China Employment Law Update - April 2016

China Employment Law Update People’s Republic of China April 2016 Government Considers Amending Employment Contract Law to Make Employment “More Flexible” On February 29, 2016, the head of the Ministry of Human Resources and Social Security (“MOHRSS”), Mr. Weimin Yin, addressed some publicly expressed concerns that the Employment Contract Law (“ECL”) imposes too high a burden on companies and makes the labor market too rigid. He stated that although the ECL has had a positive impact on regulating employers’ activities, safeguarding the employers’ and employees’ legal rights, and establishing harmonious labor relations, it also may have created a less flexible labor market, increased labor costs for companies, and may not be adaptable to the changing labor situation. Given these concerns, according to Minister Yin, MOHRSS is open to comments from various channels and will consider the pros and cons for the potential amendment of the ECL. The minister did not specify which exact rules in the ECL would be subject to consideration for amendment, though when deciding how to make the law (and the labor market) more flexible, the restrictions on termination or the imposition of openterm employment contracts on companies would likely be key points of discussion. Shortly before the head of MOHRSS made these comments, the Finance Minister, Mr. Jiwei Lou, also shared his views that the ECL fails to provide protection for companies, and that rigid rules which potentially have an adverse impact on the flexible labor market should be removed. Furthermore, during China’s annual National People’s Congress and Chinese People’s Political Consultative Conference meetings, several representatives also expressed concerns regarding the lack of balance in the protections afforded to the employers and employees under the ECL, leading to increased liability and costs for companies. As a result, according to these representatives, companies may be more cautious about their hiring decisions, which may indirectly harm the interests of employees. The State Council is also reportedly reviewing and researching the possible amendment of the ECL to make it more flexible. Key Take-Away Points: The above comments reflect the fact that, as China’s economy is slowing, multiple voices in the government are taking a more company friendly approach to labor relations, which is in line with President Xi Jinping’s remarks about the need for supply-side reform. Any amendments to the ECL to make termination easier would inevitably change the dynamics of Beijing Suite 3401, China World Office 2 China World Trade Centre 1 Jianguomenwai Dajie Beijing 100004, PRC Tel: +86 10 6535 3800 Fax: +86 10 6505 2309 Hong Kong 14th Floor, Hutchison House 10 Harcourt Road Central, Hong Kong Tel: +852 2846 1888 Fax: +852 2845 0476 Shanghai Unit 1601, Jin Mao Tower 88 Century Avenue, Pudong Shanghai 200121, PRC Tel: +86 21 6105 8558 Fax: +86 21 5047 0020 Follow us on "Employment Law" group (贝克麦坚时劳动法热点话题) More information on the next page In This Issue Government Considers Amending Employment Contract Law to Make Employment “More Flexible” Social Insurance and Housing Fund Costs to be Reduced in China New Family Planning Rules Issued in Beijing and Other Key Locations Further Guidance Issued on Work Related Injury Issues Sichuan Province’s Highest Court Issues Guiding Opinion on Labor Disputes Beijing Case Clarifies Issues Regarding Female Employees’ Retirement Age Chongqing Court Dismisses Employee’s Claim for Severance Pay due to Company Relocation Recent Cases on Collective Contract Issues Foreign Movie Star Ordered to Pay Back Income Tax in Beijing 2 Baker & McKenzie | China Employment Law Update • April 2016 labor relations in China. Further, such amendments would likely encounter at least some resistance from others inside and outside the government, so the legislative process for any such amendments may be contentious and lengthy. Social Insurance and Housing Fund Costs to be Reduced throughout China Recently, in light of the economic slowdown, the national government has taken several measures to reduce social insurance and housing fund contribution costs for employers. On April 4, 2016, the Ministry of Human Resources and Social Security and the Ministry of Finance jointly issued a notice on reducing the contribution rates for social insurance (which is inclusive of five types of insurance schemes, i.e., pension, medical insurance, unemployment insurance, work injury insurance and maternity insurance). According to the notice, within two years from May 1, 2016, the employer-portion of the pension contributions should be reduced to 19%-20%, while the total unemployment insurance rates for employer and employee (which have been reduced from 3% to 2% in 2015), will be further reduced to 1%-1.5% with the employee contribution rate being capped at 0.5%. In addition, local authorities will continue to implement a 2015 national notice on reducing work injury insurance by 0.25% and maternity insurance by 0.5%. The State