Should XiaoYe, a partner of an accounting firm, sign a labor contract? Lawyers for both sides debate this issue. The lawyer in support of Xiao Ye maintains that there is no need to sign a labor contract, while the lawyer in support of the accounting firm argues that Xiao Ye has dual roles and must sign the labor contract.

 

 

Xiao Ye, a Certified Public Accountant, works in an accounting firm as a partner, and she is also one of the investors who established the accounting firm. According to the CPA Law and other related laws and regulations, Xiao Ye has to work in this particular accounting firm otherwise she cannot work as a CPA.

The firm had twice by written form requested Xiao Ye sign a written contract with the firm. The second notice declared that if Xiao Ye did not sign the labor contract before October 31, the firm would terminate the labor relation on December 31. The written contract would be provided by the firm, and the contract period would be from January 1 to December 31. Xiao Ye did not agree with the firm’s insistence on signing a labor contract and wrote back to the firm: “The labor relation of both sides has been clarified by the agreement of investors and the firm’s charter. The labor relationship between the two parties is not an employment relationship. Therefore, it is not compulsory for Xiao Ye to sign this labor contract. She has the legal right not to sign the contract.”

The two sides could not come to an agreement on this issue, and eventually, at the end of the year, the firm terminated the contract and signed the dismissal slip. Xiao Ye resorted to labor arbitration and later litigation.

Xiao Ye states that she is an investor of the firm, a shareholder and also a CPA. According the CPA Law and regulations of the CPA Association, the two sides should be considered to have a factual labor relationship and they do not need to sign a labor contract with a fixed time period. In addition, A Letter on Whether Shareholders Can Keep Their Shares After Leaving an Accounting Firm from the Ministry of Finance has also clarified the status of accounting firm investors. There are three requirements to be met: First, one must have CPA or other professional qualifications; second, one must be practicing in the firm and third, one must not be gainfully employed with other firms or units. The Letter actually affirms the labor relationship between CPA practitioners and their firms, So, the firm could not terminate their existing labor relationship for the lack of written contract.

The firm states that according to the Labor Law, laborers must sign labor contracts with their employers. In addition, according to regulations made by the Shanghai CPA Association, firms must sign a contract valid for no less than one year with all employees, including shareholders. For Xiao Ye rejecting the request to sign a contract with no reason, according to the Labor Law, the firm had the legal right to terminate the factual labor relationship between the two parties.

 

 

Partnership enterprises play a very important role in China’s economy. Not only traditional partnerships like restaurants and retail stores are increasing, but also, with the rapid development of the service industry, some new forms of partnerships like accounting firms, law firms are also on the rise. Article 2 of the Partnership Law Of The People's Republic Of China states: “The partnership referred to herein shall mean a for-profit association established within China in accordance herewith pursuant to the partnership agreement concluded by all the partners, whereby the partners jointly contribute capital, jointly operate the business, jointly share in the incomes and the risks, and are jointly and severally liable for the debts of the partnership.”

Partnerships have some particular features, which make them different from other types of enterprises: First, partnerships should be jointly funded by more than two partners. Partners should sign contract of partnership that details the rights and obligations of all sides and also the distribution of responsibilities and profits.

Second, a partnership should be jointly run by partners. According to Article 25 of the Partnership Law Of The People's Republic Of China, “Each partner shall enjoy equal rights with respect to the conduct of partnership affairs, provided that the partnership affairs may be conducted jointly by all the partners, or one or more partners may be appointed to conduct the partnership affairs pursuant to the partnership agreement or the decision by all the partners. The partner(s) conducting partnership affairs shall act on behalf of the partnership in dealing with outside parties.” Thus, it is obvious that partners play the role of both manager and supervisor in the partnership.

Third, partnerships are jointly and severally liable for the debts of the partnership. When taking on its debts, the partnership shall pay its debts out of all of its assets first. If the partnership assets are insufficient to pay the debts, each partner shall pay the debts out of their personal assets. A creditor has the right to ask any one of the partners to pay the debts from personal assets. A partner who has paid more than his share of the debts as a result of his joint and several liabilities shall be entitled to seek recourse against other partners.

