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How to Protect the Software I Developed?

July 21, 2020

No one can deny that the 21^st century is the era of the IT industry. There, a startup can become a unicorn in just a couple of years. No wonder that it has already been proclaimed that “software is eating the world”. Did you know for example that the world’s biggest bookstore, Amazon, is actually a software company? Compared to traditional industries, the speed of wealth accumulation in digital industries is amazing. The main reason for an IT company to become successful is that they developed great software. Needless to say that, software is very important for such a company.

This begs the question: how to protect the software I developed?

Generally speaking，there are two kinds of protections provided by law, one is a software patent, and the other one is software copyright. A software patent is a way to protect the design ideas of software by applying for a patent instead of protecting the software itself. On the other hand, a software copyright refers to all the exclusive rights to the software as being an original creation which, the developers or other right holders may enjoy in accordance with the provisions of relevant copyright laws.

Then what’s the differences between these two intellectual property rights (IPRs. You may check our post: Ten Points You Need to Know about China’s IPR System to know more）Let’s take a look:

I. The law is different

If people want to obtain full protection of their software, it is recommended that both patent and copyright should be filed

《Copyright Law》and《Regulations on the Protection of Computer Software》provide protection over software copyrights. A software copyright comes automatically into existence upon completion of a software development. However, the developer may choose to register the software copyright. The purpose of the registration is to rely on some kind of notarization, which could be used to declare copyright ownership, thus to have a more powerful probative force for subsequent infringement proceedings.
《Patent Law》provides protection over software patent. Software patents are protected passively, meaning the inventor must apply with the Patent Office to obtain protection if software patent is granted. Besides, the whole patent system is based on the principle of “open to public (in exchange) for protection”.

II. Success rate

For software copyright registration, as long as the form of the material submitted is in line with the requirements and does not violate the provisions of the Copyright Law, registration will be granted without going through a substantive review.

However, the application for a software patent is relatively complex, as it must go through a substantive review, that is, to examine whether the application meets the requirements of the Patent Law, such as novelty, creativity, practicality etc. Generally speaking, the success rate for a software patent to be granted is comparatively low.

III. Term and renewal costs

For a software copyright, the IP right holders only have to pay the application fee, no annual fee needs to be paid to maintain it. According to the applicable law, the copyright protection period for an individual’s work shall be the author’s lifetime plus 50 years after his death, and the copyright protection period for work of legal person or other organization shall be 50 years.

For a software patent, apart from the application fee, an annual fee shall be paid to maintain it. Failure to pay the annual fee before the respective deadline shall be considered as giving up the patent right. The protection period for a software patent shall be 20 years.

IV. Pros & cons

Software copyright can be protected without being publicized, and can be granted very soon.

Generally speaking, it takes 4 months to have a general registration being authorized，but it may take only one business day for an expedited application.

However, a software patent must be open to the public before obtaining protection. The time for application to be granted is around 2 years, and generally speaking, an expedited application is not possible. The good point with a software patent is that it provides protection over the design concept and idea, so the protection is stronger in this respect. Meanwhile, the inventor can propose some idea which can’t be achieved currently. Once the patent was granted, the inventor can then obtain income by licensing it. Actually, many large companies commercialize their patent reserves in this way.

V. The protection is different

To apply for registration of a software copyright, the source code and user operating manual should be submitted. In another words, protection for software copyright focuses on the form of expression instead of the idea. It makes it possible for competitors to research the software and then change the programming language to achieve the same result. However, you can’t claim copyright infringement, because the code is different.

While for a software patent application, it’s the design concept (including the content of the software flow chart) to be submitted, rather than the program language implementing the concept. Once the patent is granted, other people adopting the design idea or scheme of the software patent may constitute an infringement. Thus, a patent provides a more powerful protection.

Our suggestion: if people want to obtain full protection of their software, it is highly recommended that both patent and copyright should be filed to reduce the risk of being infringed. It is also important to note that software applications for patents can only be applied for if the software amounts to an invention.

