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Highlights of new China labor contract law

As a developing country with a big population, China offers a large qualified work forceGetting familiar with the New Labor Law (went into force on January 2008) is necessary when employing local staff. Here you can find the highlights of the New Labor law, concise explanations regarding employer’s liabilities, probation period and other useful information in the matter.

Updated: January 2008

A new labor law

Employer’s liabilities

Written forms

Probation period

Confidentiality clauses


Fixed and open-ended contracts

Part-time employment

Payment of wages

Union and employee representatives

Collective dismissals

Company rules

Staffing agencies

Unresolved issues

National Holidays 2008-2009

A new labor law
On June 29, 2007, the Standing Committee of the National People’s Congress adopted the Labor Contract Law of the People’s Republic of China, set to come into effect January 1, 2008. 
The law applies to all employers within the People's Republic of China. The provisions prescribed by the law are meant to discourage employers from signing short-term labor contracts and will have a direct impact on employment costs. The aim of the new law is to improve the employment relationship, clarify rights and obligations of employees and employers and provide more stability and security for the employees in the PRC.

However, our experience has shown that these rules are poorly enforced, particularly in rural areas. In spite of existing labor laws, companies still underpay their staff, require them to work for extreme periods of time without rest and ignore health and safety measures. Many cases in which we have conducted due diligence with companies in China, we have come across non- or under-payment of wages or social welfare. This can be especially dangerous when acquiring companies or parts of companies as one may acquire all the liabilities as well. 

Foreign investors have to be in compliance with all the laws and regulation of the PRC – even if local Chinese companies are not. Foreign investors are the number one target of legal and financial control mechanisms in China. Before the Chinese authorities check local companies' compliance issues, they will check the foreign investor. Therefore, a foreign investor has to make sure they are in compliance with China’s often changing laws and regulations.

If you are not sure that you are in compliance, you are well advised to work with someone who can help. Make sure that your Chinese documents are in compliance with all laws and regulations. You are in China, only the Chinese version is the binding one. 

Employer’s liabilities
Employers are liable for damages caused by invalid contracts, lack of mandatory minimum content in labor contracts, violating laws by company rules or failure to issue termination certificates. Penalties can be imposed by the authorities in cases where the employer keeps the employees ID card or collects security deposits from their employees, and when salaries are not paid in time or below the locally stipulated minimum levels. The same is true of nonpayment or no additional rest time for overtime work and nonpayment of severance pay after termination or expiration of labor contracts.

Items that must be included in the labor contract

•  company name, address and legal representation 
•  employee’s name, address and personal ID number 
•  term 
•  job description and location 
•  working hours, rest and leave 
•  compensation 
•  working conditions 
•  workplace safety/protection 
•  protection for job-related hazards 
•  social insurance 

Written forms
Make sure that you have written contracts. A written contract must be signed by both parties to establish the employment relationship. If the employer fails to enter into a written contract with an employee for more than one month but less than 12 months, the employer shall pay the employee twice the salary for every month without a written contract.

As stated in Article 14 of the contract law, if there is no written contract concluded for 12 months or more after commencement of work, the contract is deemed to be open-ended. Oral contracts are only permissible for part-time labor. 

Well drafted labor contracts will become increasingly important. If a contract violates applicable laws, excludes the employees’ rights or relieves the employer from his responsibilities, the labor contract becomes invalid. The same rule applies when the employer exerts deception or coercion on the employee through the contract. Look for good advice if you are not familiar with these issues.

Probation period
The parties can agree on only one probation period that cannot be extended. The law requires employers to pay their employees at least 80 percent of their contractual salaries and not less than the locally stipulated minimum salary. The maximum probation period is based on the term of the contract, thus:

•  no probation period applicable if the contract term is less than three months (even if short term project)
•  one month, if contract term is between three months and less than one year
•  two months, if contract term is between 12 months and less than three year
•  six months, if contract term is more than three years

Termination of contract is only possible if the employee does not meet the recruitment requirements. The employer will have to explain the reasons for dismissal to the employee. In that case no severance pay is required.

The employee is obliged to give a three-day prior notice to the employer, before terminating the contract and during the probationary period.

Confidentiality clauses
Provisions on confidentiality with regard to maintaining the confidentiality of the trade secrets of the employer and to intellectual property may be included in the contract. If the obligations agreed in the contract are breached and cause the employer to suffer losses, the employee will be liable for damages.

The employer and employee may enter into a non-competition agreement; however, such an agreement should be limited to senior management personnel, senior engineers and any other employees having confidentiality obligations. There are no restrictions regarding the scope, the geographic area and the terms. The maximum duration of the non-competition period is two years. Non-competition is particularly critical for FIEs, as their projects often involve significant know-how and technology transfers. The non-competition obligation is tough: the employee is not allowed to work for a competing employer that produces the same type of products or is engaged in the same type of business. An employee is restricted from establishing their own business in order to produce the same type of products or engage in the same type of business. The employee is liable to pay penalties “as agreed” and for damages caused.

An employer has to pay for a non-competition agreement: the law requires “compensation on a monthly basis” for the employee during the term of the competition restriction after the termination or end of the employment contract. 

Consider the use of non-competition clauses carefully – it could be an expensive but necessary burden. If an employer does not pay compensation, the employee will be released from any non-competition obligation. 

