Equity Awards Disputes in China – Labour Disputes or not?
Introduction
Where employees working for MNCs in China are granted equity awards, they generally receive awards relating to the shares of the overseas listed parent company or affiliate company of the local employer. Besides, the employees are often required to accept the grants and give consent to the terms of the awards, including agreeing to be subject to a specific foreign law as the governing law for the award agreement, as well as a specific foreign court as the exclusive venue for litigating any claims related to the awards, etc.
When terminating the employment of these award holders in China, to obtain the employee’s consent to a “mutual termination”, MNCs will usually have the employee’s local employer pay out the awards that have vested but yet to be exercised1 or allow the terminated employee to keep and exercise such vested awards within the post-employment exercise period permitted by the relevant equity incentive plan (subject to local regulatory requirements) as part of the severance offering to the terminated employee.
Disputes, however, often arise when the employee is terminated for cause or otherwise terminated by the company unilaterally according to the laws2, resulting in all or portions of his or her vested and/or unvested awards forfeiting under the relevant equity incentive plan. Can the terminated employee sue the company in China for entitlements to the forfeited awards or damages for the forfeited awards (in addition to wrongful termination damages and other related claims)?
The answer is “yes”, but the result could be very different depending on whether the individual brings a labour dispute case vs. a non-labour dispute case to the local PRC court.
Labour Dispute vs. Non-Labour Dispute
Under the PRC laws, “labour disputes” are defined as disputes between employers and employees arising from their compliance with the labour laws and regulations and performance of the employment contracts between them. Thus, the parties of a labour dispute must be the terminated employee and the local employer.
On the other hand, “non-labour disputes” here refer to civil and commercial disputes, mainly breach of contract claims.
The following chart indicates the main differences of a terminated employee’s bringing claims related to equity awards granted by the overseas company through these two routes in the PRC.
|
|
Labour Dispute |
Non-Labour Dispute |
|---|---|---|
|
Parties |
Between the terminated employee and the local employer.3 | Between the terminated employee and the local employer and/or the overseas granting company. |
|
Jurisdiction, Venue |
The PRC court4 where the local employer is registered or where the terminated employee performed the services has the exclusive jurisdiction. | The competent PRC court or the dispute resolution mechanism agreed upon by the parties (i.e., that stipulated in the award agreement and relevant equity incentive plan). |
|
Governing Law |
The PRC employment law. | The PRC Civil Code and/or the foreign law agreed upon by the parties (i.e., that stipulated in the award agreement and relevant equity incentive plan). |
|
Others |
|
|
Obviously, from the individual’s perspective, it would be to his or her advantage to bring a labour dispute case vs. a non-labour dispute case to the PRC court. This is also proven true in real life – i.e., most of the individuals would choose to bring a labour dispute case against the former employer in China.
Current Judicial Practice
The current PRC laws are silent on whether a terminated employee’s claims for entitlements to equity awards granted by the overseas company that forfeited at termination or damages for such forfeited awards on the basis that he or she already earned such awards or was incorrectly deprived of such awards due to wrongful termination falls into the scope of labour disputes or not.5 As a result, local judicial practice on this issue varies location by location in China. Using Beijing and Shanghai, two largest cities in China where many MNCs have established operations as examples, we set out below two main views held by local courts in China on this issue.
Beijing
Recent cases indicate that courts in Beijing tend to hear this type of case as labour disputes. The rationale behind this view is that the equity awards were really granted by the overseas company due to the terminated employee’s employment with the local employer in China – with the intentions to encourage the individual to stay longer with the local employer, work harder for the local employer, and/or reward the individual for his or her past good performance at the local employer, etc. Therefore, the local employment is a key cornerstone of the awards granted by the overseas company, and the relevant disputes are those arising from the performance of the employment contract between the individual and the local employer, falling into the definition of “labour disputes” as discussed above.
Shanghai
There is a divergence of opinion among courts in Shanghai. While Shanghai First Intermediate People's Court and the local district courts under its supervision tend to hear this type of case as non-labour disputes, Shanghai Second Intermediate People's Court and the local district courts under its supervision tends to hear this type of case as labour disputes.
However, it is worth noting that the court’s hearing the case as a labour dispute does not mean that it would rule in favour of the terminated employee for sure. Some published cases indicate that courts in both Beijing and Shanghai hearing this type of case as “labour disputes” may still dismiss the individual’s claims should the latter fail to prove that the equity awards granted by the overseas company were part of the employment relationship between the individual and the local employer in China or part of the remuneration paid by the local employer in China (such as may be indicated in the offer letter and/or employment contract entered into between the individual and the local employer).
Takeaways
Unless there is a compelling reason to do otherwise6, MNCs offering equity awards to their employees in China are recommended not to include any references to the equity awards in any local employment agreements issued by the local employer in China, such as offer letters, employment contracts, etc. Similarly, references to the equity awards should avoid appearing in any local employment documents issued by the local employer in China, such as employee handbooks, C&B policies. Any written communications with the successful candidates and employees about the equity awards should be only between the overseas granting company and the relevant candidate or employee in China.
Companies, once being sued by a terminated employee for claims related to his or her forfeited equity awards, should first check whether the case is accepted by the local court as a labour dispute case or not. If it is a labour dispute case, companies are recommended to consider whether to file a challenge to jurisdiction – i.e., telling the court that the dispute is not a labour dispute, but rather a civil and commercial dispute, thus the PRC court does not have the jurisdiction over the dispute according to the award agreement and relevant equity incentive plan. Even if the court is in Beijing, it may be still worth giving it a try since China is not a common law country and the prolonged process may put some pressure on the individual’s side making the individual more willing to accept the settlement offer from the company (if the company plans to settle the case during the litigation).
Lastly but not the least, as courts in China are receiving more and more cases of this type, it is possible that more and more courts may be willing to hear this type of case as “labour disputes” in the future. Therefore, MNCs offering or intending to offer equity awards to their employees in China should closely monitor the local legislation and judicial practice in this area.
1 Awards granted to the employee that have not vested at that time would normally forfeit upon termination of the employee’s employment, unless the company agrees to accelerate the vesting of all or part of the unvested awards.
2 For example, the employer terminated the employee’s employment by not renewing the employee’s fixed-term contract upon its expiration.
3 We have seen cases where courts allow the overseas granting company to be a co-defendant.
4 Under the PRC law, “labour disputes” should be resolved through the mandatory labour arbitration first. However, currently, most (if not all) of the local labour arbitration commissions in China do not accept claims related to equity awards as they do not think that such claims fall into the scope of “labour disputes”.
5 Disputes between employees and employers related to the confirmation of the individual’s shareholder status, equity repurchase, equity transfer, etc., are generally not considered labour disputes.
6 For example, the company would like to have the equity awards granted by the overseas granting company cover the non-compete compensation for enforcing the post-termination non-compete required by the PRC employment laws such that it would be preferable to have the equity awards linked to the local employer in the PRC. Please note, however, that uncertainty exists as to whether such approach is legally enforceable because the law requires employers in the PRC to provide separate financial consideration to their former employees to enforce the post-termination non-compete and it is unclear under the law whether the equity awards granted by the overseas granting company would suffice for this purpose.
