Be Careful While Applying “Incompetent” in Dissolving a Labor Contract

Mrs. Wang worked in Company A for 6 years, and she worked in the Administration Dept.. Came back from the maternity leave, she often came to work late and left early, and became forgetful, which was not the right working attitude. No doubts, she was disqualified in the performance evaluation. Company A transferred her to the finance dept. for the reason that she was incompetent. Afterwards she was disqualified in the performance evaluation again. Then Company A dissolved the labor contract in accordance with Article 40, Section 2 of the “Labor Contract Law”. However, the court held that the dissolution was illegally.

Article 40, Section 2 of the “Labor Contract Law” prescribes that an employer may dissolve a labor contract with the payment of economic compensation, if the employee is incompetent to his position and is still so after training or changing his position. However, according to incomplete statistics of different local judicial judgements, less than 10% of which is in favor of employers.

To explain the low percentage, we should analyze 2 aspects, the substantive problems and procedural problems.

There are 2 common substantive problems. An employer fails to prove “incompetent”; and an employer fails to change the position reasonably.

Currently, the definition of “incompetent” is only mentioned in the “Explanations of the General Office of the Ministry of Labor on Certain Provisions of the Labor Law”, in which “Incompetent” refers that an employee is unable to complete the work as agreed in the labor contract or the work load for other employees doing the same type of work or taking the same position. Obviously, the keywords are “the work as agreed” and “the work load”, which request a relatively quantitative standard. An employer could agree on the detailed assignment in a labor contract with an employee. For example, for an investment director, both parties could agree on the accomplishment of XX project within 1 year. For those positions which could be evaluated by amount or quantity, then both parties could agree on the indicators, such as the line workers shall complete an agreed quantity of qualified products; the amount for monthly sales or collection of payment for a salesman, and so on.

However, for those positions which are difficult to define tasks or quantities, it would be more flexible and subjective to define whether the employee is “incompetent”, and normally the court might be in favor of the employee in a lawsuit related to “incompetent”. In view of this, it is more recommended to apply other articles (if any of the articles is applicable) to dissolve a labor contract, such as, it is proved that the employee does not meet the recruitment conditions during the probation period, or the employee seriously violates the rules and regulations set up by the employer. Under such circumstances, the employer shall stipulate the detailed and reasonable recruitment conditions and the rules and regulations in advance.

For the reasonableness on changing an “incompetent” employee’s position, in the judicial practice, there are two common mistakes. Firstly, the employer fails to consider the profession and skills of an employee while changing his position. Just like the case in the opening, Company A transferred Wang from administration dept. to finance dept., which is highly possible to be deemed as unreasonable. Secondly, the employer failed to set a reasonable criterion on identifying “incompetent” for the new position, for example, whether the criteria for the new position could be applied directly to this employee? In the judicial practice, some judges hold a negative opinion. For example, (2010) Hu Er Zhong Min San (Min) Zhong Zi No.1462 judgement points out: if an employee is incompetent for the position other than the position agreed in the labor contract, then the employee shall be trained or changed the position again. However, if the employer could train the relevant employees or propose a reasonable improvement plan, then the risks for illegal dissolution would be reduced. For example, (2011) Hu Yi Zhong Min San (Min) Zhong Zi No.488 judgement points out: since the employee failed to meet the requirements in the improvement plan for the original position and the later position, the employer was entitled to dissolve the labor contract.

The procedural problem has a clear solution, which is often neglected by employers. According to the relevant articles of the “Labor Contract Law”, the mandatory procedure for applying “incompetent” to dissolve a labor contract is: incompetent + train or change a position + incompetent + notify the labor union. Employers shall pay special attention to this procedural problem which has a clear solution.