In a diversified market economy environment, corporate groups typically maintain multiple subsidiaries for independent accounting purposes. During operations, various factors such as personnel adjustments and tax planning often require employees to "formally" change employers when their labor contracts expire or remain active. When job positions, work locations, responsibilities, and compensation remain unchanged, employees often comply with company arrangements under implicit pressure. For most workers, changing employers doesnt substantially impact benefits unless compensation conditions change. However, when irreconcilable conflicts arise during contract performance, disputes over whether employee tenure should continue counting become critical. A recent labor arbitration case I handled vividly illustrates this issue.
I. SUMMARY OF THE CASE
Employee Li ed Company A in 2020 and signed a labor contract. Due to circumstances beyond his control, the companys operational restructuring led to the signing of a "Labor Contract Amendment Agreement" in 2021, transferring the employer from Company A to Company B. In 2023, the employer changed again to Company C, but this transition was completed without formal written documentation—merely through a "Labor Contract Transfer Approval Form" process within Company Cs OA system. During her maternity leave from June to November 2023, Company C abruptly terminated Lis employment relationship in 2024 via email, citing "operational difficulties, significant changes in objective circumstances during contract execution, and Lis excessive workload" as the reasons for unilateral termination.
Li believed that the reason for C Company to terminate the labor relationship was invalid. He entrusted me as his attorney to file a labor arbitration with the arbitration commission, demanding that C Company pay compensation for illegal termination of the labor contract. During the trial, C Company denied the authenticity of the "Labor Contract Transfer Approval Form", which meant denying that Lis working years at A Company and B Company should be counted C Company.
The focus of this case is:
1. When calculating the compensation, how to calculate the working years of Li? Should it be calculated from the time he ed Company A in 2020 or from the time he changed to Company C in 2023?
2. Li took maternity leave during the 12 months before the termination of the labor contract. Should the months of maternity leave be excluded when calculating the average monthly salary?
3. Can the companys operation difficulties and the major changes in the objective conditions on which the labor contract is based become the reason for the legal termination of the labor contract?
II. Legal determination of working years of laborers
According to Article 10 of the Implementation Regulations of the Labor Contract Law of the Peoples Republic of China, when an employee is transferred from their original employer to a new employer for reasons not attribu to the employee, the length of service at the original employer shall be combined and counted toward the new employers total service period. If the original employer has already provided economic compensation to the employee, the new employer shall not count the employees years of service at the original employer when calculating the length of service for economic compensation purposes when legally terminating or ending the labor contract.
In this case, the employer changed from Company A to Company B due to reasons unrelated to Li. The three parties (Company A, Company B, and Li) signed a "Labor Contract Amendment Agreement," which served as conclusive evidence. The arbitration committee therefore accepted the view that the labor relationship between Li and Company A had been transferred to Company B due to non-personal reasons. However, when Company B subsequently changed to Company C, the three parties (Company B, Company C, and Li) failed to sign an amendment agreement. They merely completed the approval process through Company Cs OA system. The "Labor Contract Transfer Approval Form" provided by Li was considered electronic evidence. Since Li had already resigned at the time of arbitration and Company Cs OA system had been deactivated for him, Li was unable to present the original document. Additionally, Company C disputed the authenticity of this evidence, leading the arbitration committee to reject it as admissible.
In this case, the author took an innovative approach by conducting extensive searches of business registration documents for Company B and Company C. Annual reports revealed identical communication addresses, email addresses, and contact numbers between the two companies. The author submitted these reports to the arbitration committee, which recognized that such evidence demonstrated a close operational connection between the two entities. Given Company Cs inability to provide additional proof, the committee acknowledged with "high probability" that the claim regarding the employers transition from Company B to Company C was not attribu to individual employee Li. To summarize, during Lis employment, the labor entity he signed with underwent two organizational changes—neither due to personal reasons nor his own volition, but rather as part of company "arrangements." Therefore, Lis years of service with the original employer should be combined and counted toward his tenure with the new employer.
When employees change employers according to company arrangements, claims regarding continuous work tenure are generally recognized by arbitration committees or courts if supported by clear documentary evidence such as company email notifications or change agreements. However, in cases without explicit documentation, employees bear a heavier burden of proof by providing indirect evidence of continuous employment. For instance, in the labor dispute case (2020 Yue 01 Min Zhong No.25004) plaintiff Chen sued Guangzhou Qisheng Information Technology Co., Ltd. and Guangzhou Zhiben Information Technology Co., Ltd., the two companies were parent-subsidiary affiliates with overlapping leadership. The "Resignation Commitment Letters" issued by both companies showed highly consistent formats and content. The court ultimately ruled this constituted "reassignment to a new employer due to reasons beyond the employees control." Similarly, in Bao Liyings labor contract dispute case against Shanghai Shenmei Beverage Food Co., Ltd., although Bao initially worked through labor dispatch before transitioning to a formal employment contract, her workplace and job position remained unchanged. The court concluded that "reassignment without personal fault" did not affect the calculation of continuous work tenure, and labor dispatch should not serve as an impediment to recognizing continuous employment.