Council announced in April 2016 that the local housing fund contribution rate should not be higher than 12% (though it is unclear whether 12% represents the total contribution rates for both employer and employee portions, or just the employer portion), and that local housing fund centers should formulate rules to reduce the contribution rates in phases. In addition, companies facing economic difficulties may apply to reduce the housing fund contribution rate or delay the housing fund payment, and then increase the contribution rate or make back-payments when their financial conditions improve. The national authorities are working on drafting formal regulations which will provide further details on these initiatives. Over 10 provinces and municipalities (including Shanghai Municipality, Guangdong Province, Tianjin Municipality, Yunnan Province, Gansu Province, Hangzhou Municipality, Xiamen Municipality) have reduced their local social insurance contribution rates recently. For example, Shanghai reduced the employer-portion of social insurance contribution rates by 2.5% in total (i.e., 1% for pension and medical insurance respectively, 0.5% for unemployment insurance), effective January 1, 2016; Guangdong Province reduced the total unemployment insurance rates by 1% effective March 1, 2016; and Hangzhou reduced the employer rate of work injury insurance and maternity insurance by 0.4% in total. Key Take-Away Points: Companies should be aware of the changes to local policies to ensure that timely contributions are made at the correct rate. In addition, companies that are experiencing financial difficulties may apply for the housing fund deductions or authorisation to make late payments in accordance with the applicable local rules. This change is another signal that the government Follow us on Baker & McKenzie’s Employment Law Group is pleased to share with you through this Wechat group Employment related hot topics, legal developments, case analysis, seminars and trainings, and other relevant information. How to follow our Wechat group? Launch the WeChat app on your mobile, and then: • Scan the QR code below to find "EmploymentLaw" group (贝克 麦坚时劳动法热点话题); or • Search "贝克麦坚时劳动法热点 话题" or "EmploymentLaw" from the public account. * QR Reader is required for phones to scan and read the code iOS, Android and Windows Phone – click Discover > Scan QR Code > Align the QR Code within the frame to scan, or click WeChat > press the + button > select Scan QR Code > Align the QR Code within the frame to scan; BlackBerry – click the icon showing two figures > Scan QR Code > Align the QR Code within the frame to scan. * WeChat is only available in Mandarin China Employment Law Update • April 2016 | Baker & McKenzie 3 seems to be concerned about labor costs for companies in light of the economic slowdown. New Family Planning Rules Issued in Beijing and Other Key Locations After the National People’s Congress Standing Committee adopted changes to China’s Family Planning Law in December 2015, Beijing Municipality, Jiangsu Province and Chongqing Municipality recently changed their local family planning rules (“New Rules”). These New Rules implement the changes made at the national level by removing the concept of “late-marriage” and “late-birth”, and have changed the conditions for and length of marriage and maternity/paternity leave in the three locations as follows: • Marriage leave Late-marriage leave has been repealed in the three locations and instead employees are provided with additional marriage leave days provided that they legally register their marriage. Now employees will be entitled to the following marriage leave days: Beijing: 8-10 total days (local officials usually recommend that companies give all employees 3 days’ marriage leave to begin with, therefore employees will now be entitled to 10 days in total following the 7 additional marriage leave days provided by the New Rules). Jiangsu Province: 10 additional days (excluding public holidays) in addition to the marriage leave granted in each city, e.g. in Nanjing, employees are entitled to 3 days’ marriage leave, so now they will be entitled to 3+10 days of marriage leave. Chongqing: 15 days • Maternity and Paternity leave Late-birth maternity leave is replaced by additional maternity leave. If the birth of the child is legal, the female and male employees will be entitled to the following maternity and paternity leave days: Beijing and Chongqing: 128 days maternity leave and 15 days’ paternity leave Specifically in Beijing, subject to the employer’ approval, female employees may also be provided another 1 to 3 months’ maternity leave in addition to the maternity leave mentioned above. Jiangsu: 98+30 days (excluding public holidays) and 15 days paternity leave (excluding public holidays) Key Take-Away Points: Since the “late-birth” and “late-marriage” limitations on the eligibility of leave entitlements have been removed, more employees will be eligible for taking extended marriage, maternity and paternity leave. Companies operating in the three locations mentioned above will need to amend their leave policies to reflect the latest changes. 