Tax boost for Hainan FTP

July 1, 2020

On 30 June 2020, the Ministry of Finance together with the State Taxation Administration released the <Circular about Preferential Enterprise Income Tax Policy for Hainan Free Trade Port>, and the <Circular about Individual Income Tax Policy for High-end and Urgently Needed Talents at Hainan Free Trade Port>. The two circulars will be implemented from January 1, 2020 until December 31, 2024. ( You may check our previous post: Breaking news! Master Plan Unveiled for the Construction of Hainan’s New Free Trade Port for more news about the Hainan Free Trade Port. )

On 30 June 2020, Chinese central government released the <Circular about Preferential Enterprise Income Tax Policy for Hainan Free Trade Port>

According to the circulars, for high-end and urgently needed talents working at the Hainan Free Trade Port, the individual income tax rate is capped at 15%, meaning the portion of the actual tax burden of individual income tax exceeding 15% shall be exempted.

The income referred to in the above-mentioned preferential policies includes the comprehensive income derived from Hainan’s Free Trade Port (including wages and salaries, labor remuneration, copyright remuneration, royalties), operating income and the subsidized income of talents recognized by Hainan Province.

For companies that are registered at the Hainan Free Trade Port and operate the business substantially from this location, the corporation tax is reduced to 15%. Income on additional overseas direct investments by companies in tourism, modern services, or the high-tech sector will be exempted from corporation tax altogether.

Useful Link:

Ministry of Finance of the People’s Republic of China

Newly Released Negative List

June 29, 2020

On 23 June 2020, the National Development and Reform Commission and the Ministry of Commerce released the <Special Administrative Measures (Negative List) for the Access of Foreign Investment (2020)> (“Negative List”). According to the Negative List, from 23 July 2020 onward, the restrictions on foreign investments in securities, futures, life insurance, commercial vehicle manufacturing, and the construction and operation of water supplies and drainage networks in cities with a population of more than 500,000 shall be lifted.

This amendment further reduces the negative list of foreign investment access. This is the fourth consecutive year that China has revised the negative list with regards to foreign direct investment in the country since 2017.

Compared to the 2019 edition, the restriction on the Negative List of 2020 have been reduced from 40 to 33. The level of openness in the services, manufacturing and agricultural sectors has been further improved.

Restriction on the Negative List of 2020 have been reduced, the level of openness in the services, manufacturing and agricultural sectors has been improved.

The highlights are as follows:

1. Accelerating the process of opening up key services areas:

In the financial sector, China will scrap foreign shareholder limits in securities companies, fund houses, futures companies and life insurance firms. ( For more information about more opening up in this sector, please visit our previous post: China-More Opening-up in Financial Sector )

In the infrastructure sector, the requirement that the construction and operation of water supply and drainage networks in cities with a population of more than 500,000 must be controlled by Chinese investors shall be removed.

2. Easing market access restriction in manufacturing and agriculture sectors:

In the manufacturing sector, liberalize the restrictions on foreign-funded share ratios in the manufacture of commercial vehicles and scrap a ban on foreign investments into companies that smelt and process radioactive resources and produce nuclear fuel.

In the agricultural sector, for the selection and seed production of new wheat varieties, a majority Chinese shareholder is not required anymore, as long as Chinese shareholders own not fewer than 34% of the equity.

On the same day, the <Special Administrative Measures (Negative List) for the Access of Foreign Investment in Pilot Free Trade Zones (2020)> was released too, the entries in the Negative List were also reduced from 37 to 30.

According to the amended Negative List, In the medicine sector, the prohibition of foreign investments into Chinese medicine have been removed. In the education sector, wholly foreign-owned vocational education institutions are allowed to be established.

Link to the original list:

Special Administrative Measures (Negative List) for the Access of Foreign Investment (2020)

Special Administrative Measures (Negative List) for the Access of Foreign Investment in Pilot Free Trade Zones (2020)

foreign direct investment, foreign investment law, free trade zone, negative list

After Signing the Dissolution Agreement, She Learnt That She’s Pregnant

June 19, 2020

Sunny Technology Co., Ltd. (“Sunny“) and the employee Angela signed an “Employment Dissolution Agreement” (“Agreement”) on 15 March 2018. The Agreement mainly stipulates that the employment contract between the two parties will be terminated on 31 March 2018 after friendly negotiation.

