Working Guide on China's Labor Contract Law**

Introduction



In the People’s Republic of China (“China” or “PRC”), employment related matters are governed by a multitude of laws which include:


· Trade Union Law of the PRC (1994);
· Regulations on Labour Management in Foreign Investment Enterprises (1994);
· Labour Law of the PRC (amended 1995);
· Company Law of the PRC (amended 2006);
· Law of the PRC on the Mediation and Arbitration of Employment Disputes (effective May 1, 2008); and
· Various municipal and local regulations, promulgated in accordance with the Labour Law of the PRC (together the “Existing Law”).

The Existing Law has most recently been supplemented and clarified by the Labour Contract Law of the PRC (effective January 1, 2008) and the Implementing Regulations on the Labour Contract Law of the PRC released on September 18, 2008, and taking effect that day (together the “LCL”). The LCL codifies widely accepted practices rooted in policies of the Ministry of Labour and Social Security (“MOL”) and was also promulgated in response to rampant worker abuse (e.g. dangerous conditions, long hours, etc.) and a further attempt to bring China’s employment laws more in line with other developed nations. Highlights of the LCL include a new private right of action for workers, limitations on probationary periods, a section devoted entirely to staffing firms, and clarification on compensation under various circumstances. Since the LCL went into effect, labour disputes have increased throughout the nation by well over 100%. Nanjing’s cases alone went up 231% in this past year. Below is a guideline to interpret the LCL.

I. Preliminary Measures Employers Must Take to be In Line with the LCL
Caveat - unlike the Existing Law where an actual contract was required to create an employment relationship, under the LCL if any money exchanges hands or an employee begins work, an employment relationship is created.

A. Labour Term and Required Provisions of a Labour Contract
The LCL, like most other employment laws divides employment contracts into three types: (i) fixed term – with an agreed end date; (ii) open-ended – no stipulated expiry date; and (iii) contract/ project based – terminates on completion of a certain job. After negotiation, an employer and employee must sign (or seal) a contract in at least two originals of which each party will hold one. An employment contract shall at minimum specify the following:


(a) name, address and legal contact of the employer;
(b) name, address and ID number of employee;
(c) term of contract;
(d) job description and site location;
(e) working hours, rest, holidays;
(f) compensation (per month or per annum);
(g) allocation to the 5 social insurance funds (pension, medical, maternity, accident, and unemployment insurances)[1];
(h) working conditions and protection against occupational hazards; and
(i) others stipulated by PRC law.

Agreements for “Part-time Labour”, in which the employee works no more than 4 hours a day and no more than 24 hours in a week for the same employer, may be concluded orally – and such employee must be compensated every 15 days (or less). Either party may terminate a part-time labour arrangement with notice at anytime, and no severance pay is necessary.

ü Note: labour contracts must be written in Chinese, but may be accompanied by any language translations. In case of discrepancies between the language versions, the Chinese version will prevail.


ü Note: an employer may not collect or retain any collateral from the employee (i.e. ID card or personal property etc.).

B. Timely Entry into Labour Contracts Required of Employers
Regardless of when a formal contract is issued, the “employment relationship” is considered established on the day the worker starts working for the employer (not when a contract is signed). Employers have a grace period of up to one (1) month from the establishment of an employment relationship in which to conclude an employment contract. Employers that fail to enter into employment contracts with their employees within the grace period will be responsible for double (2x) the month’s salary for each month thereafter without a formal contract (up to a year). If after a year, a labour contract is still not concluded, the employment relationship shall be considered open-ended (starting from the last day of that year) and the employer is required to immediately enter into a written contract.

C. Employee Handbook, the Single Most Valuable Tool in Avoiding a Labour Dispute
A written employee handbook or policy manual setting out thorough internal rules and regulations must be maintained and updated (even if employing only one worker) and should be incorporated into the employment contract by reference. Contents of such handbook may include, among others: code of conduct, conflicts resolution, use of company resources, confidentiality, grounds for termination, etc. The purpose is to be comprehensive nearly to the point of being exhaustive, because under the LCL, firing an employee is basically impossible without “cause” – and it is the employee handbook that will be referenced when defining cause.