4 Baker & McKenzie | China Employment Law Update • April 2016 Further Guidance Issued on Work Related Injury Issues The Ministry of Human Resources and Social Security issued new opinions on Matters Relating to the Implementation of the Regulation on Work Related Injury Insurance on March 28, 2016, which supplemented the April 2013 Opinions on this topic. The latest Opinions (“Opinions (II)”) provide helpful clarification on several contentious issues on the implementation of the work injury regulations. One point addressed in the Opinions (II) is regarding the employer’s liability when engaging employees at or above retirement age. Where an employee who has attained mandatory retirement age, but not yet completed retirement formalities or started receiving pension benefits, suffers a work injury or an occupational illness while still working for the original employer after reaching the retirement age, the employer shall bear liability pursuant to work injury insurance regulations. However, even if the above procedures are completed, the Opinions (II) does not say that retired persons would be covered by the work injury insurance system (unless contributions are made to a “project insurance” system, which is only applicable to the construction industry), so companies in most industries would appear to be liable for any costs related to a retired person’s work injury. The Opinions (II) also clarify when an employee is considered to be engaged in work for the employer for the purpose of determining when a work injury occurs. It provides that where the employee joins the activities organized by or assigned by the employer, this shall be categorized as ‘work related’ unless the activity is completely irrelevant to work. It also confirms that time reasonably spent by an employee commuting between the work place and their place of residence shall be deemed as work related travel. Key Take-Away Points: In order to minimize the risk of incurring work injury liability when engaging workers at or above retirement age, it is advisable for employers to obtain commercial insurance for such worker to cover any potential liability. Sichuan Province’s Highest Court Issues Guiding Opinion on Labor Disputes The Sichuan Province High People’s Court issued a “Reply to Several Issues Concerning Handling of Labor Dispute Cases” (“Reply”), on January 15, 2016, for the purpose of providing guidance to the lower courts in Sichuan province on unresolved issues that came up in past labor dispute cases. It is likely that the Reply will influence the way in which local judges handle employment dispute cases in Sichuan. We have listed a number of highlights from the Reply below: • Severance calculation formula: The Reply defines the salary base for calculating statutory severance and the double wage penalty for failure to sign a written employment contract as regular salary received for the past 12 months. The Reply expressly excludes overtime pay and other irregular pay such as bonuses, allowances or benefits from the salary base. China Employment Law Update • April 2016 | Baker & McKenzie 5 • Working hours: The Reply may make it slightly easier for companies to avoid normal overtime pay requirements. Usually, to avoid the normal overtime pay rules under the standard working hours system, a company must obtain approval from the local labor bureau for an alternative working hours system to apply to certain types of job positions. The Reply states that if a job position is not covered by any labor bureau approval, but the nature of the work appears to have the characteristics of the flexible working hours system or comprehensive working hours system after looking at multiple factors, the courts may conduct an overall analysis to determine whether overtime compensation is payable. • Social insurance: The Reply confirms that any agreement to include the employer-portion of social insurance payments in an employee’s salary or any employee acknowledgement to waive social insurance payments will be deemed void. Therefore, any arrangements that are made to reduce or avoid social insurance contributions will not satisfy the employer’s obligations to make full social insurance contributions at the statutory rate. • Double wages claims: The Reply puts some limits on when double wage claims should be supported for failure to sign a written contract. Some of the more important clarifications in this respect include the following: (i) if any written documents such as job applicant registration form, offer letter or employee registration form contains employment terms such as a contract term and labor remuneration and the company has honoured such terms of employment, then the parties will be deemed to have entered into a written employment contract; (ii) double wage claims will be rejected if made by senior managers or Human Resources managers whose job duties cover management over employment contract signing; and (iii) retrospectively dating the commencement