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In a diversified market economic environment, each business group of a group company generally has multiple corporate entities under its name for the purpose of independent accounting. In the course of operation, for various reasons such as personnel adjustment and tax planning, the group will require employees to nominally change their employing units either after the expiration of their labor contracts or before the expiration thereof. Where the post, work location, job responsibilities, remuneration and other factors remain unchanged, employees usually comply with the company's arrangements under intangible pressure. For most employees, the change of employing unit has no substantial impact given that other benefits and terms remain unchanged. However, once the "friendly relationship" between the employee and the company breaks down and legal disputes arise out of irreconcilable conflicts, whether the length of service of the employee shall be calculated consecutively becomes a key point of contention between the two parties due to the change of employing unit during the performance of the labor contract. This issue is fully illustrated by a labor arbitration case recently handled by the author.

I. Case Overview

The employee Li joined Company A in 2020 and entered into a labor contract with the company. Subsequently, for reasons not attributable to Li and pursuant to the business arrangements of Company A, a *Labor Contract Modification Agreement* was executed in 2021, under which the employer was changed from Company A to Company B. In 2023, the employer was further changed from Company B to Company C, but no written agreement was executed for this change, and only the relevant procedure for the "Approval Form for Labor Contract Transfer and Re-signing" was completed in Company C's OA system. Li took maternity leave from June 2023 to November 2023. In 2024, Company C sent an email to Li, unilaterally notifying Li of the termination of the labor relationship between the two parties on the grounds of "the Company's operational difficulties, a major change in the objective circumstances relied upon at the time of conclusion of the labor contract, and Li's seriously insufficient workload".

Li Mou held that the grounds for Company C to terminate the labor relationship were unfounded, and authorized the undersigned as his attorney ad litem to file a labor arbitration application with the Labor Dispute Arbitration Commission, claiming that Company C shall pay compensation for illegal termination of the labor contract. During the arbitration hearing, Company C denied the authenticity of the *Approval Form for Labor Contract Transfer*, that is, denied that Li Mou's length of service at Company A and Company B shall be consolidated and calculated into his length of service at Company C.

The focus of dispute in the present case is:

1. When calculating damages, how shall the length of Li's employment be computed? Shall it be calculated from 2020 when Li commenced employment with Company A, or from 2023 when the employing entity was changed to Company C?

2. Li Mou took maternity leave during the 12 months prior to the termination of the labor contract. When calculating the average monthly wage, shall the months covered by maternity leave be excluded?

3. Can the operational difficulties of a company and the occurrence of material changes to the objective circumstances on which a labor contract was based at the time of its conclusion constitute legitimate grounds for the lawful termination of the said labor contract?

II. Legal Determination on the Calculation of Employees' Working Years

Pursuant to Article 10 of the *Regulation on the Implementation of the Labor Contract Law of the People's Republic of China*, where a laborer is assigned to work for a new employing unit from the original employing unit for reasons not attributable to the laborer himself/herself, the number of years the laborer has worked for the original employing unit shall be consolidated into the laborer's working years with the new employing unit. Where the original employing unit has paid economic compensation to the laborer, the laborer's working years with the original employing unit shall not be counted when the new employing unit calculates the working years as the basis for paying economic compensation upon dissolving or terminating the labor contract in accordance with the law.

In the present case, the employer was changed from Company A to Company B not due to Li's personal reasons. The three parties, namely Company A, Company B and Li, signed the *Labor Contract Modification Agreement*. With this "irrefutable evidence", the arbitration commission accepted the argument that the change of labor relationship from Company A to Company B was not attributable to Li's personal reasons. However, as for the change of employer from Company B to Company C, the three parties of Company B, Company C and Li did not sign a modification agreement, and only completed the approval process on Company C's OA system. The *Approval Form for Labor Contract Transfer* provided by Li falls into electronic evidence. When Li filed the arbitration application, he had already resigned, and Company C had revoked his access to its OA system, which made Li unable to demonstrate the original carrier of the evidence. In addition, Company C denied the authenticity of the evidence, so the arbitration commission ruled the aforesaid evidence inadmissible.

