I. Case Playback

After he graduated from university, DaQiang, entered a foreign-funded enterprise in Shanghai and soon became one of the most valuable technical experts in the company.
Unfortunately, when carrying out an experiment, DaQiang’s right arm was caught in a machine necessitating amputation below the right elbow. It was categorized as a third class disability. According to the regulations at that time, worker’s compensation for third class disability injuries should be 110% of the average monthly wages of the municipality for the previous year. Considering DaQiang’s actual hardship, the unit issued Paper #17 which stated that the unit had decided to increase DaQiang’s cost-of-living allowance by 20% and increased that of his daughter by 20 % until she was 18 years old. The increases totaled 150% of the municipal average monthly wages for the previous year. With the help of the additional allowance, DaQiang maintained a stable life.
Years later, DaQiang received Paper #2 from the unit mailed as a registered letter which stated: “Because the profits of the enterprise are marginal and the enterprise is surviving on loans, the enterprise hereby decides to cancel the additional compensation paid to DaQiang, and, from this point forward, provide him compensation according to the related documents and regulations of this city. Considering DaQiang’s daughter is still a student, the enterprise will give a one-time RMB 6,000 payment for her.” DaQiang did not agree with the decision. After getting no results with negotiation, he applied for an arbitration hearing.
Paper #17, DaQiang argued, states clearly that “Regarding the rising price index and the rising standard of living, as well as his personal request, it is decided after discussion amongst unit leadership to increase DaQiang’s cost-of-living allowance by 20% and give an additional 20% compensation until his daughter is 18.” This letter indicates that that decision was a result negotiated by both sides, and it has been practiced for many years. The enterprise cannot unilaterally dissolve the agreement; such an action is invalid.
But the company contends that Paper #17 stated very clearly that they gave DaQiang additional compensation “decided after discussion amongst unit leadership.’’ This indicates that Paper #17 was a unilateral decision made by the company.
Now that the profit of the enterprise is marginal and the enterprise is living on loans, it is the right of the company to make a new decision about DaQiang’s situation. The extra compensation given to DaQiang by the leadership is special treatment and is not a statutory obligation. Under such unfavorable business conditions, it is legitimate and reasonable for the unit to cancel the special treatment and grant compensation according to the law.
After trying this case, the Arbitration Committee contended that the extra compensation given to DaQiang, which is higher than the national standard, was cancelled because of objective reasons. The unit’s action was not in conflict with any national laws or regulations. Therefore, the petition was overruled by the Arbitration Committee. DaQiang refused to accept this ruling and filed a lawsuit with the Court requesting the Court confirm the validity of the original agreement.

II. Legal Background

In the domain of the Labor Law, the doctrine of actual performance states that in the process of establishing, performing, altering and dissolving the labor contract, what both sides agree to perform then constitutes their rights and liabilities within the labor relationship.
In the judicial practice of the labor law in China, the confirmation of validity for a written contract and actual performance is not a unified process.
On one hand, Article 16 of the Labor Law stipulates that “a labor contract is the agreement reached between a laborer and an employing unit for the establishment of the labor relationship and the definition of the rights, interests and obligations of each party. A labor contract shall be signed when a labor relationship is established.” Article 17 further stipulates that the “conclusion and modification of a labor contract shall follow the principles of equality, non-coercion and unanimity through consultation, and shall not run counter to the stipulations of laws, administrative rules and regulations.”
Obviously, the Labor Law in China regulates the labor relationship according to the written contract concluded by the two parties. Any agreement reached by the two parties to establish or alter the labor relationship must be reflected in the written contract otherwise it will be difficult to secure legal protection. But, due to substantial numbers of cases coming to the judiciary related to actual performance issues, legislators are forced to offer legal protection for some actual performances such as factual labor relationships. However, generally speaking, because the Labor Law excessively emphasizes the written contract, it is still difficult for a mutual agreement of actual performance to have legal protection.
When the power of voice is with the enterprise, namely they have more ability to initiate the establishment or alteration of a contract, the constant emphasis on a written labor contract provides more chances for employers to evade the law and exploit the laborer. For example, the unit may verbally establish a high-standard labor relationship in order to attract the laborer to work, but in the written contract the unit lowers the standards. When a dispute occurs, because the verbal high-standard labor agreement can be considered an actual performance, it will be invalid, and the Arbitration Committee or the Court will support the lower-standard written contract. In this way, the laborer’s rights and benefits cannot obtain the protection which they deserve. Today, the labor contract has been gradually becoming formulaic, and the space in which a laborer may use the labor contract to protect benefits and rights is being gradually compressed.
Under such present conditions, many countries generally confirm the validity of actual performance and view it as a complement to the written contract. In the continental legal system, the good faith principle is used to interpret the agreement displayed by actual performance. Since both sides reached an agreement based on a declaration of true will, they should abide by their promises and perform the agreement. In the common legal system, the doctrine of implied provisions is used to interpret the agreement displayed by the actual performance. The written contract is regarded as the explicit agreement between the unit and the laborer, while the agreed upon content of the actual performance under certain conditions can be regarded as implied provisions. Thus, the agreed upon content of the actual performance is as effective as the written contract.
The Labor Contract Law legislation could have been a good opportunity to resolve the contradiction between the existing law and reality in China. Unfortunately, the Labor Contract Law puts as much, if not more, emphasis on the written contract as the Labor Law. Although Article 3 of the Labor Contract Law stipulates the good faith principle, Article 10 stipulates that a written labor contract must be signed when establishing a labor relationship. Article 35 goes further: “When a labor contract is modified, the amended provisions shall be recorded in written form.” Obviously, it is clear in the Labor Contract Law that signing and altering the labor contract must be done in writing. Additionally, it invalidates agreements reached outside the parameters of the written labor contract. That is to say, it denies the validity of actual performance. The principles conflict with the content in the Labor Contract Law. Thus, the conflicts will remain between the written labor contract and agreements reached in actual performance.

