Understanding common misconceptions about overtime pay, fixed-term contracts, and termination is essential to any business in Taiwan. Here’s your essential guide to mastering this challenging terrain.
American companies operating in Taiwan often look to find a way to reconcile their headquarters’ global standards and expectations with domestic legal needs. For most multinationals, there’s some comfort in knowing that most – if not all – basic company rules will be applied in the same way around the world. However, it’s still important to know Taiwan-specific laws that may affect how matters are handled domestically.
The Labor Standards Act as a floor for employee rights. Although employers and employees enjoy a great deal of “freedom to contract” in Taiwan, the contractual rights of the employee cannot dip below those granted in the Taiwan Labor Standards Act (LSA), Labor Pension Act (LPA), and other employment laws and regulations. Conversely, if an employer gives the employee rights or benefits beyond what the LSA provides, the employer will be held to those promises.
For example, if the LSA would allow for 30-day advance notice for the termination of an employee but the contract provides for 60 days advance notice by either party, the contract will be read in favor of the employee.
Another example is the severance provisions of the LPA, which generally provide for half a month’s severance pay per year of service, up to a maximum of six months’ severance pay. If the employment contract specifically provides one month per year of service, the company will be held to that stipulation. However, if the contract cites an American-style “at-will employment doctrine,” that provision will be disregarded and the company will be obliged to pay the statutorily required severance. The main exception to this is “mandates.”
“Employment” versus “mandate” agreements. Nearly all people working in a company are considered “employees” under Taiwan law, giving them substantial rights under the LSA and LPA, including overtime pay and protections against termination. Top-level country managers, however, will often be put under “mandate” agreements that essentially appoint the manager to their local position and allow for removal from that position with or without cause. This can be a huge benefit when fighting over the cause of termination for a manager, an at-times expensive or embarrassing process.
But it’s important to remember that anyone covered under mandate agreements needs to have real decision-making authority over the Taiwan entity and not merely hold the position for the company’s convenience. Otherwise, they will still be considered an “employee” under the law. Typical problems that interfere with the greater flexibility and benefits of a mandate agreement include country-manager contracts that specifically call the manager an “employee” throughout or specify that the relationship is “subject to the terms of Taiwan’s Labor Standards Act.”
Terminated top-level managers can often successfully argue for the tougher employee-friendly protections of the LSA if it’s clear that they had no discretion over routine office decisions, such as hiring employees, signing contracts, and other mandate-related tasks.
Fixed-term contracts. Many international companies try to insert fixed terms of employment into their employment agreements on the misconception that this will allow them to essentially “renew” the relationship with the employee every year or so. Taiwan’s LSA requires limiting fixed-term contracts for temporary or short-term work of less than six months or specific work that can be completed within a specified time period.
The LSA will treat nearly all employment contracts for continuous work as if they were non-fixed-term contracts, and courts and labor authorities will disregard fixed-term contracts in situations where it is demonstrated that the work was actually continuous. Examples include:
• If the employer raises no immediate objection when an employee continues their work.
• If at the time of the new contract’s conclusion both the prior contract and the new contract had terms of more than 90 days, and the time between the expiration of the prior contract and the start of the new contract did not exceed 30 days.
• The work is not seasonal, temporary, or short-term (less than six months), or project-specific (a project exceeding 12 months must be registered).
Some past court precedents based on the Employment Service Act will still allow a company to treat some foreign employees with a limited work permit period as fixed-term contract workers, even where their work is continuous. Note that this does not apply to situations where the employee has an open work permit, such as with a spousal visa or permanent residency.
Overtime. Many multinationals wrongly assume that employment agreements calling large groups of employees “exempt” or “salaried” will help them avoid paying for overtime. Other than a top-level mandated country manager, basically all other company employees (including other senior and mid-level managers) have overtime pay rights.
Issues related to unpaid overtime will often rest dormant only to rise up in the midst of a disputed termination. Many companies try to maintain some control over overtime by requiring prior approval from line management before the employee conducts the overtime work. For overtime not requested by the company, court precedents would consider work as overtime only if the employee obtained prior approval (per agreements, policies, or work rules), or where the company accepted the work product.
In recent years, Taiwan courts have tended to expect employers to take stronger measures to stop unnecessary overtime, including shutting down computers or turning off electric power at workplaces. If the employer lets employees work overtime freely, the employee should be compensated for the overtime hours.
The importance of work rules. It’s common for multinationals to have an extensive body of standard policies, rules, and procedures. Similarly, an internally published set of company “work rules” is quite standard within many Taiwanese workplaces, as they’re legally required for companies with 30 or more employees.
For companies in Taiwan that have passed that key 30-employee threshold, an up-to-date set of work rules must be submitted to the local labor authorities for review and approval. The employees must of course have access to the rules. Even if your company has fewer than 30 employees, having a set of rules and even referencing them in employment contracts can be beneficial to lay out the company’s expectations for the many topics not covered in the LSA.
LSA provisions restrict the situations in which companies can terminate employees without advance notice or severance rights, and many types of employee misbehavior are not covered by the specific rules.
Work rules should be something that employees understand and internalize. They should not just be left for when someone finally breaks a rule so badly that the company decides to fire them. Training sessions should be conducted to ensure that employees understand the expectations under which they are working, and it is far better to be proactive than reactive.
