Labour relationships in China

Chinese labor laws are modeled on the European civil law system, but there are some notable and important differences. China is considered to be an employee friendly legal regime where the rights of the employee are considered forefront to the objective of the law.

Some key considerations to take into account when drafting a labour agreement are as follows.

Fixed-term or open-term labour contracts

The Labour Contract law allows for businesses to engage in either fixed-term contracts with their employees, or open-term contracts. There are two important considerations to take into account with fixed term contracts, (1) should the term expire, the company is obliged to offer to renew the contract, should the same work still be available for the employee, and (2) should a fixed term contract be renewed twice the company is obligated to offer an open term contract at the end of the second term.

Probation periods

At the commencement of a new labour relationship the labour contract law allows for a probation period subject to agreement between the parties. The probation period is considered part of the contract period however there are two key considerations. The first is that you are able to offer a probation period salary of 80% of the contract salary as long as it is above the legal minimum salary. The duration of the probation period depends on the length of the employment contract. If the employment contract is less than one year then the maximum term of probation is one month; if it is at least one year but less than 3 years then the maximum term is 2 months; and if it is three years or longer, including open-ended contracts, then the maximum term of probation is 6 months.

Non-compete clauses/agreements.

Agreements on non-compete upon termination of the employment contract (for any reason) may not be longer than 2 years, and during the non-compete the former employer must pay compensation to the former employee. Local rules on the level of compensation vary, but if no level of compensation is agreed then the default is 30% of the former salary. In case of breach, the former employer only has the option to claim monetary damages; as actual damages are often very difficult to calculate, therefore it is recommended to include a figure for liquidated damages in the non-compete clause.

Overtime

Overtime in China is per definition payable, irrespective of the position of the employee. This means that even salaried employees such as general managers or other senior managers must be paid overtime if they work more than 40 hours per week. Clearly this is not practical; the most common approach is to make overtime subject to advance prior approval. As long as no prior approval is given, the company will be able to avoid any liabilities for overtime work.

Employee handbook

The staff handbook is a legal document adopted by the company through specific procedures as laid out in Chinese labor laws, which details the rules of the company. Key components of the employee handbook are leave application procedures, and disciplinary measures. Chinese law allows a company to unilaterally terminate an employee that has materially breached the rules of the company; but the burden is on the company to determine the rules, the breach, and that such breach was material.

OTHER CONSIDERATIONS IN EMPLOYMENT RELATIONSHIPS

Terminating employment relationships

Chinese labour law is pro employee, and as such it is not permissible to unilaterally terminate employees at will. For just cause however it is permissible to terminate, for example in such situations as the expiry of the employment contract with no similar work to maintain; non-performance even after training or a change of circumstances; and or a material breach of the company’s rules. The former two require the payment of severance, the latter does not.

The burden to prove due cause for termination is always placed on the employer. If the employer fails to prove due cause in a labor arbitration or lawsuit, then the employee may be re-instated or receive economic compensation.

Social insurance

Social insurance contributions are mandatory for all employees, whether Chinese or foreign; the largest part is paid by the employer, while a smaller part is contributed by the employee. Exact rates vary from location to location but generally, social insurance contributions are a large portion of employment costs. While foreign employees legally must contribute to China’s social insurance system, Shanghai has yet to enforce social insurance contributions on foreigners.

Special rules for expatriates

A foreigner that wants to work in China for a Chinese company must obtain a work permit and a residence permit. Foreign employees are limited to fixed term contracts which corresponds with their resident permit duration. It is not permissible for a foreign employee to engage in a labour relationship with multiple employers.

Labour Agencies

Companies may either directly employee their employees or use the service of a labour agent. The sole exception to this is representative offices which are obligated but to use labor agents. One of the perceived benefits is more flexibility in termination and the outsourcing of HR related matters such as payment of social contributions. Using labor agents is limited however, Chinese laws allow the employment of staff through labor agents only in the case of temporary, auxiliary or replacing positions. In addition, no more than 10% of a company’s total work force should be retained through a service provider.