The employment landscape in China has changed over recent years. China is facing competition from other jurisdictions in terms of providing low cost labour solutions. China’s ability to offer flexibility for businesses and to be able to adapt efficiently to changing market conditions is increasingly becoming an area of focus. In seeking to address the employer desire for increased flexibility, there have been some important developments to the employment law landscape in China this year that global employers should have on their radar. This briefing summarises the key changes

Given the ongoing uncertainty in the global economy, it is no surprise that many employers in China are thinking about ways to streamline their businesses and to keep their labour costs competitive.

Whereas China has traditionally been a popular ‘low-cost’ choice for global businesses to base operations, the employment landscape has changed over recent years. Other jurisdictions are competing with China’s model, offering even lower cost labour solutions. This means that China’s ability to offer flexibility for businesses and to be able to adapt efficiently to changing market conditions is becoming paramount.

Flexibility is critical for employers, particularly in times of economic turbulence. The ability to flex the workforce to suit fluctuating demand and market factors is a real advantage to employers. But that flexibility often runs counter to what employees and their representatives demand in uncertain times, in particular greater job security alongside better pay and conditions. In China workers have become increasingly vocal and there has been a rise in levels of headline-grabbing worker unrest, particularly in the context of proposed downsizings and on corporate transactions.

In seeking to address the employer desire for increased flexibility, there have been some important developments to the employment law landscape in China this year that global employers should have on their radar. This briefing summarises the key changes.

The view from China’s Ministry of Finance

In a speech at the 2016 Chinese Economists 50 Forum in February this year, Mr. Lou Jiwei, the Minister of Finance, said the current law in the PRC does not go far enough to protect businesses and to give them the necessary flexibility to adapt to changes of market conditions. He specifically called for changes to be made to the PRC Labour Contract Law, which is the central piece of legislation in the PRC governing employment relationships.

To further reinforce this point, one of the messages which came across at a conference convened by the political bureau of the Communist Party of China central committee in July this year was the need to increase the flexibility of the labour market to enable businesses to reduce their costs. Many have interpreted this as a key message of the Chinese government and the ultimate aim of any reforms to the PRC employment law regime.

Whilst it is still unclear what changes, if any, are going to be made to the Labour Contract Law, there are already discussions on sensitive topics such as termination of employment.

Unilateral termination of employment by an employer is something that must be handled with care in the PRC. Under the Labour Contract Law, there are limited (and very specific) statutory grounds under which an employer may terminate the employment relationship. Even where the dismissal falls under one of the statutory grounds, an employer is sometimes required to take other steps prior to dismissal, such as re-training or reassigning the employee to a different position where the dismissal is related to the employee’s performance. After the employer has completed the necessary steps, it must then notify the employee’s trade union. The union may have comments on the proposed termination, which the employer is required to consider and respond to, amending the termination plan where necessary.

As such, one of the key changes which is being discussed is whether an employer and employee should be allowed to contract out of these statutory termination grounds and statutory protections, allowing the employer greater flexibility to terminate the employment relationship. There are also discussions on potentially reducing statutory severance, which is currently set at one month of an employee’s salary for every year of service.

Changes in basic pension and other mandatory insurance payments

With effect from 1 May 2016, the mandatory employer contribution rates to basic pension insurance has been capped at 20%. For companies that are already making contributions at the 20% level, contributions may be further reduced to 19%. In addition, the overall unemployment insurance payment rate has been further reduced to the range of 1% to 1.5%, following an earlier 1% reduction in 2015. Work-related injury insurance rate has also been reduced to 0.25% and the maternity insurance payment rate has been reduced to 0.5%.

That said, specific social insurance contribution rates are decided by the local authorities at a provincial level. At the moment, it is unclear as to whether these new policies will be implemented locally, and if so, to what extent.

Against that backdrop however, employers should be aware that the costs of labour may go up on other fronts.

The impact on employers of the 2-child policy

The amendment to the PRC Law of Population and Family Planning came into force on 1 January 2016, which enables all married couples in China to have two children rather than just one.

This change will undoubtedly have profound influence on businesses in China. For one, employers will need to factor in the cost of paying for additional maternity benefits to female employees who are looking to have a second child.

The amendment also changes maternity leave, parental leave and marriage leave entitlements. Although the actual changes will vary depending on the individual implementation of the rules in each province, the new rules generally give employees enhanced benefits and longer periods of maternity leave, parental leave and marriage leave which were previously only offered to those employees who have a late marriage or childbirth.

Changes to China’s Labour Dispatch laws

Changes to the rules on labour dispatch imposed by the Interim Provisions on Labor Dispatch will also mean higher costs and less flexibility for employers in China.

Dispatch workers are atypical – in essence they are workers that are hired by agencies and remain employed by the agencies rather than the employer/”end user” to whom they provide their services.

Dispatched labor is widely used in China as it is generally less expensive and more flexible than employing employees directly. Dispatch agencies can offer companies temporary employees for particular projects or for a set time frame. Most workplace issues or grievances are dealt with by the dispatch agency. Once a company has no further need for a dispatch employee, it can simply return him/ her to the dispatch agency, without the headache of dealing with termination issues and severance pay.

However, this leaves dispatched employees vulnerable to exploitation. The Interim Provisions were enacted as a response in 2014. They sought, amongst other things, to limit the types of positions that could be taken on by dispatched workers as well as cap the number of dispatched workers that can be used by employers to 10% of the overall workforce.

There was a two-year grace period for employers to comply with this new cap, which came to an end in February this year. A breach of the Interim Provisions will mean a hefty fine of up to RMB10,000 for each dispatched employee the employer has in its workforce above the 10% threshold.

Statutory Retirement Age to be increased

Another very recent change which may impact on the flexibility of the labour market is the raising of the statutory retirement age. This topic has been discussed for a number of years and was officially announced in the Outline of the 13th Five-Year Plan for the Development of Human Resources and Social Security Undertakings, which was released in July this year. According to the spokesman of Human Resources and Social Security Ministry, the proposal is to raise retirement age gradually by a few months each year until it hits the new “target” retirement age. It is currently unclear what the target age will be, although many scholars predict that it will likely be 5 years above the current retirement age, which is 60 for males and 50 or 55 for females, depending on the position.

In practice, many employers in China choose to re-engage employees after their retirement on a consultancy basis as many of them have valuable experience and expertise in their area. However, since they will be receiving pension payouts from the social security fund after their retirement, they will no longer be considered employees. One impact of this new policy is that it may affect employers’ ability to hire “fresh blood” as well as limit their flexibility to re-engage more senior employees on a consultancy basis, which allows them to avoid employment-related obligations and responsibilities imposed under Chinese labour laws, such as mandatory contributions to social insurance, minimum salary, annual leave entitlements, compensation for overtime work, limited termination grounds, statutory severance payment upon termination, etc.

Conclusion

2016 has seen a number of substantial new developments for the PRC employment law regime. Time will tell as to what the new focus on increasing employer flexibility and protection will mean in terms of further legislative changes. Watch this space as we will continue to monitor for upcoming developments.