The Labor Contract Law of the People’s Republic of China was adopted by the Standing Committee of the National People’s Congress on June 29, 2007, and was signed by Hu Jintao, the President of China, on the same day. The Labor Contract Law will take effect on January 1, 2008. China’s Labor Law (“Labor Law”), which has been in effect since January 1, 1995, will remain effective.

The Labor Contract Law adds significant protection to those found in the Labor Law for employees, in various areas including penalties to employers who do not sign an employment contract with their employees and compensation to employees for improper termination.

This memorandum summarizes certain key provisions of the Labor Contract Law.

1. Consultation with the Workers’ Union.

Under the Labor Contract Law, for policies concerning material issues such as compensation, work hours, vacation and holidays, work place safety, benefits, training, discipline and work load, employers must consult with the workers’ union. Based on media reports, in an early draft of the law, for such material issues, an employer was required to obtain approval from the workers union. The final version of the Labor Contract Law apparently reflects heavy lobbying by employers. The law, however, does not provide what happens if the employer and the workers union do not agree on any of the identified key issues. It is not clear what standing the workers union would have in an event if its position is ignored or disregarded.

2. Formation of Employment Relationship.

Under the new Labor Contract Law, the employment relationship is deemed to exist from the day the employee starts to work for the employer. The Labor Contract Law further provides that after the formation of the employment relationship, the employer and the employee must enter into a written contract within one month. Moreover, for employers who started to use the labor of laborers before January 1, 2008, the effective day of the Labor Contract Law, the parties must enter into a labor contract within one month of the effective day of the new law.

After a month but within one year of the commencement of an employment, if an employer does not sign a labor contract with the employee, the employer must pay double salary for every month the employee worked without an contract. If such period without a contract exceeds one year, then the employer and the employee are deemed to have entered into a labor contract with open terms (see discussions under paragraph 3 below), in addition to the payment of double salary.

3. Three Types of Labor Contract

The new law divides labor contracts into three types:

(i) contracts with a fixed term;

(ii) contracts with an open term; and

(iii) contracts whose term is linked to the completion of a specific task.

4. Deemed Entry into an Open Term Contract.

Designed as a deterrent to employers who try to avoid signing labor contracts with their employees, the Labor Contract Law provides that one year after employment commencement, if there is no labor contract, then the employer and the employee are deemed to have entered into a labor contract with an open term.

5. Mandatory Open Term Contracts

If requested by an employee, an employer must enter into an open term contract with the employee if one of the following conditions exists:

(i) the employee has been working for the employer for ten years consecutively;

(ii) if it is the first time that an employer has adopted the system of labor contract or at the time of reforming a state-owned enterprise, the employee has been working for the employer for ten years, and the employee has less than 10 years before he or she reaches the legal retirement age; and

(iii) a contract with a fixed term has been renewed two consecutive times.

6. Mandatory and Optional Provisions of the Labor Contract

All labor contracts in China must include information about the employer and the employees, term of the contract, description of the job and location of the job, working hours, rest period and vacation, compensation, social insurance, safety measures and working conditions. In addition to the mandatory provisions, an employer and employee can also include certain optional provisions to cover matters such as probationary period, training, confidentiality, supplemental insurance and benefits.

7. Detailed Regulation of Probationary Period.

Under the existing Labor Law, a labor contract may contain a probationary period, with a maximum term of 6 months. Under the new Labor Contract Law more details are added to the permitted length of probationary period:

  • Contracts with a term of three months to one year, the maximum probationary period is one month; 
  • Contract with a term of one year to three years, the maximum probationary period is two months; 
  • Contract with a term of three years and longer, or with an open term, the maximum probationary period is six months; and 
  • Contract with a term of less than three months, or with a task-based term, the law does not permit any probationary period.

In addition, the same employer and employee can only have one probationary period, no matter how many labor contracts they sign.

The new Labor Contract Law also provides that if a labor contract has only a probationary period, then such probationary period is void, and instead, the probationary period will be deemed to be the term of the contract.

During the probationary period, an employee’s compensation can not be lower than: 

  • the lowest salary of similar positions of the employer; 
  • 80% of the regular salary as stipulated in the contract; and 
  • the minimum local wage standard.

8. Non-Competition Provisions

Under the new Labor Contract Law, for those employees who have an obligation to keep certain of the employer’s information confidential, the labor contract may include a noncompetition term. Such clause shall also provide monthly compensation to the employee during the non-competition term. The maximum term of a non-competition provision is two years from the date of termination of the labor contract.

9. Validity of a Labor Contract

The new Labor Contract Law provides that a labor contract is invalid or partially invalid if the contract includes provisions that exempt the employer from any legal liabilities, or exclude any of the employee’s legal rights.

For a determination of the validity of a labor contract, the contract parties may go to a labor arbitration organization or the court.

If a labor contract is determined as invalid, and if the employee has started working already, the employee is entitled to compensation for service provided.

10. Performance of a Labor Contract

The new Labor Contract Law provides that if an employer delays paying its employees or if it fails to make full payment due to the employees, the employee may apply to the local court for an order of payment.

11. Rescission of a Labor Contract.

(i) Rescission by an Employee

(a) Generally, an employee has the right to rescind a labor contract provided that a written notice is sent to the employer thirty days before rescission (3 days notice during probationary period).

(b) If the employer is involved in any of the following acts, an employee can rescind the labor contract with notice at any time: 

  • failure to provide safety measures or proper work conditions as called for under the labor contract; 
  • failure to make full payment to an employee when due; 
  • failure to pay social insurance premium for the employee as required by law; 
  • failure to follow laws and regulations which result in harm to the rights of an employee;

(c) An employee can rescind a labor contract at any time, without the obligation to provide prior notice if an employer uses violence, threatens or illegally limits the freedom of an employee.

(ii) Rescission by an Employer

(a) If an employee is involved in any of the following acts, an employer has the right to rescind the labor contract with notice to the employee at any time:

  • it has been proved that during the probationary period the employee is not qualified for the job; 
  • material breach of the employer’s rules and policies; 
  • failure to fulfill his or her obligations or acting in self-interest which results in significant losses to the employer;

(b) In certain cases, such as when an employee can not resume an old job after being sick for some time or after injury and is unable to take a new job, then the employer can rescind the labor contract with a 30-day notice to the employee.

12. Termination of a Labor Contract

A labor contract terminates under the following circumstances:

  • expiration of the labor contract term; 
  • the employee starts to collect social benefits; 
  • death; 
  • the employer is declared bankrupt; or 
  • closing of business of the employer.

13. Severance Compensation

An employer must provide compensation to the employee when an employee rescind the labor contract:

  • due to (i) unsafe work conditions, (ii) under payment or no payment of salary, or (iii) failure to pay social benefits, (iv) rescission for one of the circumstances described in the Labor Contract Law, (v) the employer is declared bankrupt, or (vi) the business is closed;
  • In general, for every year an employee worked for the employer, the employee must be paid one month’s standard salary.

However, for an employee whose monthly salary is three times or more than the local average salary, then the maximum compensation is three times that of the local average salary and the maximum of years which will be compensated is 12 years. In addition, the new Labor Contract Law also added new provisions about outsourcing of labor, collective bargain contracts and part-time jobs.