To What Extent May a Company Regulate Employees’ Outside Concurrent Employment?
In case (2021) Su 06 Min Zhong No. 4333], Jiang, an employee of Company A, held shares in and served as a supervisor of another company without informing Company A. Company A terminated Jiang’s employment contract for breaching its internal rules. Both the trial court and the appellate court upheld the termination.
In case (2025) Jin 0319 Min Chu No. 34290, Guo, an employee of Company B, also served as a supervisor of another company. Company B terminated Guo’s employment contract for breaching its prohibition on the outside concurrent employment. The court, however, ultimately found the termination unlawful.
Why did the courts reach opposite conclusions when both employees were dismissed for serving as a supervisor of another company?
The issue is complex. Broadly speaking, employers can address concurrent employment from two perspectives. The first is employment management: regulating certain types of outside employment through the Labor Contract Law and internal employment rules. The second is compliance management: using conflict of interest policies to regulate both outside employment and other conduct that creates, or may create, a conflict with the company’s interests.
From the employment management perspective, Article 39(4) of the Labor Contract Law permits an employer to terminate an employment contract only when an employee “establishes an employment relationship with another employer that seriously affects the performance of duties for the current employer, or refuses to rectify the situation after the current employer raises the issue.” Textually, this provision requires two conditions: first, the employee must have concurrent employment relationships; second, the outside employment must seriously affect the employee’s regular duties, or the employee must fail to rectify the situation after being asked to do so. Accordingly, behaviors such as driving for Didi or working as a freelance translator after work do not meet the first condition and cannot, on that basis alone, justify termination under this provision.
In practice, many companies prohibit outside employment in their employee handbooks or employment contracts and dismiss employees who do outside work based on Article 39(2) of the Labor Contract Law, which permits termination for a serious breach of the employer’s internal rules.
However, employers must nevertheless have legitimated and reasonable grounds for regulating employees’ conduct after work. Article 39(4) already sets limits in the two respects outlined above. Restrictions in internal rules or employment contracts should therefore only make moderate extension beyond that provision. Generally, the stricter the restriction, the greater the legal risk. Two key points below deserve particular attention:
First, a blanket ban on outside employment carries a very high risk and should be avoided. Courts often reject the reasonableness of a rule that allows dismissal solely because an employee undertakes outside work without approval. Such a rule removes the substantive requirements in Article 39(4): a serious impact on the employee’s duties or a failure to rectify the situation after the employer raises the issue.
Second, when drafting the rules, employers are suggested to retain the second condition under Article 39(4) while moderately extending the first. For example, the rules may cover serving as another company’s legal representative, director, senior executive or supervisor, as well as performing other outside work. Manufacturing businesses where employees commonly hold outside work as Didi drivers or food delivery workers may cover conducts of this kind that would ordinarily be expected to affect regular duties. However, if termination is the only available sanction, the employer may find it difficult to respond appropriately in individual cases.
Having a rule in place is only the starting point. How to apply the rules in an individual case is critical. Employers should consider the following aspects.
First, to assess whether the outside work seriously affects the employee’s primary job duties in particular cases. Courts consider more than the title of an outside position. They would review whether the employee actually performs work or carries out the duties of that position, and whether it creates an actual or potential conflict with the employee’s regular job. There is no uniform judicial approach, but the general tendencies can be summarized as follows.
| Outside Role | Judicial Approach |
| Non active shareholder (Capital contribution only, with no position, management involvement or remuneration) |
Generally, such role would not be treated as outside work. Dismissal on this ground alone carries a very high risk. |
| Legal representative, director or senior executive | A legal representative or director usually has a relationship based on appointment or trust relationship with the company; an employment relationship does not arise automatically. However, because these positions involve performing duties and participating in decisions, courts are relatively more likely to define this kind of work as unauthorized outside work. Whether the breach justifies termination still requires a case-by-case assessment. Senior executives are also relatively likely to be regarded as actual performing duties. |
| Supervisor | This role primarily involves overseeing the board and senior executives and examining the company’s finances. Some courts have treated it as a service or employment relationship with the employer, but the issue remains disputed. Courts often consider whether the employee actually performs the role, receives remuneration, competes among peers or affects the performance of primary job duties. |
In the first case discussed above, Jiang worked in finance while also holding shares in and serving as a supervisor of an outside bookkeeping agency. The court held that “this conduct breached the employee’s duty of loyalty and the principle of good faith. As a full-time finance employee, serving as a supervisor and shareholder of a third-party company whose business included bookkeeping services would inevitably affect the employee’s regular duties in terms of time, energy and the nature of the work.” The court therefore upheld the termination. In the second case, by contrast, the court found that “the evidence did not show a serious impact on the plaintiff’s work” and rejected the adequacy and reasonableness of the grounds for dismissal.
Second, the disciplinary measure should be proportionate to the circumstances of the breach. Where the conduct is minor or the evidence is insufficient, the employer may first provide guidance and require the employee to rectify the situation within a specified period, then decide on an appropriate sanction in light of the response. For example, in case (2016) Zhe 0603 Min Chu No. 10087, an employee worked part-time at KFC in breach of the employer’s rules and refused repeated requests to stop. Witness testimony also showed that the outside work had affected the employee’s primary job duties. The court ultimately held that the termination was lawful.
From the compliance management perspective, conflict of interest policies should principally prohibit two types of conduct: competing with the employer (which mainly concerns sales) and using one’s influence to interfere with transactions involving the employer (which mainly concerns procurement). Employers should also establish disclosure requirements that specify who must disclose conflicts, which circumstances must be disclosed and the applicable deadlines. The rules should provide for appropriate disciplinary measures for failures to disclose. These requirements should reflect the company’s industry and business model and be coordinated with the disciplinary provisions in its employee handbook.