Working in Taiwan: The Legal Lowdown

A version of this article first appeared in Euroview magazine, which is published by the European Chamber of Commerce Taiwan. You can read a version of this article hosted by Crossroads, a multilingual nerve center of activity among the foreign, local, business, and governmental communities of Taiwan, here.

By John Eastwood and Heather Hsiao

European companies operating in Taiwan often look to find a way to meet the global standards and expectations set by their head offices with local legal needs. There’s always something comforting about being able to know that most, if not all, of the basic company rules are going to be applied in the same way around the world; but it’s still important to know Taiwan-specific laws that may affect how things are implemented locally.

The Labor Standards Act as a floor for employee rights

Although employers and employees have a substantial ability to shape their relationship through a mutually agreed-upon contract, the reality is that the contractual rights of the employee cannot dip below those granted in the Taiwan Labor Standards Act (“LSA”), Labor Pension Act (“LPA”) and the other employment laws and regulations. Conversely, if an employer gives the employee rights or benefits that go beyond what the LSA provides for, the employer will be held to that promise.

For example, if the LSA would allow for a 30-day advance notice for termination of an employee but the contract provides for 60-days advance notice by either party, then this will be read against the company but not against the employee. The employee will only need to provide the LSA-allowed 30-day advance notice if he/she wishes to quit – the employer would be bound to give the full 60-day advance notice.

Another common example is the severance provisions of the LPA, which generally provide for half month’s severance pay per year of service, up to a maximum of six months’ severance pay. If the employment contract provides specifically for one month per year of service, then the company will be held to that. However, if the contract cites to an American-style “at will employment doctrine,” that provision will be disregarded and the company required to pay the statutorily required severance. The main exception to this are “mandates.”

Credit: Eiger

'Employment' versus 'mandate' agreements

Nearly all persons working in a company will be 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 his/her local position and allows 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 could be expensive or embarrassing. Note that the persons covered under mandate agreements need to have real decision- making authority over the Taiwan entity and not merely be holding the position for the convenience of the company in order for them not to be considered “employees” 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 which specify that the relationship is to be “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 of employees, signing of contracts, etc.

Note that internal promotions can often give rise to interesting problems wherein a top country manager (who might usually be on a “mandate” agreement) ascends to the position after years as an “employee”. It is strongly recommended that any change to a mandate status be explicitly covered in a signed new mandate agreement.

Fixed-term contracts

Many international companies try to insert into their employment agreements fixed terms of employment, 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 to temporary or short- term work of less than six months or else specific work that can be completed within a specific period of time. The LSA will treat nearly all employment contracts for continuous work as if it were a non- fixed-term contract, and the 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 his or her work.

• If, on the conclusion of a new contract, both the prior contract and the new contract were for a term of more than 90 days, and the period of time between the expiration of the prior contract and the start of the new one did not exceed 30 days.

• The work is not seasonal, temporary (less than six months), short-term (less than six months), or project- specific (must be registered if over 12 months).

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 making overtime payments. Other than a top-level mandated country manager, basically all the rest of the company employees (including other senior and mid-level managers) will be treated as having overtime pay rights. These issues 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 prior to the employee conducting the overtime work.

For overtime not requested by the company, the court precedents will consider the work as overtime only if the employee obtained the prior approval (per agreements, policies or work rules), or where the company accepted the work product.

The importance of work rules

It’s quite normal for multinationals to have an extensive body of standard policies, rules, procedures, etc., and an internally published set of company “work rules” is quite normal within many Taiwan workplaces, as they’re legally required for companies with 30 or more employees. For companies that have passed that key 30-employee threshold within Taiwan, an up-to-date set must be submitted to the local labor authorities for review and approval, and the employees of course must have access to them. Even if your company has fewer than 30 employees, it can be important to have a set and even make a reference to them in the employment contracts to lay out the company’s expectations for the many topics that are not covered in the LSA.

The LSA’s provisions restrict the situations in which companies can terminate employees without advance notice or severance rights, and there are many types of employee misbehavior that are not covered by the specific rules.

Work rules should be something that employees understand and internalise and not just 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 does not exist in Taiwan, and the LSA is quite narrow in its restrictions on the termination of employment relationships. Article 11 provides for a set of circumstances where an employment can be terminated with advance notice (or payment of salary in lieu of notice) and payment of severance:

• The employer is ceasing business or the business has been transferred.