On 1 April 2018, Angela went to the hospital for a medical check-up as she did not feel well, and on 9 April 2018, she was told “being pregnant.” According to the outcome of the medical examination, Angela was pregnant on 15 March 2018 already, meaning when she signed the Agreement.

On 12 April 2018, Angela called Sunny to inform them of her pregnancy and made it clear that she did not know about the pregnancy when she signed the Agreement. Thus, she requested that the agreement be revoked and the employment relationship be reinstated on the grounds that there was a significant misunderstanding at the time of signing the Agreement. But Sunny believes that the Agreement was a true and exact declaration of intention of both parties and therefore, did not agree to the resumption.

After many unsuccessful negotiations, Angela filed for a labor arbitration on 4 May 2018, requesting to revoke the Agreement and restore the employment relationship.

Focus of the controversy:

Whether Angela signed the Agreement without knowing that she is pregnant constitutes a “significant misunderstanding” as set out in the 《General Principles of Civil Law 》, and whether the Agreement should be revoked.

Expert’s opinion:

Article 59 of the <General Principles of Civil Law> stipulates that in the event that any party has a significant misunderstanding, the party shall have the right to request the court or the arbitration organ to change or revoke it. Then what exactly is a “significant misunderstanding”? In this regard, article 71 of the <Opinions of the Supreme People’s Court on the Implementation of the General Principles of the Civil Law of the People’s Republic of China (Trial Version)> clearly defines that the party’s misperception of the nature of the act, the other party, the variety, quality, specification and quantity of the subject matter, etc., makes the consequences of the act contrary to its own intention and causes greater losses, which may be regarded as a significant misunderstanding.

In this case, although Angela was pregnant before signing the Agreement, and was not aware of it at the time. However, according to the legal definition of the aforementioned “significant misunderstanding”, this is not a false understanding of the nature of her act of negotiating the termination of the employment contract, neither the wrong understanding of the counterparty or the subject matter, etc. Therefore, Angela’s claim that she succumbed to a significant misunderstanding while signing the Agreement was invalid.

Employee is unaware of her pregnancy did not constitute a "significant misunderstanding", the dissolution agreement is valid

Of course, one might argue that given the truth that it would have disadvantaged Angela to find a new job during pregnancy, Angela would not have agreed to dissolute the employment contract if she had known she was pregnant. This argument seems tenable. However, let’s look at the following example: suppose someone has bought a relatively expensive property while the market price of real estate was actually going down, but he was unaware of it. Then he asked for the cancellation of the property purchase agreement because of the price going down, could he cancel it? Obviously, he couldn’t. This person has a false understanding about the objective factors which exist when he made his decision, and the adverse consequences of such misperception can only be borne by himself. In other words, he has no right to request the cancellation of the purchase agreement on the grounds of a “significant misunderstanding”.

In addition, Article 42 of the <Labor Contract Law of PRC> provides special protection to female employees during three special times ( pregnancy, childbirth, lactation, please check our post “Female employee rights in China” for more information), that is, the company may not terminate the employment contract in accordance with the provisions of Article 40 of the <Labor Contract Law of PRC> about dismissal of employees without fault ( please check our previous post “How to Fire an Incompetent Employee Properly?” for more information ) and the provisions of Article 41 about economic layoffs. However, the law also respects the true declaration of the intention of both parties, and does not therefore prohibit the parties from terminating the contract through friendly negotiation.

Under the Chinese labor law, the only prerequisite for an employee to seek a resumption of an employment relationship is that the company illegally terminated the employment contract. However, Sunny and Angela terminated the employment contract through negotiation, which obviously, was not a violation of the law.

In summary, the fact that Angela being unaware of her pregnancy did not constitute a “significant misunderstanding”, and Sunny’s termination of the employment contract with Angela was in line with the law, and the declaration of intention between the two parties was true and valid, so Angela’s request for arbitration was denied.