Under such circumstances, the author adopted an alternative approach and accessed a large number of industrial and commercial documents of Company B and Company C, and found from their annual reports that the two companies had identical correspondence addresses, email accounts and contact numbers. The author submitted the said annual reports to the arbitration tribunal, which held that the evidence could prove that Company B and Company C were closely connected. In the absence of other evidence provided by Company C, the arbitration tribunal ruled that the claim that the change of employer from Company B to Company C was not attributable to Li's personal reasons was of "high probability", and therefore upheld the claim. In brief, during Li's employment, the employers with whom Li signed labor contracts changed twice, but none of the changes were made for Li's own reasons, all of which were carried out under the "arrangement" of the companies. Accordingly, Li's length of service with the former employer shall be consolidated into his length of service with the new employer for calculation purposes.

Where an employee changes the employer as arranged by the company, as long as there is clear documentary evidence such as the company's email notification, change agreement, etc., the employee's claim for continuous length of service will generally be recognized by the Labor Dispute Arbitration Commission or the People's Court. However, if the employee has no clear documentary evidence, the employee shall bear a heavier burden of proof and needs to provide circumstantial evidence to prove the continuity of the length of service. For example, in the labor dispute case of Plaintiff Chen v. Guangzhou Qisheng Information Technology Co., Ltd. and Guangzhou Zhiben Information Technology Co., Ltd. (Case (2020) Yue 01 Min Zhong No. 25004), the two defendant companies are parent-subsidiary affiliated companies with identical principal persons in charge, and the format and text content of the *Resignation Commitment Letter* issued by the two companies are highly consistent. The people's court finally held that the circumstance falls into the scenario of "an employee is arranged to work for a new employer from the original employer for reasons not attributable to the employee himself". Another example is the labor contract dispute case of Ba Liying v. Shanghai Shenmei Beverage & Food Co., Ltd. Although Ba Liying first worked for Shanghai Shenmei Beverage & Food Co., Ltd. through labor dispatch, and then worked for the same company under a formal labor contract, there was no change in her workplace and job position. The people's court finally determined that the case falls into the scenario of "an employee is arranged to work for a new employer from the original employer for reasons not attributable to the employee himself", which does not affect the continuous calculation of the length of service, and labor dispatch shall not be a precluding factor for the continuous calculation of the employee's length of service.

III. Legal Determination on the Calculation of Average Monthly Wage

Pursuant to Article 47 of the *Labor Contract Law of the People's Republic of China*, economic compensation shall be paid to a worker at the rate of one month's wage for each full year of service with the employing unit. Where the length of service is not less than six months but less than one year, it shall be calculated as one year; where the length of service is less than six months, half a month's wage of economic compensation shall be paid to the worker. The term "monthly wage" refers to the average monthly wage of the worker for the 12 months prior to the cancellation or termination of the labor contract.

In this case, the 12 months immediately preceding the termination of the labor contract relationship between Li Mou and Company C exactly coincide with Li Mou's maternity leave period. Whether the months falling within the maternity leave period shall be excluded when calculating the average monthly wage constitutes another key contentious issue in this case.

Pursuant to Article 8 of the *Special Provisions on Labor Protection of Female Employees*, for the maternity allowance of female employees during maternity leave, those who have participated in maternity insurance shall be paid by the maternity insurance fund at the standard of the average monthly wage of the employer's employees in the previous year; for those who have not participated in maternity insurance, the allowance shall be paid by the employer at the standard of the female employee's wage before maternity leave. Therefore, if the wage of a female employee during maternity leave is paid by the employer, there is basically no dispute, and the wage received during maternity leave shall be included in the scope for calculating the average monthly wage. However, if what the female employee receives during maternity leave is the maternity allowance paid by the maternity insurance fund, there are disputes over whether the maternity allowance shall be included in the scope for calculating the average monthly wage. From the perspective of judicial practice, there is no unified standard across all regions in China. Even different courts in the same region may make different judgments, which essentially comes from different understandings of whether maternity allowance belongs to labor remuneration. The author has briefly screened local regulations and relevant cases in three regions including Beijing, Shanghai and Shandong, and it is confirmed that the adjudication standards are indeed inconsistent, as shown in the table below:

Region

local regulations

Reference Cases

The court finds that

Beijing

Article 15 of the *Provisions of Beijing Municipality on Maternity Insurance for Enterprise Employees* stipulates that maternity allowance shall be the wage payable to female employees during their maternity leave. Where the maternity allowance is lower than the employee's personal wage standard, the shortfall shall be made up by the enterprise.