Termination basics. The “at will” employment doctrine – in which employees cannot claim for losses resulting from a dismissal – does not exist in Taiwan, and the LSA sets quite narrow restrictions on the termination of employment relationships. Article 11 provides for a set of circumstances – covering a range of economic, restructuring, and employee poor-performance issues – where employment can be terminated with advance notice (or payment of salary in lieu of notice) and payment of severance. Courts in Taiwan have grown tougher in enforcing these rules on many companies, making it crucial to have a solid basis for any dismissal.
Article 12 of the LSA outlines a set of misconduct circumstances that allow for immediate termination without statutory severance payment. Lying, office violence and threats, violation of the employment contract or the company’s work rules, being sentenced to prison, deliberate damage or destruction of company property, and absenteeism are examples of such circumstances. Action on these grounds needs to be taken within 30 days of the company’s confirmation of the conduct.
Companies must take great care to shut off access to company email, files, intranet, and other platforms when an employee is being terminated. A failure to establish appropriate grounds for termination can lead to costly litigation and even reinstatements, wherein an employee may get months or even years of back pay upon being restored to their old position. It is best to get it right the first time.
Severance calculations. The calculation of severance is based on several factors, including when the employee was hired, whether the employee is a Taiwanese national or foreigner, and the employee’s pay and bonus structure.
For Taiwanese employees hired after the LPA came into force on July 1, 2005, severance is calculated at a rate of half a month’s salary per year of service, up to a maximum of six months’ salary. Taiwanese employees hired before that date may be covered under the LSA severance calculation of one month’s salary per year of service with no maximum cap, although the calculation may be pro-rated between the LSA and LPA rates if the employee “opted in” for the LPA. Some foreign employees in Taiwan on spousal visas were made eligible for the LPA, but most foreign employees are under the LSA.
The severance calculation will normally be based on an average of the past six months’ salary plus non-discretionary bonuses (such as earned commissions and guaranteed “14th-month” pay). Still, it will not include discretionary bonuses subject to vague concepts (such as “if the economic performance of the company allows”) that don’t constitute a firm promise.
Non-competition agreements. After many years of not updating its rules and guidelines on the enforcement of non-competition agreements, Taiwan issued new restrictions on non-competes in December 2015 and October 2016. Included are specific provisions for compensation of at least 50% of the employee’s average monthly salary at the time the employment relationship was terminated, to be paid throughout the non-compete period in exchange for the non-compete obligation. Geographic restrictions may not exceed the area where the employer does business, and the duration cannot be more than two years.
Some multinationals try to get cute with non-competes, sneaking them into the middle of huge boilerplate Restricted Stock Unit agreements or other unrelated documentation that are dozens of pages long and accessible via an emailed link. But the strength of a non-compete is enhanced when employees know clearly what they are supposed to do at the end of the relationship.
Non-competes should be reserved for key management, sales, or technological positions, as per the amended law, and companies should ensure that their agreements give them the flexibility to decline to enforce a non-compete when it makes no sense to do so.
Intellectual property considerations. It’s vital that companies make clear to employees that their working-time efforts belong to the company. Many employment agreements specifically state that the economic rights to any inventions, improvements, copyrightable works, and other products developed by the employee are to be treated as “works for hire” and thus belong to the employer.
Companies should also watch out for obvious gaps in their trademark or domain name registrations, as these can sometimes be used by disgruntled ex-employees as post-termination targets. Employment or termination agreements can state that even after termination of the employment relationship, the employee shall not file or register any trademarks, service marks, or domain names that are the same or similar to those used by the employer.
Trade secrets. Although many employment agreements provide for the protection of confidential information, employers need to pay attention to how such information is treated. Employees should be trained in how and when to label materials as “confidential,” how to restrict access to certain files or documents to those with a “need to know,” the maintenance of a “clean desk” policy, as well as appropriate shredding and document-destruction procedures.
The Taiwan Trade Secret Act defines “trade secret” very broadly, but the secret must have actual value and the company must have taken reasonable steps to protect it.
Discrimination and sexual harassment. Taiwan has long had provisions prohibiting broad categories of discrimination in the Employment Service Act (ESA) and the Gender Equality in Employment Act (GEEA). In the wake of the international #MeToo movement, Taiwan laws like the Sexual Harassment Prevention Act (SHPA) have made significant progress in requiring companies to investigate and take action in situations of sexual harassment.
Companies are responsible for preventing sexual harassment in the workplace and taking prompt remedial measures if it happens. In terms of prior prevention and control, companies with more than 30 employees were previously required to formulate sexual harassment prevention and control measures, but the recent new amendments add that companies with 10-29 employees must also clearly define their sexual harassment complaint channels and publicly disclose them in the workplace.
While most multinational corporations already had strict policies in place, many have now implemented rules that specifically prohibit the type of “hostess club” entertainment that was once common in Taiwan.
Local police and other officials have sometimes interpreted the SHPA to require companies to investigate employee sexual misconduct that occurred completely without a workplace nexus, including actions outside working hours and work premises and with no other employees present.
Personal Data Protection. Taiwan’s Personal Data Protection Act is quite strict, and it provides a double-edged sword for many companies operating here. Care must be taken that procedures for departing employees and investigations do not violate the rules.
A typical problem occurs when companies consider accessing or copying data belonging to the employee, such as photos and financial and tax records. But a company also has the right to require departing employees to delete personal data of customers and suppliers to which they had access while working for the company.
— John Eastwood and Heather Hsiao are partners at the Eiger law firm and regularly work with SMEs and multinationals on their employment matters.