Useful link:

Ministry of Human Resources and Social Security of the People’s Republic of China

dissolution agreement, Female employee rights, labor law of PRC, pregnancy

Individual Insolvency Law in Shenzhen

June 9, 2020

On 2 June 2020, the Standing Committee of the Shenzhen Municipal People’s Congress publicly solicited opinions on the 《Regulations on Personal Insolvency of the Shenzhen Special Economic Zone ( Draft for Comments, hereinafter “Draft”)》, which is the first local regulation in China to solicit opinions on individual bankruptcy.

The main purpose of the regulation is to establish a personal system of insolvency, meaning any individual whose assets are not sufficient to pay off all his or her debts or who obviously lacks liquidity, due to production, operation and consumption, may apply for personal insolvency if certain conditions are met.

Previously, on more than one occasion, the Chinese government had already proposed that “the bankruptcy system should be improved and individual bankruptcy legislation should be initiated, to achieve an orderly exit of market participants.” Meanwhile, according to the <Opinions of the Central Committee of the Communist Party of China and the State Council on Supporting Shenzhen in Building a Pilot Demonstration Zone for Socialism with Chinese characteristics> promulgated earlier, Shenzhen may undertake changes to existing laws, administrative regulations and local regulations in accordance with the authorization.

According to the statistics, by the end of January 2020, there were 1.236 million registered individual businesses in Shenzhen, in addition to a large number of self-employed commercial entities in various forms. Due to the long-term absence of a personal insolvency system, parts of the aforementioned commercial entities bear unlimited debts once they encountered market risks.

In order to provide these “honest but unfortunate” businesses with the opportunity to obtain economic regeneration and encourage innovation and entrepreneurship, the establishment of a personal insolvency system is crucial. It goes without saying that further rules need to be explored and studied. For example, the definition of non-malicious criteria, how to deal with any retroactive responsibility during the exemption period and who is in charge of monitoring, how to achieve a balance between protecting the rights of creditors and ensure a bona fide relieve for insolvent debtors etc.? Workable legal rules and regulations need to be established for all such issues and should be constantly revised in practice.

Establishment of a personal insolvency system is crucial to provide businesses with the opportunity to obtain economic regeneration.

Now let’s take a look at the highlights of the Draft:

1. Debtors and creditors

Individuals who have lived in Shenzhen and participated in Shenzhen’s Social Insurance scheme for three consecutive years may go into liquidation or settle the property if their assets are insufficient to pay off all the debts or if they are facing liquidity constraints as mentioned above, or if they are clearly unable to pay off all of their debts. At the same time, creditors who hold more than 500,000 yuan of maturing claims against their debtors alone or jointly with creditors may apply to the court for bankruptcy liquidation of the debtor.

2. Inspections and restrictions

From the date of bankruptcy, the insolvent debtor faces a minimum of three years, a maximum of five years of an inspection period for exemption. In insolvency proceedings and during the inspection period, the insolvent debtor has to accept restrictions with regards to his actions and rights, including on personal consumption and the inability to serve as a senior executive of a company. The Draft also provides a variety of indefensible debts and exonerations. For example, debts such as property damages arising from malicious torts cannot be forgiven, neither significant debts incurred as a result of extravagant consumption or a significant reduction in personal assets, even if the individual is insolvent.

Individual Insolvency, Individual Insolvency Law

Breaking news! Master Plan Unveiled for the Construction of Hainan’s New Free Trade Port

June 4, 2020

On 1 June 2020, the Master Plan for the Construction of Hainan’s Free Trade Port was unveiled by the Chinese central government (hereinafter “Master Plan”). The policy document proposes in total 39 new policies with regards to the liberalization and facilitation of trade, investments and cross-border capital flows to develop Hainan into a global state-of-the-art free trade port.

According to the Master Plan, such a free trade port shall be established in Hainan by 2025, to enable the province to become a globally-influential free trade port by the middle of the century.

