Currently under the 2020 Enterprise Law, the terms of office for Directors/General Directors shall not exceed a maximum of 05 years. Concurrently, the 2019 Labor Code provides for 2 types of labor contracts, being a definite-term labor contract with a maximum term of up to 36 months and an indefinite-term labor contract.

Needless to say, these provisions cause confusion for enterprises when they enter into labor contracts with employees holding Director/General Director titles. This article summaries key issues that enterprises typically encounter in this area.

With respect to a Director position under Article 82.1 and Article 162.2 of the 2020 Enterprise Law, the term of office shall not exceed 05 years.

If an employee is initially recruited to hold these titles:

Article 82.1 and Article 162.2 of the 2020 Enterprise Law provides that the term of office for Directors shall not exceed a maximum of 5 years. Therefore, at the outset, if the enterprise recruits the employee to hold a Director title (or General Director), the enterprise can only enter into a definite-term labor contract up to 3 years instead of an indefinite-term labor contract.

As such, due to the conflict between the 2020 Enterprise Law and the 2019 Labor Code, signing an indefinite-term labor contract under Article 20 of the 2019 Labor Code is not possible in this case.

If an employee is NOT initially recruited to hold these titles:

Another situation occurs when an employee is initially recruited under an indefinite-term labor contract to hold different titles or positions, but, in the course of operations, the enterprise requires the appointment of such employee as the Director.

Under these circumstances, before deciding on the appointment, the enterprise and the employee should determine how this employee will be able to return to their former position after the expiration of the term, assuming they will not be reappointed as Director.

Example 1 – If the company is planning to return the employee to their former position, the parties are only required to create an annex to the labor contract providing for the new scope of work, rights and benefits of the Director title. The annexure is only valid for a maximum 5-year term. When the term expires, this annex will become invalid and the parties will continue their employment relationship as agreed in the previous labor contract under the former title of the employee.

Example 2 – Different actions need to be taken if the employee is unable to return to their former position when the term of Director expires because the parties substantially change the nature of the former employment relationship. In such a case, the parties must agree to terminate the former labor contract and sign a new labor contract. This effectively terminate the labor contract to remove the employee from their current position and sign a new labor contract. The new labor contract needs to be similar to the role in which the employee is initially recruited to hold these titles, i.e. a definite-term labor contract.

The key point in these two examples above is that the enterprise must clarify with the employee that the enterprise wishes to appoint the employee as a Director. If the appointment follows Example 2, it is important for the employee to consider if they will be willing to potentially give up the right to sign an indefinite-term labor contract. In fact, there exist cases where the enterprise has not clarified this issue at the beginning. This has led to misunderstandings between the parties and subsequent disputes (e.g. the enterprise applies Example 2 but the employee understands it to be Example 1, therefore, when the term of office expires, the employee does not agree to resign).

For functional Director titles (Finance Director, Human Resources Director, etc.)

Unlike the positions of Director/General Director, there are no regulations limiting the terms of office of these titles. Instead, the terms of office are seen as internal regulations for enterprise management. Therefore, enterprises shall conduct the contract engagement pursuant to Article 20 of the 2019 Labor Code.

More specifically, if the enterprise recruits an employee to hold a functional Director title at the outset, and the labor contract also provides the rights and benefits of a functional Director title, the enterprise would have to maintain these titles, rights and benefits according to the terms of the labor contract.

If the labor contract becomes an indefinite-term labor contract, the enterprise would have to maintain these titles, rights and benefits indefinitely (unless disciplinary measures are applied to the employee or the employment relationship is terminated by law, etc.).

If the enterprise wishes to ensure that the titles, as well as the rights and benefits, are always under a definite term, the enterprise should recruit the employee with an ordinary title (i.e. instead of hiring the employee as a ‘Human Resources Director’, the enterprise should sign the labor contract with the employee as ‘Human Resources Staff’).

Afterwards, should the enterprise decide to appoint the employee to a functional director position they must (i) supplement the contract with an annex identifying the new scope of work, rights and benefits of the functional Director title, and (ii) state that the annex shall only take effect for a fixed term (which is consistent with the provisions in the decision of appointment).

When the stated term of office expires, the annex of the labor contract will become invalid and the employee will return to his/her former position.

If you have any questions or concerns about this insight, please contact us at info@letranlaw.com