D. Register of Employees and Reporting Requirements



A “Register of Employees” should be kept at all times for reference purposes and shall include particulars such as:
employees’ name, gender, ID number, registered permanent address, current residence, contract details, method and details of employment (whether directly hired or seconded), contract term, etc. An Employer can be fined between RMB 2,000 and RMB 20, 000 for failure to rectify a violation with respect to this rule.



In December 2006, the MOL issued guidelines requiring employers to within thirty (30) days of hiring new employees or renewing labour contracts, report the following information to the local labour bureau:
number of employees it is hiring; and
an updated Register of Employees.


Within seven (7) days of ending an employment relationship, employers must report:
§ The numbers of employees being terminated.


And according to the LCL, within fifteen (15) days of ending an employment relationship, employers must carry out procedures for transfer of the employee’s file and social insurance; disburse severance pay (as calculated below in Section II. D. (v)). And such terminated contracts shall be kept on file for two (2) years, for reference purposes.

II. Clarification of Specific Employment Contract Related Issues

A. Limitation on Probationary Periods
The limitations on probationary periods have the greatest impact on the rights of seasonal workers who under the Existing Law have been under arbitrary threat of being fired prior to termination of their short term contracts and generally were being underpaid. The LCL mandates that an employer may only set a probationary period once per employee regardless of how many times a contract is renewed. Also the wages of a probationary worker: (i) may not be less than 80% of the wage stipulated in the contract or less than 80% of the lowest wage level for the same job if no salary has been agreed; and (ii) may not be less than the minimum wage where the employer is located. The probationary periods should be set according to the following schedule:




3 months and < 1 year 1 month
> 1 year and < 3 years 2 months
3 years or open-ended 6 months
< 3 months or contract/project based No permissible probation period

B. Training Expenses and Employees’ Liquidated Damages for Prematurely Terminating
Employers that provide specially funded employee training (over and above that required by the State), may require that workers at minimum continue employment for a specified term or else subject them to payment of liquidated damages which: (i) shall be calculated based on the portion of training expenses allocable to the unperformed term of service; and (ii) in total shall not exceed the cost of the training expenses. These expenses may include, among others, travel, accommodation and food, trainer fees, and other direct expenses paid by the employer with respect to the training (evidenced by receipts).

C. Not all Employees can be bound by Non-compete and Confidentiality Obligations
Non-compete and confidentially obligations may only be imposed on senior management, senior technical personnel and employees that have access to business secrets of the employer, and can be no longer than two (2) years. ‘Senior management’ is clarified with reference to the Company Law and includes: managers (general, deputy, financial), board secretaries, and others specified in the company’s articles of association. Such covenant should be included in the employment contract or in a separate writing and must include the scope, territory, and terms of restrictions, along with stipulated monthly economic compensation throughout the duration of the covenant (which means compensation up to two years after termination of the employment relationship). The laws remain silent as to what is the minimally acceptable rate of economic compensation in this regard.

D. Employer’s Duty to Compensate under Various Circumstances




(i) No written contract –
If it is not clear what labour compensation was agreed, the rate shall be that specified in the enterprise’s or industry’s collective contract; if there is no collective contract, then fair pay should be given for the work, presumably based on market standards. See Section I. B. above, for penalties associated with no written contract.




(ii) Lay-offs –
See Severance Pay below and Section III. C. below for rules governing layoffs.




(iii) Overtime –
In China, standard working hours are: 8 hours a day/ 5 days per week with a maximum of 40 hrs per week, and 2 days of rest. These standards shall strictly be adhered to; meaning employers may not compel or used disguised manners to compel employers to work overtime. Statutes specify that such compensation shall be paid under condition that employers “arrange” for such overtime – in a plain sense, the employer must unambiguously ask a worker to perform overtime, although the rules defining “overtime” still remain vague in this regard. Any overtime work must be compensated according to the following schedule:



Work Day 150%
Day of Rest 200%
National Public Holidays[2] 300%
* based on actual salary

(iv) Unlawful Termination by Employer
If after an unlawful termination by the employer the employment relation is not resumed, due to impossibility or simply because the worker refuses, the employer is responsible for severance pay at twice (2x) the rate of severance pay (see below).