Under the Master Plan, investors would be given greater freedoms such as:

Master Plan for the Construction of Hainan’s Free Trade Port was unveiled, which proposes 39 new policies regarding to liberalization and facilitation of trade

1. Freedom of trade

“Zero tariffs” on the trade in goods;

For services the policy measures aim to liberalize “market access and operations”;

Reduction of restrictions on cross-border trade in services.

2. Freedom of investment

Investment shall be allowed if not generally forbidden, for industries implementing mandatory standards, investment and operations are permitted without permission and approval as long as companies commit to meeting the relevant requirements and submitting relevant documents for filing;
Investment and “ease-of-doing-business” measures will be implemented from setting-up businesses to their deregistration and insolvency procedures;
Increased penalties for intellectual property infringement, a strengthening of the application of blockchain technology in intellectual property transactions as part of a “Property Rights Protection System”.

3. Freedom of capital flows

Building a multi-functional free trade account system;
The promotion of settlement facilitation;
Leading the way in implementing a policy of opening up the financial industry in Hainan to support the construction of an international energy and shipping industry;
To support property and equity rights, and other trading facilities, in addition to accelerating the development of settlement centers.

4. Freedom of entry and exit

To provide immigration facilities to attract foreign talents for the purpose of making investments or to engage in academic exchanges and business activities;
To implement a wider visa-free entry policy and gradually extend the length of stay free of any visa requirements.

5. Freedom of transport

A less constraint and open shipping system;
Further relaxation of airspace controls and relaxation of restrictions with regards to the right of navigation;
Removal of restrictions on offshore financing for ships and aircrafts.

6. Tax policy

The free trade port will adopt an arrangement characterized by “zero tariffs” on cargo trade. In addition, the enterprise income tax for companies in certain industries shall only be 15%. The individual income tax for highly-skilled talent and talent in short supply shall be 15% at the most.

7. Industry development

The “Master Plan” also proposes that the tourism industry, modern services industry and high-tech industries shall be vigorously supported, as they are key industries in Hainan.

Another point which deserves attention is the fact that the “Master Plan” grants Hainan’s Free Trade Port full legal authority to enable Hainan’s Free Trade Port and to enact Hainan’s Free Trade Port Law.

For more information, please visit the Chinese government’s website under: www.gov.cn

free trade port, Hainan free trade port, liberalization and facilitation of trade

“I Want My Equity Back!”

June 2, 2020

On 14 May 2020, the Shanghai No. 1 Intermediate Court (hereinafter “Appellate Court”) publicly announced the result of a dispute over the qualification of a foreign shareholder. The Appellate Court found that a foreign individual, is an anonymous shareholder of a domestic company and has the right to claim back his equity. This case is the first one in China where a foreign individual has requested the confirmation of his shareholder status since the implementation of the Foreign Investment Law on 1 January 2020 ( You may check our post: Abstract of Foreign Investment Law of PRC)

In 2009, Mike Cheng and Zhang Yan met each other and wanted to start their business jointly. However, according to the then “People’s Republic of China Sino-foreign joint venture law” (hereinafter “JV law“), Mike Cheng, as a foreign individual, Zhang Yan, as a Chinese, could not set up a joint venture. To solve this problem, Mike Cheng asked his brother Tony Cheng, a Chinese citizen to join them.

On 3 November 2009，Mike Cheng transferred to Zhang Yan 260,000RMB, which was Mike’s capital contribution invested in the name of Zhang Yan. At the same time, Zhang Yan and Tony set up Junda Company.

Later on, the three parties signed an ” Equity share agreement” and specified: “As a foreigner, Mike is unable to set up a joint venture with Chinese individuals currently”, hence “Junda company will be set up in the name of Zhang Yan and Tony initially. When the situation presents itself, Mike shall set up a joint venture with Junda company.” As to the actual investment ratio, the agreement made it very clear: “Mike 51%, Zhang Yan 25%, Tony 24%.”

Since the incorporation of Junda company, Zhang Yan has been communicating with Mike and Tony via e-mail, such as reporting Junda company’s operations, financials and dividend plans.

On 6 August 2018, Junda Company issued a <Certificate of Contribution> to Mike, which stated that Mike had paid a capital contribution of 510,000RMB to the company on 3 November 2009.