III. Legal determination of monthly average wage calculation
According to Article 47 of the Labor Contract Law of the Peoples Republic of China, severance pay shall be calculated based on the employees length of service with the employer. For each full year of service, one months salary shall be paid as compensation. If the service period exceeds six months but is less than one year, it shall be calculated as one full year. For periods shorter than six months, half a months salary shall be paid as compensation. The monthly salary refers to the average wage earned by the employee over the twelve months preceding the termination or dissolution of the labor contract.
In this case, the first twelve months of Lis labor contract termination with C company coincided with the maternity leave period. Whether the maternity leave months should be excluded from the calculation of the average monthly salary is also another key issue in dispute in this case.
According to Article 8 of the "Special Provisions on Labor Protection for Female Employees", maternity benefits during maternity leave are paid by the maternity insurance fund at the standard of the employers average monthly wage from the previous year for employees enrolled in maternity insurance. For those not covered by maternity insurance, employers must pay based on the employees pre-pregnancy salary during maternity leave. When employers cover maternity wages, disputes are generally avoided, as these payments should be included in calculating the monthly average wage. However, whether maternity benefits paid by the maternity insurance fund during leave should be counted remains controversial. Judicial practice shows no unified standards across regions, with different courts even issuing varying rulings within the same jurisdiction – essentially reflecting differing interpretations of whether maternity benefits constitute labor compensation. The author has reviewed local regulations and relevant cases from Beijing, Shanghai, and Shandong, revealing inconsistent judicial interpretations as shown in the below:
area
Local legislature
Reference cases
Court findings
Beijing
Article 15 of the Regulations on Maternity Insurance for Enterprise Employees in Beijing stipulates that maternity allowance shall be the salary of female employees during their maternity leave, and if the maternity allowance is lower than their own salary standard, the difference shall be made up by the enterprise.
(2024) Jing 03 Min Zhong 9543
If wages or maternity benefits are not paid in full during the maternity leave, the difference shall be included in the average wage.
Shanghai
Shanghai Municipal Human Resources and Social Security Bureau: The maternity leave months in the 12 months should be excluded, and the average salary of the remaining months should be used as the base of economic compensation.
(2018) Hu 02 Min Zhong No.11329
Maternity allowance is a social insurance benefit that workers enjoy according to law. Its standard is the average monthly salary of employees in their employers in the previous year when they give birth, and its standard is higher than the actual work of workers, so it should not be included in the calculation base.
Shandong
Article 13 of the Regulations on Maternity Insurance for Enterprise Employees in Shandong Province stipulates that maternity insurance benefits enjoyed by female employees during maternity leave or family planning operations shall be implemented in accordance with relevant national and provincial regulations. Among them, maternity allowance shall be calculated according to the average monthly salary of employees in the employing unit in the previous year.
(2022) Lu 03 Min Zhong No.485
Maternity allowance enjoyed by workers does not belong to labor remuneration and should not be included in the calculation of average wage.
In this case, the arbitration committee did not exclude maternity leave months but instead calculated the compensation based on maternity benefits as wages during maternity leave, as reflected in the maternity insurance benefit payment verification form. This approach aligns with the authors claim in the labor arbitration application: incorporating maternity benefits the monthly average wage calculation would have resulted in a higher compensation base for Li, thereby increasing her entitlement. Ultimately, the arbitration committee endorsed this perspective, supporting the authors position.
IV. Legal determination of reasons for termination of labor contracts
Under Articles 40,41, and 46 of the Labor Contract Law of the Peoples Republic of China, when material changes in objective circumstances that formed the basis for establishing a labor contract render the contract unfulfillable or when an employer encounters severe operational difficulties, the employer may terminate the labor contract with the employee provided that the following conditions are met. In such cases, the employer must pay economic compensation to the employee.
In this case, C company unilaterally notified Li to terminate the labor relationship with C company on the grounds of operational difficulties and major changes in the objective conditions on which the labor contract was concluded, which obviously did not comply with the legal provisions of the Labor Contract Law and was an illegal termination of the labor contract.
In summary, while we wont debate whether employers or employees are the "vulnerable group" in todays employment landscape, I must remind workers: When adjusting employers during employment by complying with company arrangements, they should retain written evidence. For involuntary resignations, its crucial to pre-record key evidence through video recordings or obtain notarized digital copies. Only with sufficient evidence can one better protect their legal rights in potential disputes. As employers, while legally entitled to terminate employment relationships under specific conditions—such as severe operational difficulties requiring layoffs—their actions must meet requirements: Did they consult trade s or employees? Was the layoff plan reported to labor authorities? Employers shouldn t indiscriminately wield operational challenges or changing circumstances as "legislative authority" to arbitrarily initiate layoffs.
This article was written by Yin Sisi and Zhang Ruize
