Series Discussions on Trial Practice of Equity Incentive Mechanism Disputes (3) ─ Whether Equity Incentive Cases Are Labor Dispute Cases (Mainland China)

April 2023

Jolene Chen and Teresa Huang

The first two articles of the Series Discussions on Trial Practice of Equity Incentive Mechanism Disputes discussed (i) the passive lay-off of employees and (ii) the determination of equity exit price, and this article will analyze whether equity incentive cases are labor dispute cases.

Whether an equity incentive case falls within the regulating scope of labor relations laws has been another important point of contention in the case.  If it shall be governed by labor relations laws, the Labor Contract Law, the Labor Dispute Mediation and Arbitration Law and other relevant laws may apply to the trial process of the case, and the legislative purpose of these laws is to better protect the lawful rights and interests of laborers (for example, in the case of any loopholes in a contract, such contract shall be interpreted from protection of laborers’ rights).  If it shall not be governed by labor relations laws, the above laws and regulations will not apply to regulate the rights and obligations of equity incentives.

After searching the judgment documents, we can find that the objects of a company’s equity incentives include laborers and non-laborers, and the laborers are managed by the employer and get labor remuneration from the employer, while the non-laborers do not establish labor relations with the employer, for example, directors and supervisors, etc. of the company.  Of course, any equity incentive dispute between a non-labor relation naturally is not a labor dispute case, and the laws and regulations related to labor relations shall not apply to it.

However, for any equity incentive dispute filed by any laborer, is it a labor dispute because it is dependent on the labor relation, or is it not a labor dispute because it is independent of a labor relation and is a contractual relation with equal rights and obligations?  But it is quite difficult to judge whether the contractual positions of both parties are equal or not in practice, so the judge scale on this issue is not uniform in judicial practice nowadays.  In this article, the judge’s reasoning in three court decisions are selected to analyze and elaborate this issue:

Case 5:

In the case of Dou v. Jingdong Technology and Jingdong Financial Group (Case No.: (2022) Jing 02 Min Zhong No. 3040), the Beijing court held that, in essence, the income from stock buyback obtained by the laborer was closer to labor remuneration or belonged to a kind of welfare benefits rather than a mere investment income.  Specifically in this case, from the situation of labor relation established between both parties and the content of the Notice on the Grant of Restricted Stock Units under the Equity Incentive Plan signed by both parties, the reason why Dou was issued the restricted stock units of Jingdong Financial Group was based on the premise of the labor relation established between him and Jingdong Technology, and his exercise agreement was also closely related to the establishment, performance and termination of the labor relation.  The equity incentive in this case was essentially an act of management and remuneration distribution of Jingdong Technology, which was attached to the labor relation, so the equity buyback dispute in this case was a labor dispute and belonged to the scope of acceptance by the court.  As Dou’s initiation of the labor dispute for this case was not improper, the court did not accept the claims of Jingdong Technology.

Case 6:

In the case of Labor Dispute Retrial Review and Trial Supervision of Bao v. Meituan and Others (Case No.: (2022) Jing Min Shen No. 3321), the court held that the acquisition and exercise of the employee’s stock options were closely linked to his labor relation, reflecting the typical characteristics of labor relation in which the laborer is subordinate to the employer’s management and receives remuneration by working.  As the income from the stock options obtained by the employee was closer to labor remuneration, or belonged to a kind of welfare benefits, it was not improper to hear the case as a labor dispute. However, since the dispute not only involved issues related to labor relation, but also involved relevant laws such as the Company Law, Securities Law and other relevant regulations of the state on equity incentives, while applying the provisions of labor laws, the relevant laws and regulations shall also be considered.

Case 7:

In the case of Other Labor Dispute of He v. Shanghai Lixiang Automobile Co., Ltd.(Case No.: (2022) Hu 0114 Min Chu No. 16805-1), the court held that as the property income involved in the equity incentive was uncertain, closely related to the operating conditions and stock price of the enterprise, and not the fixed salary, bonus, welfare and other labor remuneration paid regularly to the employee by the enterprise, the equity income was different from the labor remuneration under labor laws. In this case, the plaintiff required the defendant to pay the shares based on the cause of action of labor dispute, but from the grant of the equity incentive, exercise conditions and the reasons for the dispute, the dispute is caused by the equity incentive agreement between both parties.  A labor dispute refers to the dispute between the employer and the laborer in the process of realizing labor rights and fulfilling labor obligations, while the restricted shares granted by the defendant to the plaintiff based on the incentive plan, the relevant rights and interests were related to the operating conditions of the defendant, but not related to the plaintiff’s fulfillment of labor obligations, and did not involve the rights and obligations under labor laws.  Therefore, the plaintiff’s claim in this case does not fall within the people’s court’s scope of accepting labor dispute cases.