Fixed and open-ended contracts
Different from earlier drafts, the termination rights between the fixed and open-ended contracts are the same. Open-ended contracts are concluded if:

* the employer and employee have mutually agreed to do so
* the employee has been working for the same employer for ten consecutive years
* the second fixed-term contract expires and the employee requests or agrees to renew the contract (please note that this only applies to fixed-term contracts entered into on or after January 1, 2008)
* the labor contract has not been signed for one year or more

Part-time employment
Part-time employees should work no more than four hours per day and no more than 24 hours per week for an employer. The maximum payment schedule is 15 days. No written contract is necessary and a part-time employment can be terminated at any time – monetary compensation is not payable. 

Payment of wages
An employer is obliged to pay the salary, in accordance with the national regulations and the provisions of the employment contract, on time and in full. Under the current law, employees must hand in their complaints against unpaid wages at a labor arbitration tribunal; from 2008 onwards, they will be able to ask the court directly for an order to pay. 

Unions and employee representatives
Unions and employee representatives protect the interests of workers. They may organize collective bargaining and have to be “consulted” on many instances, even though their agreement is not mandatory. They must be involved in mass lay-off and company policy making. Unions have to be informed if the employer unilaterally terminates labor contracts or establishes changes in regulations and policies concerning immediate interest of the workers, such as labor compensation, work hours, rest, work safety, insurance, and training. The trade union may render support and assistance for employees that apply for labor arbitration or file for litigation. Unions will enter into collective contracts. Industry-wide or regional collective bargaining is encouraged by the new law. A collective contract is binding on all companies or employees in the industry and/or region concerned. The stipulated terms must be above minimum standards specified by local regulations. Employees hired through staffing agencies are also entitled to participate in or organize trade unions.

Collective dismissals
Mass layoffs (20 or more employees or 10 percent of the total workforce) are only permitted if the employer has consulted the union or employee representatives, and proposed the action to the labor departments in accordance with the law. Collective dismissals are only allowed if one of the following reasons applies:
•  the company is undergoing restructuring according to the Enterprise Bankruptcy Law
•  the manufacturing or operating capacity of the enterprise is severely limited
•  the enterprise switches its mode of production, introduces major new technology or adjusting its operations and, following modification of employment contracts, still needs to retrench employees
major changes have occurred in the objective circumstances under which the labor contracts were concluded, such that the contracts could no longer be performed.

Priority must be given to employees who have a long fixed-term contract, open-term contract, or are the sole breadwinner in the family. If the employer decides to recruit within six months of a mass layoff, the dismissed employees should be notified, and if they accept the same conditions as new applicants, must be given the position.

Company rules
A specific procedure must be followed in order to validly adopt company rules. The terms and conditions must be discussed by the employee representative congress (ERC) or employees at large. The ERC/employees at large will put forward proposals or comments. The management then negotiates with the ERC/union and publicly communicates the new regulations and policies to the employees. Any charges or revisions to the company rules must follow the same procedure.

Staffing agencies
The new law affects representative offices which use the service of FESCO or other staffing agencies. The requirements for the agent are the following: RMB500,000 minimum registered capital, two year contract with employee with monthly pay, even without actual employment.

A company using staffing agencies services will have to pay overtime and performance based bonus and benefits, and apply the same pay standard and pay increase mechanism for all employees. The company may not send the employee to another entity than agreed in the contract. Please note that the agent and the company are both jointly and severally liable for a breach of contract. 

Implications of the Labor Contract Law for foreign invested entities
The ultimate consequence of the new labor law will be the effective abolition of fixed-term contracts. Every fixed-term contract that expires creates a severance obligation. Without paying compensation, a problem employee cannot be dismissed. Business costs will rise due to the higher expenses for hiring and terminating staff. Increasing obligations and legal requirements lead to declining employment flexibility and rising employment risk. However, those who have intently followed the previous drafts will notice that the cost increases could have been even higher. Companies will need to reassess their China HR capability and decide if someone should be designated to handle labor issues, if they do not have an established department. Possible solutions could be outsourcing or part-time employment. In all cases you should act with caution, especially when drafting contracts and company policies. Consider hiring a professional advisor to make sure contracts are in compliance with the new law and to avoid unnecessary administration and legal costs due to incomplete or worse, invalid contracts. 

Besides drafting the contracts and revising the pay structures, companies can also be proactively involved in the process of establishing an employee representation committee (ERC) or unions in order to build a strong and trusting communication basis. As collective bargaining will be reinforced, a good relationship with the ERC/union advances cooperation and may help influencing their decisions. The Labor Contract Law improves the power of unions and serves to inform employees better of their rights, which might encourage workers to do more to enforce better working conditions. The law is aimed at changing unfair labor practices that are not employed by most foreign companies (e.g. confiscating employee ID cards or collecting a security payment to detain them is common practice in Chinese entities).

Employers should...
•  make themselves familiar with the new Labor Contract Law
•  prepare basic contracts for new employees that meet the new legal requirements (in Chinese)
•  prepare or revise employee handbooks
•  review existing contracts and pay structures (open or fixed-tem, non-compete/confidentiality clauses, probation period arrangements)
•  update or draft company rules 
•  establish an employee register and draft a termination certificate
•  review cost impact and create annual provisions (severance, compensation)
•  have HR connect with the union/worker representation (expect collective bargaining, involvement in policy decisions)
•  plan for increased labor costs in the near future
•  extend existing contracts
•  communicate and sign new contracts will all employee before 2008
•  review staffing agency arrangements (check for outsourcing options)


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