China: De Facto Employment Relationship found to exist between Company and its Chairman

Mr. Sun (the “employee”) was appointed and registered as the chairman of the board of directors and legal representative of the alloy manufacturing company (the “company”). The employee was responsible for the daily operation and management of the company, but the two parties failed to sign an employment contract. The company paid the salary to the employee on a monthly basis and arranged social insurance contributions for the employee through an HR service agent. Later, the company removed the employee from the chairman of the board of directors and as a legal representative, and the dispute on whether an employment relationship existed between the two parties arose.

The Supreme Court eventually ruled on the case with the decision that indeed, a de facto employment existed between the company and the employee, as based on the reasoning that: i) the appointment relationship established under the PRC Company Law and employment relationship were not mutually exclusive; ii) the employee was in charge of daily operations of the company and bound by the company’s rules or policies, and received a salary from the company; and iii) the relationship between the company and the employee reflected all the basic characteristics of a de facto employment relationship.