At first glance, the reasoning of the three judges is apparently contradictory, and there seems to be an appearance of different judgments on similar cases.  In this article, we will find the answer through analyzing layer by layer the essence of equity incentives.

What is the essence of equity incentives? 

First of all, a laborer’s incentive income from equity incentive is “labor income”. 

To discuss equity incentives, we must first discuss the nature of incentive income. Firstly, is the nature of incentive income “labor income”?  The answer is yes.  A Laborer does obtain incentive income by working, and cannot get incentive income without working.  Therefore, the income from equity incentive is “labor income”.  The situation that the income from equity incentive can be obtained without working is for directors and supervisors mentioned above.  A laborer cannot obtain any income from equity incentive without providing work.  At the same time, according to the Notice of the Ministry of Finance and the State Taxation Administration on the Issue of Levying Individual Income Taxes on Incomes from Individual Stock Options, the income tax on any income from equity incentive shall be calculated as incomes from wages and salaries.  If the income from equity incentives is not labor income, how can it be taxed in the same way as labor income?

What are the components of “labor income”? 

Obviously, the income that a laborer earns through his or her work after establishing a labor relation with the employer is called “labor income”.

The sources of labor income include those paid by the employer and those paid by the non-employers.

According to Article 53[1] of the Opinions on Several Issues Concerning the Implementation of the Labor Law of the People’s Republic of China, it should be concluded that:

1. the “labor income” paid directly by the employer in monetary terms is wages;

2. what is not paid by the employer in “labor income” is other “labor income”, and is not labor remuneration;

3. excluding Item 2 of “labor income” which is not paid by the employer, the remaining labor income paid by the employer is labor remuneration in nature.

Second, any income from equity incentives is labor remuneration. 

Let’s look at whether any income from equity incentives is other “labor income” as defined in the above Opinions.  It is obvious that it is not, because according to the conclusion above, other “labor income” is paid by non-employers, while the income from equity incentive is paid by the employer.  Therefore, any income from equity incentives is labor remuneration.

In conclusion, we give the answer to the previous question: the essence of laborers’ equity incentives should be the way and means to obtain the labor remuneration that is dependent on labor relations. 

According to Article 2 of the Labor Dispute Mediation and Arbitration Law, the Labor Contract Law shall apply to any dispute arising from the labor remunerations, medical expenses for a work-related injury, economic indemnity, compensation, etc.  As equity incentives adjust the payment of labor remunerations, they shall naturally be governed by labor relations laws.

Therefore, disputes arising from the payment of incomes from equity incentives are labor disputes.  However, as incomes from equity incentives are not only monetary, disputes may also arise from the personal attributes of equity, such as the shareholder qualification, shareholder’s voting rights, shareholder’s right to know, etc. of a laborer.  Therefore, after the payment of equity incentives, a dispute may still arise due to the personal attributes, and such dispute is not a labor dispute. 

To sum up, a dispute of a laborer about the payment of income from equity incentive shall be a labor dispute case, to which the labor related laws and regulations shall be applicable, and which shall be handled together with the labor dispute, with the pre-placement of labor arbitration system being applicable.  The result is that in the process of equity incentive dispute resolution, the Labor Contract Law, the Labor Dispute Mediation and Arbitration Law and other related laws may apply.  For example, in case of any loopholes in a contract, the contract shall be interpreted for protecting the laborer’s rights.  For instance, if the employer exempts itself from legal responsibilities, excludes the laborer’s rights, or violates the mandatory provisions of laws and regulations through any terms and conditions of the contract, such terms and conditions may be considered as invalid or partially invalid.

[1] Departmental Regulations: Opinions on Several Issues Concerning the Implementation of the Labor Law of the People’s Republic of China
53.”Wages” in the Labor Law refers to the labor remunerations paid by the employer directly to its laborers in monetary terms in accordance with the relevant state regulations or the labor contracts, which generally includes hourly wages, piece-rate wages, bonuses, allowances and subsidies, wages for extended working hours, and wages paid under special circumstances, etc.
The following labor incomes of laborers do not fall within the scope of wages:
(1). social insurance and welfare benefits paid by the employer to laborers, such as funeral expenses, pensions and relief funds, subsidies for living difficulties, family planning allowance, etc;
(2). the expenses for labor protection, such as the expenses for work clothes, antidotes, cool drinks, etc.  paid by the employer to laborers;
(3). various labor remunerations and other labor incomes not included in the total wages according to regulations, such as the creation and invention award, national spark award, natural science award, science and technology progress award, rationalization proposal and technology improvement award, China skill award, etc. granted in accordance with state regulations, as well as manuscript fees, lecture fees, translation fees, etc. 

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