Guidelines on China's New Employment Contracts Law

Overview

The Law of People's Republic of China on Employment Contracts ("Employment Contracts Law" or the "Law"), effective on January 1, 2008, made significant changes from the previous employment laws. The changes in the employment law provide more protection to employees. Companies, both domestic and international, are confused about the effects of those changes. As more and more companies are considering entering into the Chinese market, employment law becomes more relevant internationally. This QuickCounsel provides some insights into what in-house counsel need to know when hiring employees in China.

Time of Contract

Under the Employment Contracts Law, the employment relationship begins when the employee starts work. The Law requires a written employment contract to be entered into when such a relationship is established. However, if the employment relationship is established before a written contract is entered into, then the parties have one month to work on an employment agreement.

Employers should be very careful about this "one-month" deadline. If no written contract is signed by the deadline, the employer has to pay double salary to the employee, counting from the first day of the second month. After a year without a written contract, the employer must pay double salary from the second month to the end of the first year of employment and the contract is also deemed to be a labor contract without fixed term from the first day of the second year. Given the risks, In-house counsel employing labor in China should get written employment contracts as soon as possible.

Required Information in the Employment Contract

In order to be valid, the employment contract must include the following information:

1. The employer’s name, domicile, legal representative, or major person-in-charge;
2. The employee’s name, domicile, identity card number, or other valid identity certificate number;
3. The term of the labor contract;
4. The job descriptions and work locations;
5. The work hours, break time, and vocations;
6. The remuneration;
7. The social security information;
8. The employment protection, work conditions, and protection against and prevention of occupational harm; and
9. Other items that shall be included in the labor contract under any laws or regulations.

In addition, the parties can always include other clauses as they deem necessary and appropriate. Also, severability is the default rule: the invalidity of any part of the contract does not affect the validity of the other parts of the contract.

The Term of the Contract

There are three types of employment contracts under the law:

• fixed-term labor contracts,
• labor contracts without a fixed term, and
• labor contracts for the completion of specific tasks.

The contract without a fixed term brings the most trouble for companies because limits their ability to terminate the contract. A labor contract without a fixed term is a contract in which the employer and the employee do not stipulate an end date for the contract. This type of contract is considered better for long-term employment relationships. However, problems arise when the employee has worked for the company for ten consecutive years. In this situation, the parties are deemed to have a labor contract without fixed term unless the employee proposes otherwise. The law also imposes some limits on employers in this type of contract:

Termination

The employee has more control over the termination of contract when it is one without fixed term. A contract without fixed term can be terminated with mutual consent or by the employee unilaterally with a 30-day advance notice. When lay-offs are necessary, the employees with a contract without fixed term have seniority over others. Also, the employer can only terminate the contract for causes listed in the law, such as bankruptcy, significant changes in the company, or the employee's potential criminal conviction.

Severance

When the company terminates the contract without a fixed term for cause, it does not need to pay severance. However, for some situations, like bankruptcy, significant changes in the company or employee's incompetence for work, the company must pay severance. The severance is based on the length of time the employee has worked for the company:

• a month salary for each year in the company;
• if it is less than 1 year but more than 6 months, one month salary should be given; and
• if it is less than 6 months, half month salary should be given.

Non-Competition Clauses

A major concern of companies is the protection of trade secrets and business plans. Non-Competition Clauses serve to protect companies from disclosure of sensitive materials by former employees. But a new problem arises when the contract includes the non-competition clause: how to make sure it is valid and enforceable?

In China, for a non-competition clause to be effective, the non-compete period should not be longer than two years, and such a clause cannot violate any law or regulation. The parties could stipulate the scope and the geographic area of restriction, both of which should be reasonable. There are three types of employees that may be subject to the non-competition clause:

• senior management,
• senior technicians, or
• other people with a confidential obligation.

Other employees, who are deemed to have no access to confidential information, cannot be subject to non-competition clauses.

A valid non-competition clause prevents an employee from working for a competitor or setting up his own firm in the same business during the stipulated term. The employer should make monthly payments to the employee during the term and the amount could be stipulated by mutual consent. There is no national standard for the amount of such compensation, but some provinces or cities may have their own standards. In-house counsel should check the local standards before determining the monthly amounts to be paid in the contract.

Dispute Resolution

In Employment Law, arbitration is required before either party can file a complaint with the court. The statute of limitations for the arbitration is one year, from the date the party knows or should have known the violation of rights. Each city or district has special tribunals dealing with arbitration disputes, and in most situations, a company's local tribunal has jurisdiction.

The applicant, usually the employee, has the burden of proof for his/her claims. However, considering the employee may not have access to important documents, the law places the burden of providing documents on the employer if the documents are in employer's possession. The failure to provide such documents will be used against the employer in the arbitration.

Generally, if either party is unsatisfied with the award of the arbitration, he/she can file a complaint to the court within 15 days of the award. However, there are two exceptions to this rule. The award is final if the dispute is (1) about payment of salary, severance, compensation for work-related injury, or a disputed amount which is fewer than 12-month minimum local wage; or (2) about the enforcement of national standards in work hours, social security benefits, vocations, and other issues. However, it does not mean that the award cannot be modified. The employee can still bring suit if he/she finds the award is unsatisfactory, while the employer, under limited circumstances, can only apply to the Intermediate Court for the revocation of award within 30 days. The arbitration rules are obviously more favorable to the employees.

Conclusion

The employment law issues in China can get very complicated when the labor union and local government get involved in the employment relationship. This is just the start of knowing employment law in China, not the end. When a company wants hire local employees, in-house counsel should make sure to have a written contract with required information. Also, in-house counsel should always check the local regulations for specific requirements. If considering putting a non-competition clause into the contract, make sure to get everything straight in line. This QuickCounsel provides in-house counsel with brief guidance on China's Employment Contract law, including the rights of employees, the risks to employers, and some issues to consider in the event of a dispute.