date of an employment contract to an earlier employment period is acceptable and can release an employer from liability for double wage penalties. Beijing Case Clarifies Issues Regarding Female Employees’ Retirement Age In March 2016, the Beijing No. 2 Intermediate People’s Court ordered a company to reinstate a female Office Administrator who was dismissed upon reaching 50 years of age. Under the law, when an employee reaches the statutory retirement age, the employment contract automatically ends. In its judgment, the court examined in detail the issues relating to female employees’ statutory retirement age. The court analysed various laws and regulations and confirmed that the law on a female employee’s retirement age is as follows: the retirement age should be 55 years of age for a “cadre” (ganbu) or a technical employee, and 50 years of age for a “worker” (gongren). The court also acknowledged that nowadays, the “identities” (shenfen) of “cadre” / “worker” no longer exist in most companies, and therefore, the common practice of local labor authorities is to determine a female employee’s retirement age based on the employee’s job position, i.e., whether it is a managerial / professional / technical position or not, as defined in company policies or according to the employment contract. 6 Baker & McKenzie | China Employment Law Update • April 2016 The court concluded, however, that the labor authorities’ policies and views are not legally binding or capable of being applied by the court. Further, as the labor authorities fail to clearly define the “managerial”, “professional” and “technical” positions, it renders their guidance difficult to follow in practice. In this particular case, the employer had entered the employee’s “identity” into the social insurance system as “cadre”. Also, the company’s policy clearly stated that “With the company, a ‘managerial position’ refers to such position that is of the department leader level or above, and the employee in that position has the authority to manage other employees; all other positions are non-managerial positions.” This company policy was adopted in May 2012 through employee consultation with the final publication step notarized by the notary public. The employee’s employment contract also contained the employee’s agreement to abide by the company’s policies. The court ruled that the employee should not retire until age 55 as the records in the social insurance system showed that the employee joined the company as a “cadre” and the company had failed to provide sufficient evidence to prove that the Office Administrator position that the employee held at the company was a “worker” position. Key Take-Away Points: The current retirement age rules are based on very old laws and regulations. In many cities, the local labor authorities and some local courts (e.g., in Shanghai) have their own guidance on how a female employee’s retirement should be determined. Many jurisdictions apply the law in a similar way to the Beijing labor authorities, i.e., female employees’ retirement age should be determined based on the employee’s job position (i.e., 55 or 50, depending on whether it is a managerial / technical position). This case illustrates that in some jurisdictions, the court’s practice differs. Employers should have clear policies setting out what roles fall under the category of “managerial”, “professional” or “technical”. It would also be prudent to check what identity an employee is registered under in the local social insurance system. Chongqing Court Dismisses Employee’s Claim for Severance Pay due to Company Relocation In April 2016, a Chongqing court dismissed an employee’s claim for severance on the basis that a workplace relocation within the same district did not constitute a breach of the employee’s employment contract. The employer relocated its factory to another location which was about three (3) kilometers away from its original location. Both the factory’s new location and the original location were within the same district. The employee refused to relocate to the new location of the factory and terminated the employment alleging that the employer had failed to provide him with the working conditions stipulated in the employment contract. The employee brought a claim for severance on that basis. The court concluded that the employer had not breached the employment contract, because it provided that the employee’s workplace was Chongqing. Given that both the new location and the original location were in Chongqing, the court found that the factory’s relocation did not China Employment Law Update • April 2016 | Baker & McKenzie 7 substantially impact the employee’s commute, as the new location was very close to the original location. The employee’s claim for severance pay was thus dismissed. Key Take Away Points: In practice, companies may sometimes need to relocate for various reasons. Except for a few cities such as Shenzhen, most local regulations do not provide clear legal guidance as to when a company’s relocation would give employees