(2024) Jing 03 Min Zhong No. 9543

Where the wages during maternity leave or the maternity allowances are not paid in full, the shortfall thereof shall be included in the average wage.

Shanghai

Shanghai Municipal Human Resources and Social Security Bureau: Maternity leave months within the 12-month period shall be excluded, and the average wage of the remaining months shall be taken as the calculation base for economic compensation.

(2018) Shanghai No. 2 Intermediate People's Court Civil Final No. 11329

Maternity allowance is a social insurance welfare benefit that workers are entitled to pursuant to the law. The standard of maternity allowance is the average monthly wage of all employees of the worker's employer in the preceding year, determined as of the month when the worker gives birth. Where the aforesaid standard is higher than the actual wage of the worker, the excess portion shall not be included in the calculation base. The above translation is revised and rendered in accordance with the standard expression of China's labor and social security laws and regulations to ensure logical consistency and compliance with official legal translation norms.

Shandong

Article 13 of the *Regulations of Shandong Province on Maternity Insurance for Enterprise Employees*: Maternity insurance benefits enjoyed by female employees during their maternity leave or the period of undergoing family planning surgery shall be implemented in accordance with relevant provisions of the State and Shandong Province. Among them, the maternity allowance shall be calculated and disbursed based on the average monthly employee wage of the employing unit where the relevant employee works in the preceding year.

(2022) Lu 03 Civil Final No. 485

The maternity allowance received by workers does not constitute labor remuneration and shall be excluded from the calculation of the average wage.

In this case, the arbitration commission did not exclude the months of maternity leave, but calculated the wages during maternity leave on the basis of the payment standard reflected in the Verification Form for Payment of Maternity Insurance Benefits, namely maternity allowance. This is also a claim put forward by the author in the Application for Labor Arbitration. Including the maternity allowance corresponding to the maternity leave months into the scope of average monthly wage will bring a higher calculation base of compensation and a larger amount of compensation for Li. The arbitration commission finally supported the above view advocated by the author.

IV. Legal Determination of the Grounds for Termination of Labor Contracts

Pursuant to the provisions of Articles 40, 41 and 46 of the *Labor Contract Law of the People's Republic of China*, where a material change occurs in the objective circumstances relied upon at the time of conclusion of the labor contract, which renders the labor contract unable to be performed, or the employer encounters serious difficulties in production and business operation, the employer may terminate the labor contract with the employee when the corresponding conditions are satisfied, but shall pay economic compensation to the employee.

In this case, Company C unilaterally notified Li of the termination of the labor relationship between Li and itself on the grounds of operational difficulties and material changes to the objective circumstances on which the labor contract was based at the time of its conclusion. Such act is obviously inconsistent with the provisions of the *Labor Contract Law of the People's Republic of China*, and constitutes an unlawful termination of the labor contract.

To sum up, in the current employment environment, we will not debate whether employers or employees are the "vulnerable groups". However, the author hereby reminds employees that they shall retain written evidence when cooperating with the company's arrangement to change the employer during their employment. In the event of involuntary dismissal, they shall collect key evidence that is difficult to obtain after leaving office in advance by means of screen recording, video shooting or electronic notarization for evidence preservation. Only with sufficient evidence can they better safeguard their legitimate rights when facing legal disputes. As for employers, the law grants them the right to terminate labor relationships with employees, but such right shall be exercised subject to corresponding conditions. For example, if economic layoffs are required due to actual serious difficulties in production and operation, even if the layoff conditions are met, has the employer solicited opinions from the trade union or staff and workers in accordance with the law, and has the layoff plan been reported to the labor administrative department? Employers shall not blindly regard production and operation difficulties or changes in objective circumstances as a carte blanche to arbitrarily carry out layoffs and act willfully whenever they intend to cut staff.

Authors of this Article: Yin Sisi, Zhang Ruize