the shareholders' meeting or the general meeting of shareholders before the expiration of his/her term of office, the people's court shall not support the claim that the removal does not have the legal effect. After the removal of a directorship, if lawsuit is filed in a dispute with the company, the people's court shall, in accordance with the provisions of the law, administrative regulations, the company's articles of association or the contract, comprehensively consider the various factors including reasons for the release, the remaining term, the director's remuneration, to determine whether to make compensation and the reasonable amount of compensation.

    Based on PW’s years of practicing experience in corporate governance and employment, PW believes that article 3 of the judicial interpretation (V) contains two aspects:

    For the entrusted (principal-agent) relationship between the company and the director, Judicial Interpretation (V) clarifies that the company can legally remove the director through effective shareholders' meeting/ resolution of general shareholders' meeting(P.S.: There are employee directors in state-owned enterprises. Employee directors are not appointed or removed by shareholders and are not the case in the discussion here);

    For a removal from directorship, the court has discretion on whether to compensate and how to compensate.

    However, above is only considered from the perspective of Company Law. In practice, it is common that the director is also an employee of the company. The removal of directorships will also involve the application of the Labor Contract Law, especially for the issue of whether the labor contract can be continued to perform after the removal of directorship. Thus, PW lawyers have summarized and analyzed the following issues for your reference and discussion:

    1

    Whether the labor contract can be continued to perform after the removal of directorship?

    PW believes that the removal of the directorship does not necessarily lead to the inability to perform the labor contract, mainly for the following two reasons:

    It has been generally recognized in the theoretical research and judicial practice of company law that the relationship between a company and its directors is entrustment, and the provisions on entrustment contract in the Contract Law can be applied. While relationship between company and employees is labor-management,  the provisions of the Labor Contract Law shall be applied. It means that director identity can coexist with employee status (both director and employee) or exists solely (director only). The removal of directorship does not mean the elimination of the employee status.

    The identity of director who is  non-employee representative is elected by the shareholders' meeting/general meeting of shareholders, while the employee status is generated by the labor contract signed by the employee and the company. Shareholders' meeting/general meeting of shareholders belongs to the company's internal organization. Even if the shareholders' meeting/general meeting of shareholder remove an employee director from power, it neither means that the company is exempted from the obligations under the labor contract, nor means that the position of the employee under the labor contract no longer exists.

    2

    How should the early dismissal compensation/economic compensation be paid after the removal of directorship?

    PW believes that this should be discussed according to various scenarios:

    For directors who are not employees of the company, “either the principal or the agent may terminate the agency appointment contract at any time. Where the other party sustains any loss due to termination of the contract, the terminating party shall indemnify the other party, unless such loss is due to a reason not attributable to the terminating party.”, so said the Article 410 of the Contract Law. Therefore, even if the directorship is removed by the shareholders' meeting/general meeting of shareholders, there is still a basis of claim for reasonable compensation. Hence, Judicial Interpretation (V) endows the court with the discretion to make judgment according to the actual situation.

    For directors who work both as employees of the company and in the board of directors, after the directorship are removed, if they can continue to provide normal labor as agreed in the labor contract between the two parties, the corresponding salary should be paid in accordance with the labor contract. If the directorship is part of the work content of the labor contract, the removal of the directorship will lead to the inability to carry on the labor contract, PW is inclined to the view that this situation should belong to “a major change has taken place in the objective situation and results in the inability to perform the labor contract”. The company can adopt the provisions of part 3 of article 40 of the Labor Contract Law to terminate the employee's labor contract and pay economic compensation.


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