(v) Severance Pay
The calculation for severance pay = [number of years worked x average monthly wage (based on the last 12 months of employment)].



If however, the employee’s average monthly wage is greater than three times (3x) the average monthly wage in the relevant municipality, (i) the average monthly wage will be calculated based on (3x) the average municipal rate instead of the actual average, and (ii) the years of employment shall be capped at 12 years.




The circumstances giving rise to the employer’s duty to make severance payments are outlined in Article 46 of the LCL and the employer shall make such payments within fifteen (15) days of the date of termination. Interestingly, an Employer will be required to make a severance payment, if after the expiration of a fixed-term contract, an Employer does not offer to renew the contract on equal or better terms.

ü Note: for the purpose of calculating severance pay, any period less than 1 year shall be counted as 1 year.
ü Note: an employee is only entitled to half a month’s wages for service less than 6 months. Project based and seasonal workers are also entitled to severance pay.
ü Note: salary, bonuses, allowance and subsidies should be included in the figure.
ü Note: employers are not liable for additional severance pay if damages have already been paid to the employee for illegal termination of the contract.

(vi) Work Related Injury
For employees suffering work related injuries, in addition to severance pay (as calculated above), the employer shall also pay a medical and disability subsidy in one lump sum, according to the State’s regulations on work related injuries.

E. Dispute Resolution
Under the Mediation and Arbitration Law (May 1, 2008), the statute of limitations (“SOL”) for bringing a claim: (i) under an existing contract is 1 year after its termination or expiry; or (ii) if the contract has already expired, 1 year after the employee knew or should have known of an infringement. The following describes the process of a claim:
1. The dispute must be submitted to the local labour arbitration committee within the SOL;




2. Within 45 days after acceptance of the case, an award shall be rendered;




3. Arbitration decisions are final on the following issues: severance pay, salaries, medical fees for job related injuries and penalties (provided such amounts do not exceed 12 months minimum wage in the particular jurisdiction); and




4. Within fifteen (15) days of the arbitration decision either party may submit the dispute to the people’s court for a hearing (except for those issues listed as final above). Otherwise, the decision is final and binding.



Mediation is always the preferred method of dispute settlement as it requires much less strain on judicial resources. The Mediation and Arbitration Law stipulates that mediated settlements on severance pay, salaries, medical fees for job related injuries and penalties, can be entered into a people’s court for legal binding.

F. Other Points
Ø Employees may refuse to work in dangerous conditions.
Ø Existing contracts will survive mergers or acquisitions.
Ø Changes in name, legal representative, investor, person in charge etc., will not alter employment relationships, and Employers are required to honour those existing contracts.

III. Termination of Employment Contracts

A. What are conditions for indefinite employment?
Under the following situations an “open-ended contract” (as defined in Section A. I., above) should be concluded, thus creating an indefinite employment relationship:



1. At renewal, the employee has been working for the employer for a “consecutive period” of 10 years or more. When defining “consecutive” if an employee moves between employers due to corporate decisions, restructuring, or administrative decisions, the time with the old employer will be counted when determining the consecutive period. Also if after 10 years, as calculated above, an employee under the following circumstances wishes to enter into an open-ended contract, the employer is required to do so, if the employee:
· was exposed to dangerous conditions and not has had a health check prior to leaving, or is undergoing medical examination for a suspected occupation related disease/disorder.
· is recovering from a non-work related injury/illness.
· is pregnant or nursing.



2. If renewal occurs after the conclusion of two consecutive fixed-term contracts. Note: if an employee continues work after termination of a fixed-term contract and the employer has taken no such measures to end the employment relationship, a natural extension of the fixed-term contract will be presumed – and may, if it is the 3rd consecutive period, render the employee eligible for an open-ended contract.



3. If after a year a written labour contract is still not entered into (See Section I. B., above for details).
ü Note: open-ended contracts in the above situations can only be avoided if the employee explicitly states that he/she wishes to enter into a fixed-term contract.

