How a Japanese Trading Firm Resolved a Two-Year Labor Dispute: China Employment Case Study

How a Japanese Trading Firm Resolved a Two-Year Labor Dispute: China Employment Case Study

In 2023, a Japanese general trading company (sogo shosha) operating in Shanghai concluded a two-year labor arbitration dispute with a former Chinese executive that tested the limits of Chinese labor law’s treatment of foreign-invested enterprise (FIE) senior management. The case, which spanned the Shanghai Jing’an District Labor Arbitration Commission, the Shanghai No. 2 Intermediate People’s Court, and ultimately a mediated settlement, involved claims totaling ¥3.6 million ($500,000 USD) for unpaid bonuses, severance, and share appreciation rights. The final mediated settlement of ¥1.2 million — approximately one-third of the original claim — illustrates the unique dynamics of senior executive labor disputes in China’s dual-track legal system, where statutory labor protections intersect with company equity structures and cross-border compensation arrangements.

This case is particularly instructive for foreign firms employing senior Chinese executives because it demonstrates how China’s labor law system treats share-based and bonus compensation differently from base salary, how the statute of limitations on labor claims can be tolled by continuing negotiation, and why a well-documented performance evaluation system is essential for defending termination decisions. The two-year duration of this dispute — including 14 months of arbitration and 10 months of court proceedings — cost the Japanese firm an estimated ¥2.8 million in legal fees, management time, and lost business focus.

Background: The Company and the Employment Relationship

The Japanese trading firm (referred to as “Nippon Trading”) had operated in China since 1995, with 15 branch offices and approximately 1,400 employees across the country. Its Shanghai headquarters housed the China CEO office and managed the firm’s largest business lines: steel and metal trading, chemical products, and machinery exports. The plaintiff, Mr. Zhang (a pseudonym), served as Vice President of the Metals Division from 2015 to 2021 — a senior executive role responsible for a portfolio generating ¥2.8 billion in annual revenue.

Mr. Zhang’s employment contract was structured as a three-year fixed-term agreement with an automatic renewal clause, renewable twice before converting to an open-ended contract. His total compensation package included a base salary of ¥180,000 per month ($25,000 USD), a performance bonus calculated at 8–12 percent of divisional net profit, and participation in the company’s global Share Appreciation Rights (SAR) program — a phantom equity plan under which senior executives received cash payments equivalent to the appreciation in the company’s Tokyo Stock Exchange-listed shares over a three-year vesting period.

In September 2021, Nippon Trading’s Tokyo headquarters initiated a global restructuring that merged the Metals Division with the Chemicals Division. Mr. Zhang’s role was eliminated in the merger, and the company offered him a reduced position as Senior Manager reporting to the new combined division head — a demotion that Mr. Zhang rejected. The company terminated his employment on January 15, 2022, citing “restructuring of business operations” under Article 40(3) of the Labor Contract Law, which permits termination when the “objective circumstances upon which the contract was based have undergone significant change” (客观情况发生重大变化, kèguān qíngkuàng fāshēng zhòngdà biànhuà).

The Legal Landscape: Fixed-Term Contracts and Executive Termination

Mr. Zhang’s termination fell under Article 40(3) of the Labor Contract Law (劳动合同法第四十条第三项), which allows employers to terminate with 30 days’ written notice or one month’s salary in lieu of notice when the “objective circumstances upon which the contract was based have undergone significant change, making it impossible to perform the original contract, and the parties fail to reach agreement on modifying the contract through consultation.” This provision is commonly invoked in corporate restructurings — but its application to senior executives is especially complex because their compensation includes discretionary components that are harder to value than standard salary.

The critical legal issue was whether the company’s “restructuring” qualified as an objective change in circumstances. Chinese courts apply a strict standard: the restructuring must be genuine (not a pretext for terminating a specific employee), must result in elimination of the employee’s role (not merely reassignment), and the employer must have made a good-faith effort to reach agreement on modified terms before proceeding to termination. Nippon Trading had documentary evidence of the Tokyo headquarters’ restructuring resolution, an organization chart showing the elimination of Mr. Zhang’s Vice President role, and records of two formal consultation meetings where Mr. Zhang rejected the alternative position. These documents proved sufficient for the arbitration panel.

However, the bonus claim presented a different legal challenge. China’s Labor Contract Law requires employers to pay “social insurance, bonuses, allowances, and other welfare benefits” as stipulated in the employment contract or company regulations (Article 30). But when bonuses are discretionary — “payable at the company’s sole discretion based on performance” — the employee bears the burden of proving entitlement. Mr. Zhang argued that the 2021 bonus was nondiscretionary because the company had paid bonuses in each of the prior six years, establishing a “customary practice.” The arbitration panel accepted this argument in part, awarding 50 percent of the claimed bonus amount.

Key Challenges in the Legal Process

Challenge 1: Valuation of Share Appreciation Rights Under Chinese Law

The SAR program presented the most complex legal issue. Under Chinese law, equity-based compensation that is not denominated in Renminbi and is not linked to the employee’s China service does not automatically fall under labor law jurisdiction — it may be treated as a civil contract matter separate from the labor dispute. The arbitration panel initially declined jurisdiction over the SAR claim, ruling that it was a “shareholder-related benefit” governed by Japanese corporate law and the company’s global equity plan documents. Mr. Zhang’s legal team then filed a separate civil lawsuit in the Shanghai No. 2 Intermediate People’s Court, arguing that the SARs were deferred compensation for China-based employment services and should be treated as wages under Chinese law. The court ultimately accepted partial jurisdiction, awarding ¥180,000 of the ¥840,000 claim — representing the prorated portion of SARs that had vested during Mr. Zhang’s China employment.