• The employer suffers operating losses or business contractions.

• The operations of the employer are suspended for more than one month by reason of force majeure.

• Where the change in the nature of business necessitates the reduction of workforce and the terminated employees cannot be reassigned to other suitable positions.

• The employee is confirmed to be incompetent to carry out the work.

Note that the courts in Taiwan have grown tougher in enforcing these rules on many companies, and so it is important to have a solid basis for each of these. If you’re making employees redundant because of an operating loss, then get the data that shows it. If the change in business requires a reduction in workforce and the employees cannot be reassigned, you must be prepared to explain the basis for selection and take care not to run advertisements for similar positions in the aftermath If the employee is incompetent, then there should be written evaluations documenting it, and it can be useful to have at least tried to use a Performance Improvement Plan (“PIP”) to make a positive change. Article 12 of the LSA lays out a set of circumstances that allow for immediate termination without payment of statutory severance when:

• The employee misrepresents facts at the time of signing the employment contract, thereby misleading the employer, with possible resulting damages.

• The employee commits violence against or insults the employer, the employer’s family, the employer’s representative, or fellow employees.

• The employee seriously breaches the employment contract or violates the work rules.

• The employee is sentenced by a court in the final judgment to detention or a more severe punishment, and the sentence has not been commuted to probation or a fine.

• The employee purposefully causes damage to or excessively abuses machinery, equipment, tools, raw materials, products or any articles belonging to the employer, or intentionally discloses the technological or business secrets of the employer.

• The employee is absent from work for three consecutive days, or for six days in a month, without justifiable reasons.

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.

One key date is July 1, 2005, the date that the Labor Pension Act (“LPA”) came into force. Taiwanese employees hired after that date have their severance calculated at a rate of half 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 1 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 a couple of years ago, but most foreign employees are considered to be under the LSA.

The severance calculation will normally be based on an averaging of the past six months’ salary plus non-discretionary bonuses (earned commissions, guaranteed “14th month” pay, etc.), but it will not include discretionary bonuses of the sort subject to vague concepts about “if the economic performance of the company allows” that don’t constitute a firm promise.

Non-competition agreements

After about 12 years in which Taiwan’s labour authorities had not really updated its rules and guidelines on the enforcement of non-competition agreements, Taiwan issued new restrictions in December 2015 and October 2016 on non-competes, including specific provision for compensation in exchange for the non-compete obligation of at least 50 percent of the employee’s average monthly salary at the time the employment relationship was terminated to be paid throughout the non-compete period. Such compensation needs to be sufficient to maintain the employee’s “life needs.”

The non-compete agreement must be in writing, and must state the period, area, and scope of the non-competition obligation, the amount of compensation the employer will pay the employee, and it must be signed by the employer and employee. Geographic restrictions may not exceed the area where the employer does business, and the duration cannot be more than two years.

Note that some multinationals try to get cute with non-competes, sneaking them into the middle of huge boilerplate Restricted Stock Unit agreements. The problems with those are numerous in that the agreements often:

• Involve employer entities that do not employ the employee;

• Specify the laws and courts of the jurisdiction where the parent company is headquartered or the exchange where the stock is listed;

• Are never read by the employee, meaning that the employee has no knowledge of their compliance obligations;

• Define a geographic scope too broad to comply with Taiwan law;

• Provide for inadequate compensation, based on the amended LSA and Enforcement Rules; and

• Are sent to employees as links or attachments without any actual signing by either party.

Non-competes really should be reserved for key management, sales or technological positions, as 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 important that companies make it clear to employees that their working- time efforts go to the company, and many employment agreements have specific provisions that the economic rights to any inventions, improvements, copyrightable works, etc. 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 post-termination targets for disgruntled ex-employees. 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, it’s important for employers 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,” 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 to mean any method, technique, process, formula, program, design, or other information that may be used in the course of production, sales, or operations with specific requirements, thus the company would be required to prove the following restrictions if the issue moves to courts:

• It is not known to persons generally involved in the information of this type;

• It has economic value, actual or potential, due to its secretive nature; and

• Its owner has taken reasonable measures to maintain its secrecy.

John Eastwood is a senior partner heading up Eiger’s intellectual property and employment law practices, Heather Hsiao is a senior associate in the employment and litigation practices.