Partnership as a form of enterprise organization is a legal employer, according to the Labor Law and the Labor Contract Law. For partners, the Partnership Law has already affirmed their status as employers, but the question whether they are laborers at the same time has not been answered clearly either in the Labor Law or in the newly promulgated Labor Contract Law.

 

 

Lawyer Ye Hongjun from Shanghai Jin Tian Cheng Law Firm in support of Xiao Ye

 

First, the firm is correct in principle when it stated that “according to the Labor Law, laborers must sign written labor contracts with their employers” and requested that Xiao Ye sign a labor contract. However, this case has some important particularities. Accounting firms are different from legal enterprises like limited liability companies, government organizations and social organizations. Accounting firms are partnerships, and they are non-legal-person enterprises.[1] According to the existing laws and regulations of China, as a partner of a partnership, Xiao Ye is not bound by the Labor Law but rather by the Partnership Agreement. The Partnership Agreement clearly stipulates the rights and obligations of partners. Rights and obligations of Xiao Ye are handled explicitly in the Partnership Agreement.

Second, Xiao Ye is a shareholder of the partnership (that is to say the “boss”); therefore, she is not a laborer employed by the accounting firm. According to the CPA Law and relevant regulations of the CPA Association, accountants must work in one accounting firm in order to have practitioner qualifications. It is a compulsory provision of the State Law，which edges over the legal force of a labor contract. Whether or not there is a labor contract won’t influence the practitioner status of Xiao Ye.

Third, Xiao Ye enjoys shareholder rights in the accounting firm rather than just wage income. This proves that the relation between Xiao Ye and the firm is not a labor relationship.

 

A labor contract should be signed under dual status circumstances.

First, Xiao Ye works in the firm as a CPA. She takes jobs, provides services to customers and gets paid a salary. To outsiders, Xiao Ye does not work as an investor of the accounting firm or a company boss. To her customers, she works as an employee of the accounting firm. Simultaneously, Xiao Ye is a practitioner and according to industry convention, she can receive a monthly salary from her accounting firm. This salary is different from shareholders’ dividends that are distributed at the end of every year. This monthly wage fully proves that Xiao Ye is a salaried employee of the accounting firm.

Third, labor contracts are different from partnership agreements. It is impossible for an investor agreement or a partnership agreement to prescribe the working conditions of a partner in the enterprise because the main contents are only provisions on the partners’ rights and obligations related to running and managing the partnership. It is obvious that the difference between them is substantial. In addition, a partnership agreement applies to all the partners, and the modification procedures are complicated and require all partners’ negotiation and consent.

Fourth, according to the current general regulations, a partner’s qualifications can be gained or lost through working performance. Xiao Ye’s present partner status in the accounting firm was likely earned through her outstanding achievements. The partnership’s requirement that Xiao Ye sign a labor contract serves not only as a protection for her, but also satisfies enterprise management requirements.

 

 

The Court concluded that the firm has not entirely fulfilled its obligation to consult with Xiao Ye, and the termination of the labor relationship may have a huge influence on Xiao Ye, on her future career and on her right as a shareholder. The actions of the firm do not comply with the original Labor Law provision that requires a written labor contract. Thus, the Court canceled the firm’s decision to terminate the labor relationship and compelled the resumption of the labor relationship between the two parties.

