China’s New Labor Contract Law
By: RUILIN LI
January 2008
China’s new Labor Contract Law (also known as the Employment Contract Law, “ECL”) has come into force from January 1, 2008. In general, the new law expands employee rights and protections. Companies that have business operations in China should review their employment practice in China promptly to ensure compliance with the ECL.
The following are some key developments/provisions of the ECL:
Employment Contracts. Under the ECL, a written employment contract is required. The basic terms that it must contain include employer’s address and its legal representative, employee’s address and ID number, term of the contract, job description, remuneration and benefits, social insurance, and enumerated protections in working conditions, among others. An employer should also consider including the term of probation, the penalty for the employee failing to work for the employer following employer-paid training, and the penalty for failure to maintain confidential company information.
Note that an employer may be subject to penalties for failing to implement the written employment agreements with its employees. For example,
- If no employment contract is signed within one month of commencement of an employee’s employment, the employee is entitled to double wages.
- If an employer fails to enter into an open-ended agreement with its employee in accordance with the ECL, the employer will also have to pay double wages from the date the employer should have entered into such agreement with the employee.
- If no agreement is entered into within one year of commencement of the employee’s employment, the parties are deemed to have signed an open-term contract (see below).
Contract Term. In terms of the term of a labor contract, the ECL distinguishes between three types of labor contracts: fixed-term, open-term, and contracts based on the completion of an assignment. Employers often prefer the fixed-term employment contract because it gives them more control over their ability to terminate a worker who is not performing adequately. Contract-termination provisions under ECL generally favor the employee. It provides that, after an employee has completed two fixed-term contracts (regardless of length of contract), or if an employee has worked for the same employer for at least 10 consecutive years, it is deemed that the employer has an open-term contract with the employee.
Probationary Period. Probationary periods are permitted in newly hired employee contracts, but only one such period is allowed for one employee. Probationary period should be between one to six months depending on the term of the individual agreement. Termination during probation is permitted if the employer can prove that the employee did not meet the previously stated conditions of employment.
Non-Compete Restrictions. Under the ELC, non-compete restrictions may be included in employee contracts, but cannot be longer than two years following employment termination. In addition, the non-compete restriction may only be imposed to senior management, technical personnel, and employees with a confidentiality obligation. Further, non-compete restrictions may be limited to geographic areas. However, in order to impose the non-compete obligation to employees, an employer has to pay employee financial compensation in monthly installments during the post-termination non-compete period. The amount of financial compensation that needs to be paid is not clear (wages paid during active employment period cannot be deemed to be financial compensation for a post-employment obligation) and consultation with local labor administration is necessary sometimes to obtain further guidance.
Confidentiality provisions are permitted and they are not subject to the two-year rule or the senior-management rule.
Termination of Employees Without Severance. An employer can unilaterally terminate an employee without severance payment under the following circumstances:
- the employer proves that the employee did not meet the conditions of employment during the probationary period;
- the employee materially breaches the rules and regulations of the employer;
- the employee’s actions resulted in a serious dereliction of duty, or are considered the practice of graft, causing substantial damage to the employer;
- the employee establishes labor relationship with another party and such relationship materially impacts such employee’s ability to perform his/her job duties and does not seek to rectify the situation after employer’s notice;
- the employee uses deception or coercion to conclude the employment contract; or
- the employee commits a crime.
Under these circumstances, the employer may terminate the employee without a notice period.
Collective Terminations. Collective terminations (defined as laying off 20 or more employees, or 10 percent or more of an employer’s total workforce) are allowed upon the occurrence of the following events:
- reorganization as a result of bankruptcy;
- serious difficulties in production or operations;
- when a company switches production, introduces a major technological innovation or revises its business methods and finds that it still needs to reduce its workforce; and
- a major change in an objective economic circumstance that was relied upon at the time of the signing of the employment contract.
Under the above circumstances, the employer must give a 30-day notice to the labor union and then report the workforce reduction plan to the local labor administration. An employer must try to retain employees who have long fixed-term contracts or open-term contracts, and those who are the only employed member in his/her families and need to support minors or elders.
Termination. An employer must give a 30-day written notice, or one month’s wage in lieu of notice, in order to terminate its employee if (i) the worker is unable to work in either his original job or any other work following the prescribed period of medical care for an illness or non-occupational injury; (ii) the worker is incompetent and remains incompetent after training and adjustment of his position; or (iii) a major change has occurred in the objective circumstances on which the labor contract was negotiated.
In all cases of termination without cause, the employer must provide a severance payment of one month’s wage for each year of service such an employee has provided to employer up to termination, but no more than 12 months. If an employer wrongfully terminates its employees, then the affected employees may be entitled to double of the severance payment.
Overall, the ECL is expected to support employees’ rights and interests. Foreign companies should remain mindful that the ECL may have implications for their hiring strategies in China.
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