China and Compliance: Reviewing your Employment Situation
By Robin Tabbers
Not seldom, foreign-invested businesses are unaware of critical employment compliance requirements in China. It is a misconception that employees can be requested to work at any hour, whenever the business requires so, or that employees can be fired at will.
The opposite is the case. Chinese labour laws favour the employee quite significantly, while enforcement procedures can be easily and economically started by employees. Foreign-invested companies who treat their employees in China as if they were employed in their home country, may find themselves in precarious situations. Luckily, many problems can be avoided if the company has valid employment contracts, has adopted a staff handbook, and otherwise complies with the local laws and regulations . In this article, we will discuss the most critical points with regards to PRC Labour Law and Labour Contract Law compliance.
Firstly, every employee must have signed a written employment contracts. The employment contracts shall not be in conflict with Chinese laws, so using standard contracts that are also used in the home jurisdiction is not advisable. These contracts will more likely than not contain plenty of clauses that will be non-compliant in China.
When drafting employment contracts, term and probation period are key considerations, and mandatory rules apply, and should not be violated. It speaks for itself that the employee must receive more than the minimum wage. The minimum wages differ from city to city and change very often, so it is crucial to stay on top of the recent developments. Therefore, pay special attention to the social insurance contribution levels, which are often – incompliantly – based on lower base levels than factually should apply.
Furthermore, it is worthwhile to protect the company’s IP and trade secrets in the employment contracts. Any successful company will have several trade secrets they do not want to see leaked. Therefore, a non-disclosure clause is an essential part of a good contract with key employees.
Besides, a non-compete clause can be useful. This will make sure (former) employees abstain from joining the competition. Please note, however, that the law on non-competes is quite extensive. The most important thing to consider is that the PRC law generally allows non-competes for a period up to two years, but that employers are required to pay the employee a monthly non-compete compensation during the non-compete term. This compensation shall be agreed between employer and employee, while failure to agree so in advance or before commencement, can lead to a court ruling that this compensation shall be set at 30% of the average remuneration during 12 months before termination.
A company may be employing several foreigners, who are then subject to special regulations in the PRC and obtaining the necessary paperwork to obtain a work permit can be time-consuming. Besides having to comply with basic requirements like being in good health, and having no criminal record, foreigners may also be subject to specific local laws. For example, cities like Shanghai and Beijing require foreigners to have two years of relevant experience and at least a bachelor’s degree before allowing them to work there.
Pay extra attention to the fact that contracts with foreigners must comply with and be subject to PRC laws. This means that solely having contracts with foreign parent companies will not be deemed adequate for this purpose.
In most cities in China, foreign employees must contribute to social insurance funds. However, some cities have not yet implemented adequate government systems for this purpose, which could save considerable employer cost (f.i. Shanghai., for the time being).
Termination of contracts
Finally, a company must act carefully when terminating employment relationships with its employees. China does not allow for at-will employment for full-time employees, which means that an employee cannot be fired without due cause. Like many civil law jurisdictions, there must be legal grounds.
One of the leading legal grounds for lawful termination is a violation of company rules. For this purpose, companies should have duly implemented (following strict mandatory procedures) an internal document that sets out the company rules and regulations, usually referred to as a staff handbook or employee handbook. This should be a detailed document that describes as precise as possible how employees should behave. Without this document, it becomes challenging to fire or even sanction employees. Note that this document should best be written in Chinese, to avoid enforceability issues in local labor tribunals or courts.
If an employment relationship is unlawfully terminated, the employee can demand reinstatement or economic compensation that is double the severance in case of lawful termination (yes, in cases of lawful termination with notice, there is still severance pay). If legal grounds cannot be found, it is advisable to negotiate with the employee and try to reach a suitable solution for both parties to avoid legal proceedings.
Most of the time an adequate severance package will suffice, though if consensus cannot be reached, the employee may file a claim in labour arbitration. Employees whose contracts are not extended after an initial agreement term, are entitled to severance.
Severance is generally calculated on the basis of one month’s salary (“Severance Salary”) for each full year the employee has worked for the company. The Severance Salary means the average monthly remuneration of the employee during the last 12 months. The Severance Salary shall not exceed three times the local average monthly salary in the relevant city (around CNY 28,740 in Shanghai, at the time of issuance of this article in June 2021).
The above are general interpretations of the general laws and regulations, but their application on a local level can vary and should be consulted with employment law specialist.
It is common wisdom that prevention is better than the cure: compliance with employment provisions is thus crucial for running a successful business in China. Being compliant in the employment arena, will significantly decrease the cost of severance, labour disputes, and other employment issues. Especially in China, where labour laws change frequently and vary locally, this does require extra diligence when dealing with employees. For this reason, your employment situation shall best be reviewed annually.