 

 

Professor Dong Baohua from East China University of Political Science and Law

 

The core issue of this case is that there is a legal collision between Xiao Ye’s roles as both a partner and a laborer of the firm. According to CPA Law, the Letter of the Ministry of Finance and other related regulations, partners, specifically investors of accounting firms, must practice in the accounting firm. This requirement naturally creates a labor relationship between investors and firms. Otherwise they cannot be investors. However, according to the Labor Law, the investors are also employees of the firm because they have formed the labor relationship. This phenomenon of working both as a boss and an employee, working both as a master and as a servant can cause difficulties when applying the law. According to the Partnership Law, Xiao Ye is an investor and a partner, so this relationship should be adjusted by the Civil Law, and regulated by the Partnership Law. Xiao Ye is also a CPA practitioner, a laborer according to the Labor Law, so this relationship can also be regulated by the Labor Law. However, the Civil Law and the Labor Law have their own unique regulation systems. The Civil Law focuses on the freedom of mind[2] and equal legislative protection; the Labor Law focuses on the statutory priority[3] and legislative protection in the favor of the laborers. The existing legal framework of China pertaining to people with dual roles as both an investor and a laborer does not cover this legal gap. Just like in this case, a labor contract is necessary to form the labor relationship, and at the expiration of the term of the contract, the status of the laborer as a partner of the firm will be influenced. Conversely, as an investor, how could a boss sign a contract with herself? Moreover, if there is no labor contract, the issue of Xiao Ye’s social insurance cannot be resolved and she bears the risk of employment termination. In the face of this awkward situation, how are we to solve all these problems?

I think we should draw some lessons from other countries on this issue. It is a common practice of all the nations that self-employers, investors and laborers are differentiated and regulated respectively. First, professionals such as accountants and lawyers are defined as “self-employers.” The characteristics of these people are as follows: They have a professional mastery of their field, and they benefit from their technical skills rather than the capital profits or dividends. Being the boss and an employee, self-employers enjoy the identification as both laborers and owners. They not only have the legal right to profit protection as investors, but also have the right to social insurance protection as laborers. It is clear that this strikes a balance between them. Second, as for investors, the law defines them as employers, thus the relationships between investors and their units are excluded from the scope of labor law. Rather, they are regulated by corporate law, contract law or partnership law. But as for laborers, the relationships fall under the scope of labor law and they enjoy the unequal protection.

But given legislative limitations and specific national conditions when the Chinese Labor Law was drafted, legislators broadened the definition of “laborer”, which means they did not define special laborers such as “self-employers” and give them special provisions, besides they did not exclude investors, employers and senior managers who represent investors out of the Labor Law. But with the diversification trend of subjects of labor relations in our nation, legal subjects like Xiao Ye who have dual roles are emerging in large numbers. So now, if we continue to use the Labor Law to regulate it, there will clearly be plenty of legal conflicts and gaps. When drafting the Labor Contract Law of People’s Republic of China, initially this issue was given some attention, and it was agreed that enterprises’ legal representatives ought to be regulated by Company Law, Civil Law and Commercial Law instead of the Labor Law. However, in the end, the Labor Contract Law avoided this issue. It is likely that this legal gap on the issue of partners’ labor contracts will persist, and these situations will continue to arise for some time.

Because of considerations about the application of the Labor Law on partners, the Court made a neutral judgment that disapproved of the firm’s termination of the labor relationship with Xiao Ye due to lack of a labor contract, and ruled the firm must maintain the labor relationship, ensure Xiao Ye her employment and protect her investor status as well. Of course, this judgment may cause some difficulties when Xiao Ye applies for her social insurance. According to the present provisions, if lawyers and accountants who are partners want to pay their social insurance or carry out employment or dismissal procedures, they must submit their labor contract to the related administrative department for approval. Provisions of this kind actually regard the scope of Labor Law and that of Social Security Law as the same. This reflects another problem: the demarcations between Labor Law and Social Security Law. Actually, Social Security Law does not overlap with Labor Law. Just like in this case, some people still can receive social insurance even though they do not have a labor relationship, such as professionals, partners, etc. Accordingly, signing a labor contract should not be a prerequisite for Xiao Ye to apply for social insurance nor should the lack of a labor contract be an excuse to terminate the labor relationship. To settle these types of awkward situations, the law should be correctly orientated to specifically regulate the status of special laborers like partners. We need to take a step forward and continue our research.

 

From LexisNexis

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