In 2019, Mike wanted Zhang Yan to transfer his 26% stake to Tony. However, Zhang Yan refused, and claimed that he is the actual owner of 51% (among which, 25% belongs to him, and 26% belongs to Mike actually) of the company, he never held any stake on behalf of Mike. Helplessly, Cheng had to file a lawsuit against Junda Company and Zhang Yan, with the purpose of confirming that the equity held by Zhang Yan, 26% of the company’s shares are owned by Mike.

The court of first instance held that the two sides had a series of clear agreements which confirmed that Mike actually held 51% of the shares of Junda, of which 26% was held by Zhang Yan, and 25% by Tony. At the same time, Mike had submitted payment records and mail exchanges to prove that he had discharged his contribution obligation to Junda company, and in fact participated in the operation and management of the company, fulfilling his rights and obligations as a major shareholder. Although Junda company and Zhang Yan denied the aforementioned fact, they failed to provide sufficient evidence to prove their denial. Therefore, the court of first instance ordered Junda company to change the ownership of the 26% equity share of Junda company to Mike instead of Zhang Yan’s. Junda refused to accept the judgement and appealed to the Appellate Court.

Junda company appealed and claimed that: what the Equity Share Agreement exactly meant is: Junda company shall set up another joint venture with Mike in the future, thus the first instance court misunderstood the meaning of this agreement. Furthermore, the e-mail address provided by Mike didn’t belong to Zhang Yan, the judgement made based on Mike’s unilateral statement is biased.

The Appellate Court believed that the content of the <Equity Share Agreement> is very clear and the following conclusions could be drawn:
a) First, all three parties confirmed that Mike is a shareholder of Junda company;
b) Second, Mike owns 51% of Junda’ shares.

In addition, according to the <Certificate of Contribution>, Mike is the shareholder of Junda company, and he had paid 510,000RMB as capital contributions on 3 November 2009.

Foreign investor can set up a company with their Chinese partner, individual or company, in China now, since the Foreign Investment Law come into effect

Regarding the e-mail address, the Appellate Court found that all the user names of these mailboxes contain “zhangyan”, which is in consistent with Zhang Yan’s name in the phonetic alphabet and all signatures of the sender are “Zhang Yan” (in Chinese), which are exactly the same characters of Zhang Yan’s name. Meanwhile, all the content of the correspondence involved the day-to-day operations of Junda company, such as monthly accounting details, financial statements, factory site selection, foreign exchange settlement schedules, etc. It is difficult to grasp such a detailed internal situation, unless the user is responsible for Junda’s daily operations. As a matter of fact, Junda’s legal representative is Zhang Yan.

Taken together with all the above mentioned facts present, the court of first instance correctly concluded that these mailboxes were actually used by Zhang Yan between 2009 and 2018.

Thus, the Appellate Court rejected the appeal and upheld the original judgment.

Comments:

The Foreign Investment Law, which came into effect on 1 of January 2020, removes restrictions on Chinese individuals in setting up sino-foreign joint ventures with their foreign partners. Foreign businessmen such as Mike and Chinese national Zhang Yan, are now legally able to set up a joint venture after the new law came into effect.

In view of China’s current system of foreign investment which stresses national treatment plus negative list, the court of first instance also consulted with relevant administrative authorities during the proceedings, and the reply they received was “… besides, Junda’s business scope is outside of the scope of special management measures for foreign investment access (negative list),…… there aren’t any legal obstacles in adding Mike as a shareholder of Junda or to initiate procedures to change Junda’s company to a foreign-invested enterprise”. Therefore, it doesn’t need to go through any special approval procedures to add Mike as a shareholder of Junda company, as there are no legal or policy obstacles any more.

Useful link:

The Supreme People’s Court of The People’s Republic of China

, foreign investment law, litigation in China, shareholder of Chinese company

How to Fire an Incompetent Employee Properly?

May 29, 2020

According to the《Labor Contract Law of the People’s Republic of China》, a company has the right to terminate the labor contract if the employee is not competent. However, a recent unofficial statistic and judicial precedents show that employers who are successful in trying to terminate employment contracts on the grounds of incompetence, is less than 10 per cent.

