Key Points:

  • Businesses still have questions regarding compensation guidelines that went into effect with the January 1, 2008 adoption of the PRC Labor Contract Law  
  • Local bureaus’ interpretation of the Labor Contract Law’s clause on openended contracts has raised concerns
  • Employers must take care not to expose themselves to liability under China’s regulations on statutory vacations with pay

Since the adoption of the PRC Labor Contract Law on January 1, 2008, there have been questions regarding how the law is applied, particularly to employment contracts that remained valid on and after January 1, 2008. China Update spoke with Laura Wang, a lawyer in the Squire Sanders Beijing office, about the law and how it has affected labor practices in China.

What are the most common questions about the Labor Contract Law with respect to the employment contracts in question?

Wang: The most common question our clients have asked with respect to employment contracts with commencing dates before January 1, 2008 but to be terminated after January 1, 2008 is how to calculate the economic compensation upon termination. The general concept is different rules apply to the service period before and after January 1, 2008. The PRC Labor Contract Law follows the principle of “one month’s salary for one year” as provided by the PRC Labor Law, but the Labor Contract Law provides changes to the details. The follow chart shows the changes:

To see chart please click here.

When terminating an employee, the employer must calculate the economic compensation for the period before January 1, 2008 by applying the then-effective rules and calculate the economic compensation for the period after that date by applying the Labor Contract Law. The sum of these two will be the total economic compensation payable to the employee.

The changes have a great impact on employees with high salary. We often see cases where a manager is terminated and the economic compensation he or she is entitled to for the period after January 1, 2008 is significantly less than the economic compensation he or she is entitled to for the service period before January 1, 2008. Because of the cap on monthly salary, the cost of terminating a senior manager is much less than it was before January 1, 2008. More and more companies prefer to terminate their managers through mutual consent by offering a termination package higher than the legally required minimum economic compensation under current rules but much lower than what they would have received under the old law before January 1, 2008.

When the Labor Contract Law was published, there were a lot of concerns about the employer’s obligation to sign an open-ended contract. What is the practice today, and are there any particular areas where employers should be particularly careful?

Wang: This remains a concern. In fact, some local bureaus’ interpretation of the clause on open-ended contracts makes this an even bigger concern. Article 14 of the Labor Contract Law provides that, “If any of the followings exists when the employee asks or agrees to renew or sign an employment contract, an open-ended contract shall be entered into unless the employee requests a fixed-term contract: … two consecutive fixed-term contracts have been signed and none of the situations listed in Section 39 or Section 40 Subparagraphs (1) and (20) exist” (Section 39 and Section 40 Subparagraphs (1) and (2) are statutory grounds entitling the employer to terminate the employee unilaterally with or without prior notice).

Many companies believe Article 14 (3) means that if both the employer and employee agree to renew the contract for the second time, the employee is entitled to an open-ended contract but the employer does not have to agree to renew for the second time. However, some local labor bureaus, such as the Beijing Labor Bureau, interpret Article 14 differently. They believe that after the employer renews the employment contract for the first time it has to renew the employment contract for the second time − unless the employee refuses to renew or there is a situation entitling the employer to terminate the employee − and the second renewal contract must be an open-ended contract unless the employee requests otherwise. This interpretation means that after a company renews the employment contract, the employee will become a permanent employee unless the company can terminate him or her on legal grounds.

What other issues should employers in China watch out for under the current PRC labor laws and regulations?

Wang: One thing many employers may overlook is vacation days. On January 1, 2008 a regulation on statutory vacations with pay took effect. That regulation provides the minimum number of vacation days to which employees are entitled. Such statutory vacation days can be carried over for one year with the employee’s consent. Also if there are any unused statutory vacation days due to the employer’s business demand, the employer is required to pay three times the daily salary in lieu of vacation for each unused vacation day. If the employer makes the vacation days available to the employee and the employee requests in writing to cash out, the employer is required to pay only the regular daily salary for each vacation day.

The common practice among employers is to ask employees to submit applications for vacation, which the employers may approve or deny. If at the end of a year an employee has unused vacation days and he or she did not apply for vacation days, the employer must allow them to be carried over to the next year. Over time, an employee could accumulate a large number of unused vacation days. This is not a good practice, as being passive and waiting for the employee to apply for vacation could expose the employer to the liability of paying three times daily salary in lieu of vacation.

The regulation on vacation days with pay requires the employer to be much more proactive in order to fulfill its obligation. The employer must make arrangements for the employee to take vacation time. The employer must remind the employee about the unused vacation days and even request that the employee take vacations. If the employee gives written notice that he or she will not take the vacation although the employer has made the necessary arrangements, the employer could be exempt from the three times daily salary payment in lieu of vacation.  

The statutory vacation days can be carried over, with the employee’s consent, for one year. The employer must make the effort to arrange for the employees to take those carried-over vacation days in the next year. Otherwise, at the end of the next year, it will be obligated to pay those unused vacation days at the rate of three times daily salary.