B. Statutory Termination of Employment Contracts
An employment contract shall terminate automatically under the following circumstances:
· expiry of term;
· employee beings legally drawing his/her pension (i.e. retires);
· employee dies, or is declared missing by a court;
· employer is bankrupt, dissolved, has business license revoked, or is ordered to close; or
· others as mandated by law.




An exception to this rule can be found in Article 45 of the LCL which protects certain workers from statutory termination, such as those close to retirement, pregnant or nursing, or those that have not cleared health checks after being exposed to occupational hazards. How a bankrupt or dissolved company may actually handle such a situation has yet to be seen. Note the above circumstances will also protect a worker from termination by lay-off or termination with notice.
ü Note: the employer and employee may not contract for termination under any other circumstances other than the statutory grounds listed in Article 44.

C. Lay- Offs
A lay-off is qualified as a reduction of 20 or more employees or 10% or more of the company’s workforce. Provided notice is given to the labour union or all employees thirty (30) days in advance, under the LCL, the employer has quite some leeway in justifying a lay-off. In addition to the obvious situations of: restructuring, insolvency, serious business and operational difficulties; the LCL further permits lay-offs when a company changes its production, or adjusts or reforms its overall business and technology, or if circumstances render the company unable to honour its employment contracts.

In the case of a planned lay-off, the LCL protects employees who are the sole breadwinners, long-term employees, and those employees with open-term contracts. Additionally, if within six (6) months, the employee is in a position to rehire it shall give notice and priority to those laid-off.




D. Employer and Employee Initiated Termination of Employment Contracts




The LCL codifies 14 circumstances in which employers may terminate employment contracts; and 13 circumstances in which employees may do the same. Much of these provisions are a reiteration of the Existing Law with the following highlights:
· Employees still under probation are required to give 3 days’ prior written notice to the employer to terminate.
· Employees faced with dangerous conditions, illegal threats or work by force may immediately terminate. And along the lines of general contract principles, employers/employees who were threatened or illegally coerced into forming a contract may terminate such due to invalidity.
· Employers may terminate contracts with employees that establish employment elsewhere that materially interferes with employment with the employer.

IV. Will Labour Unions be Effective in Bargaining for their Employees?
The All China Federation of Trade Unions (“ACFTU”) is State controlled and China’s only authorized legal labour union. Workers may not be refused their right to unionize in China. A minimum of twenty-five signatures are needed to establish a branch. Once a union is formed the Employer is required to pay 2% of the payroll as union fees. Statutorily speaking, the LCL involves unions to a greater degree than the Existing Law in the negotiation process of collective employment contracts. Whether or not unions are effective however, will depend on how independent they are from management control.

V. Staffing Firms
The LCL devotes an entire section to staffing firms and formally codifies “tri-party” employment relationships. Although staffing firms fulfil the obligations of employers with respect to employment contracts, companies should be aware that they will be held jointly and severally liable (between RMB 1,000 and RMB 5000 per employee) for serious LCL violations of seconded employees. Because of this employers may not evade their responsibilities owed to employees.



ü Note: employers are prohibited from establishing staffing firms to second employees to themselves.
ü Note: staffing firms may not hire part-time employees for placement purposes.
ü Note: these rules are also relevant to “representative offices” of foreign companies in China which hire their employees through staffing agencies.

VI. Conflict of Laws
Generally speaking with respect to employment contracts, the LCL takes precedence over all the other employment related laws - although those labour contracts signed before 2008 are still subject to the Labour Law. However, if another employment related law that was enacted before the LCL is more specific on a particular subject and the LCL does not cover such subject, its relevant clause(s) will take precedence over the LCL.



[1] These funds generally do not apply to expatriate employees because of local bureaucratic issues with regard to implementation of such funds. For expatriates, these types of insurances are generally arranged through private insurance agencies rather than through State mandated funds.



[2] New Years Day (January 1st); Spring Festival (3 days); Women’s Day (Half day March 8th for women); Quingming Festival (April 5th); May Day (May 1st); Dragon Boat Festival (1 day); Mid-autumn Festival (1 day); National Day (3 days). Note: to accommodate these holidays, employers may require workers to work weekends preceding or after such holidays.







**(this is not legal advice!)