Now the pressing question is “why”?

First of all, in any labor dispute, the employer has to bear a very strict burden of proof to terminate the employment relationship.

At the same time, the company must strictly follow certain procedures required by law to terminate the contract lawfully.

These points are two important factors that we emphasize repeatedly with all our clients when they are dealing with employment related issues. Especially when the company plans to terminate an employment contract, it is likely to lose the case if it failed to observe aforementioned requirements.

1. How to prove an employee is incompetent?

Generally speaking, a mere comment of “incompetence” by the manager is likely to be found subjective and arbitrary, and as a consequence, will not be adopted by the judge, if there is no description about the job responsibilities and work requirements in an employment contract, in particular if the company did not set any performance appraisal standards. However, a company should:

Now let’s discuss further.

1) Set out requirements clearly

Specific and complete job responsibilities and goals should be set out separately in the form of annexes to employment contracts, and those responsibilities or goals should be measurable in terms of quality and quantity. Describing job responsibilities or goals too broadly or vaguely might not carry any legal significance. For example, instead of setting specified sales targets，requiring a sales director to achieve “satisfactory sales”

2) Reasonably assess

a) The standards and procedures for performance appraisals should be fully known by all employees in a manner that follows the statutory process. Just like other rules and regulations that are related to an employee’s interests and rights, the company’s process for performance appraisals should be transparently discussed in accordance with the law and the opinions of all employees shall be solicited. The finalized version should be made public to all employees, and of course, all above mentioned job should be documented.

b) The standard for performance appraisals should be as objective and reasonable as possible. Performance appraisal should be based upon objective facts as far as possible to avoid being considered a subjective judgment. For example, the company may consider involving HR staff and employees in the appraisal process in order to achieve such objectivity in appraising an employee’s performance.

c) The results of the performance appraisal should be recognized by the employee. The employee’s signature on the performance appraisal form or the performance appraisal report can be interpreted to a large extent as the employee’s acceptance of the appraisal results.

2. Training or transfer

For incompetent employees, the company must first provide training opportunities or adjust their positions.

1) Any transfer of position should be reasonable. The company should try to assign the employee in question to positions which match their qualifications, experience and performance level. In addition, a transfer of position shall not be discriminatory or insulting, such as assigning a former sales manager to do cleaning duties. If so, the company is likely to lose the case, even if it did other things properly.

If a company wants to dismiss incompetent employees, it shall follow legal procedures and take measures to evaluate and improve the employee's performance

2) Or arrange training for the employee, and at the same time, pay attention to collect all training-related materials, such as proof of payment for training, attendance records of employees to participate in training, and training summaries signed by employees etc.

After transfer or training, the company shall assess the employee’s performance again. If the employee is proven to be incompetent once more, the company has the right to initiate the dismissal process.

In addition, please note that even for employees during the probation period, the company is required to prove that they are not competent for the position and notify them in writing before the contract can be terminated. Since the probation period is generally a short time, it is probably difficult to prove whether an employee in a certain position is competent or not by assessment. Therefore, it is particularly important to state clearly the entry requirements or job responsibilities in the relevant documents such as job specs and employment contract.

Based on the above-mentioned analysis, if the company wants to dismiss its employees on the grounds of incompetence, it shall follow the procedures required by law and take reasonable measures to evaluate and improve the employee’s performance, otherwise the termination may be found to be unlawful. As a result, the company will be required to pay compensation twofold.

Obviously, it is very important for a company to establish a sound system in the management of employment relations, including but not limited to, specific internal regulations, various norms and SOPs etc. If any reader may have questions in this regard, please feel free to contact us to find out what we could help.

Related legal provisions in <Labor Contract Law>

Article 40 In the case of any of the following circumstances, the employer may terminate the employment contract after it notifies the employee in written 30 days in advance or after it pay the employee an extra month’s salary:

…

(2) The employee is incapable of doing his job and remains so upon training or upon adjustment to his position;

compensation, fire employee, fire incompetent employee, sevarance