III. Lawyer Debate

It is an agreement, and the unit should not alter it unilaterally.
Lawyer Zhao Hongwei from Shanghai Hu Bei Law Firm in support of DaQiang

The enterprise is not entitled to alter the original standard of compensation. First, Paper #17 sent by the unit was not based on the unit’s unilateral decision, but rather, the agreement was reached by both sides. Moreover, the way that the unit used economic hardship as a reason to reduce the compensation cannot stand. That is not a legal arrangement; therefore, the unit is altering the contract unilaterally. The Court should support DaQiang’s petition and maintain the effectiveness of Paper #17.

It was a voluntary contribution and the unit was entitled to withdraw it.
Lawyer Lu Jianwu from Shanghai Law and Management Law Firm in support of the unit

Neither the Arbitration Committee nor the Court should support the petition of DaQiang.
The legal tools ruling labor disputes at present are mainly the Labor Law and Enterprises’ Labor Disputes Regulations. In this case, the enterprise in no way has violated the relevant national stipulations. In fact, the unit’s decision is in line with the national requirement to provide standard compensation to DaQiang. Therefore, this decision shpuld certainly be upheld by the Arbitration Committee.
More important, Paper #17 is a kind of gift. According to the Contract Law, a contract regarding a gift states that one party voluntarily confers the property to the other party. Therefore, the gift contract is unilaterally liable; that is, one party holds the obligation, whereas, the other has none. The Contract Law also stipulates that the benefactor may withdraw the gift contract before the delivery of the gift. In other words, the benefactor is entitled to terminate the contract unilaterally. When the enterprise is in a good economic condition and willing to give additional compensation above the national legal standard, it is considered a gift action; while the enterprise encounters economic hardship and wants to terminate the gift unilaterally, this is also a legal action.

IV. Final Judgment

After the Court trial and subsequent appeal, the petition of DaQiang was finally supported. The Court contended that Paper #17 states definitively: “Regarding the rising price index and the rising standard of living, as well as his personal request, it is decided after discussion amongst unit leadership to increase DaQiang’s cost-of-living allowance by 20% and give an additional 20% compensation until his daughter is 18.” The additional compensation not only reflected a declaration of will of the enterprise, but was also mutually agreed upon in consultation with DaQiang. The decision was not the sole decision of the unit itself. In view of the fact that Paper #17 does not violate any laws or regulations, the agreement priority principle can be applied. Furthermore, both parties have actually performed this agreement for many years and both have to accept its validity. Therefore, the Court confirmed the original agreement to be legal and valid and supported the lawsuit of DaQiang.

V. Expert Evaluation

Supporting the breach of such an agreement is harmful to social stability.
Professor Dong Baohua from East China University of Political Science and Law

This case occurred before 2004 when Shanghai had established the general social plan for laborers' work-related injury insurance. Naturally, a dispute emerged between the unit and laborer about worker’s injury compensation.
This case involves the relationships between the agreement, the decision and the mandatory requirements. First, let’s look at the relationship between the agreement and the mandatory requirement. The mandatory requirement is a standard promulgated by the state. It allows the benefactor to agree to higher levels of compensation, but prohibits them from providing a lower level.
Based on foundational legal standards, the state encourages the parties to reach an agreement to better protect the laborer. In practice, the majority of work-related injuries are resolved by agreements with compensation levels above the mandatory requirement.
The Labor Law pays great attention to actual performance. For example, someone signed a labor contract with a company for five years with monthly wages of RMB 1,000. The wage level rose every year from RMB 1,000 up to RMB 4,000. However, a wage dispute occurred during the fourth year. How is compensation to be calculated? Certainly, it should be based on a RMB 4,000 wage rather than RMB 1,000.
Most countries in the world do not overly emphasize the written contract, but rather pay more attention to the actual performance. Regarding the case details, the company and DaQiang had established a mutual contractual relationship by actual performance.
Taking a larger view, allowing employers to easily overturn agreements is potentially harmful to social stability. According to actual situations in the 1990s, a great number of work-related injury compensation cases are settled in documents mutually entered into by both the unit and the laborer. If, at present, we allow the unit to rescind agreements at random, perhaps it would be disadvantageous to social stability. As society develops, this kind of situation could be avoided by developments in the social security system.
Since January 1, 2004, all enterprises must participate and contribute to employees’ social security before paying work-related injury compensation. I believe a story like DaQiang’s will never be told again.

VI.  Editor’s Final Comments

Under the Labor Contract Law, the legal validity of actual performance is still relatively poorly protected. Apart from the factual labor relationship which has been widely acknowledged by the law, other types of actual performance have not been well protected. The Labor Contract Law requires the laborer and the unit to conclude and modify a written labor contract.
  When a unit and a laborer agree to modify the labor contract, such as making changes to the position or wage level, laborers should put the changes in written form. If the two sides only have a verbal agreement about the adjustment, when a dispute breaks out, the agreement is highly unlikely to be supported by the Court or Arbitration Committee due to a lack of written evidence.
 Despite the fact that the Court affirmed the legal validity of actual performance and supported the petition of Mr. Qiang, due to the Labor Contract Law's emphasis on the written agreement and disregard for actual performance, laborers must be warned that it is still an open question whether actual performance will be supported by the Arbitration Committee or the Court in the future.

From LexisNexis