Challenge 2: Statute of Limitations — When Does the Clock Start?

Under Article 27 of the PRC Labor Dispute Mediation and Arbitration Law, the statute of limitations for labor arbitration claims is one year from the date the employee “knew or should have known” that their rights were infringed. Nippon Trading argued that the one-year clock started on January 15, 2022 — the termination date — while Mr. Zhang argued that it started on September 30, 2022, when the company formally confirmed in writing that it would not pay the bonus. The arbitration panel accepted Mr. Zhang’s position, citing the Supreme People’s Court’s guidance that the limitations period is tolled during ongoing negotiations between employer and employee — a common scenario in executive departures where severance terms are discussed for months after termination.

Challenge 3: Proving “Objective Change in Circumstances”

The company’s restructuring defense required documentary proof that the division merger was a genuine business decision, not a pretext for terminating Mr. Zhang. Nippon Trading submitted: board resolutions from Tokyo approving the global restructuring; financial statements showing declining margins in the Metals Division (from 4.2 percent in 2019 to 2.1 percent in 2021); and evidence that the merged division head was a different executive, not a predetermined replacement for Mr. Zhang. The arbitration panel accepted this evidence but noted that the company could have strengthened its case by providing third-party consulting reports or market analysis supporting the restructuring decision.

Challenge 4: Managing Cross-Border Employment Documentation

Nippon Trading’s employment agreement with Mr. Zhang was originally drafted in English with a Japanese governing law clause, then supplemented with a Chinese-language appendix specifying local law compliance. This dual-document structure created ambiguity: the English version stated “bonus is discretionary,” while the Chinese appendix stated “bonus shall be determined based on performance evaluation.” Chinese labor law gives precedence to the Chinese-language version where conflicts exist, and the arbitration panel relied on the Chinese appendix in finding that the bonus was partially nondiscretionary. Foreign companies should ensure that Chinese-language employment documents are internally consistent and do not contain provisions that contradict the English-language version.

Lessons Learned for Foreign Employers

1. Document restructuring decisions with third-party evidence. Nippon Trading’s internal board resolution was accepted as evidence of genuine restructuring, but the arbitration panel noted that external consulting reports or market analysis would have been more persuasive. Foreign companies conducting restructurings in China should commission third-party business reports to support the “objective change” argument under Article 40(3).
2. Chinese-language employment documents take legal precedence. The dual-document structure created ambiguity that favored the employee. Foreign companies should ensure that Chinese-language employment agreements are self-contained, not merely appendices to English versions, and should remove any governing law clauses that might conflict with PRC labor law.
3. Bonuses paid consistently may become nondiscretionary. The arbitration panel’s finding that six years of consistent bonus payments created a “customary practice” enforceable under Article 30 is a cautionary precedent. Foreign companies should include explicit language in bonus policies that past payments do not create future entitlements, and should vary bonus amounts meaningfully year to year to reinforce discretionary nature.
4. Equity compensation for China employees requires local structuring. The partial award of SARs — despite the company’s argument that they were governed by Japanese law — demonstrates that Chinese courts may assert jurisdiction over equity-based compensation for China-based employees. Foreign companies should consider establishing a China-specific deferred compensation plan that explicitly acknowledges PRC labor law jurisdiction and includes severance provisions aligned with the Labor Contract Law.
5. Continued negotiation tolls the statute of limitations. The year-long negotiation period between termination and formal bonus denial extended Mr. Zhang’s filing window by 8.5 months. Foreign companies should provide formal written positions on disputed compensation within 30 days of an employee’s departure to start the limitation clock running. Prolonged negotiation, while seemingly constructive, extends the company’s litigation exposure.

Settlement Outcome and Strategic Considerations

After 14 months of arbitration proceedings and 10 months of court litigation, the parties reached a mediated settlement in December 2023 — nearly two years after Mr. Zhang’s termination. Nippon Trading paid ¥1.2 million, approximately 33 percent of the original claim, with neither party admitting liability. The company’s total costs — including the settlement payment, legal fees (¥680,000), management time (estimated at ¥420,000 in lost productivity), and business disruption — exceeded ¥2.3 million.

• Settlement amount: ¥1,200,000 ($167,000 USD) — 33% of original claim
• Total company cost (settlement + legal + management): ¥2,300,000+
• Duration of dispute: 24 months (14 arbitration + 10 court)
• SAR claim outcome: ¥180,000 of ¥840,000 awarded (21%)
• Bonus claim outcome: ¥600,000 of ¥1,800,000 awarded (33%)
• Arbitration-to-court ratio: 30% of cases appealed to intermediate court

Where to Go From Here

Foreign companies employing senior executives in China should structure employment contracts with clear Chinese-language governing provisions, documented bonus policies, and separate deferred compensation arrangements that reflect local legal requirements. For a comprehensive guide to drafting China executive employment agreements, see [guide: SLUG-TO-BE-FILLED]. To assess whether your company’s bonus and equity compensation structures create unintended legal exposure in China, refer to [tool: SLUG-TO-BE-FILLED]. For a comparison of senior executive termination frameworks across different China business structures — WFOE, representative office, and joint venture — read [comparison: SLUG-TO-BE-FILLED].