the right to terminate employment and claim for severance pay. In such cases, courts would look into the circumstances of the relocation and exercise their discretion to determine whether the relocation causes a material impact on the employees or whether it materially changes the objective circumstances upon which the employment contracts were entered into. If the court finds that there has been a material impact then it would uphold the employees’ severance claims. Employers should consider drafting employee work location provisions more broadly (but within reason) in their template employment contracts and should also take measures to reduce the impact a relocation may have on the employee’s commute, as this could assist the employer to defend against employees’ claim for severance pay should a relocation scenario arise. Recent Cases on Collective Contract Issues Three recent cases from the Beijing Haidian District People’s Court help demonstrate what the relationship is between collective contracts and individual employment contracts. In one case, the company did not sign a written individual employment contract with the employee and instead had that employee and other employees sign a collective contract (this is unusual since under the law, a collective contract should be signed with a union or elected employee representatives). The company argued that collective contracts were binding on both employer and employee in accordance with the company policy and had been signed by both parties. The court took the view that (i) a collective contract cannot replace an individual employment contract; and (ii) the separate signature page does not prove that the employee is aware of the contents of the collective contract. Therefore, the court ruled that the company should pay double salary to the employee for failure to conclude a written employment contract. In another similar case, the court also ruled against a company which also argued it had signed a collective contract with the employee and therefore should not be subject to the double salary penalty (it seems the collective contract in this case also was signed with individual employees, instead of the union or employee representatives). The court held that the collective contract was not legally binding and effective, as the company had not filed it with the labor bureau (which is a legally required procedural step tfor the collective contract to be effective). Therefore, the company was liable to pay the double salary penalty. In the final case, the collective contract provided that all employees with more than one year of service with the company were entitled to the 13th month salary at the year end. The employee’s individual employment contract did not have provisions on the 13th month salary. The court ruled 8 Baker & McKenzie | China Employment Law Update • April 2016 Tier 1 law firm for Employment in China and Hong Kong – Asia Pacific Legal 500, 2009 – 2016 Brand 1 law firm for Employment: PRC Law (China/Hong Kong) – Chambers Asia, 2009 - 2016 International Firm of the Year: Labor & Employment – China Law & Practice Awards 2015 Winning Law Firm for Employment & Industrial Relations (International Firms) – China Business Law Journal, China Business Law Awards 2013 Best Labor Law Team of the Year – China STAFF Awards 2012 In-house Community Firm of the Year: Hong Kong Employment – Asian-MENA Counsel's Representing Corporate Asia & Middle East Survey 2013 In-house Community Firm of the Year: China Employment – Asian-MENA Counsel's Representing Corporate Asia & Middle East Survey 2013 Honourable Mention: In-house Community Firm of the Year: Employment (China & Hong Kong) – Asian-MENA Counsel's Representing Corporate Asia & Middle East Survey 2014 that the 13th month salary entitlement should apply to the employee, since according to law, the provisions in the individual employment contract should be not less favourable than the provisions in a collective contract. Key Take-Away Points: Companies should enter into individual employment contracts with each employee, even if a collective contract has been signed. The collective contract can be seen as a framework agreement between an employer and its employees under which all individual employment contracts should be covered. The parties should follow certain statutory procedures (e.g. filing with the labor bureau) in order for a collective contract to be deemed validly entered into and binding on the parties. The standards for working conditions and remuneration in all individual employment contracts should not be less favourable than the standards stipulated in the collective contract. Foreign Movie Star Ordered to Pay Back Income Tax in Beijing According to an official news report, the Beijing local tax bureau recently ordered a foreign movie star to back pay his income tax and overdue payments which amounted to over RMB 18,000,000. The application of a tax treaty was an unprecedented move by the Beijing local tax bureau, allowing them to recover Individual Income Tax (“IIT”) from the foreign movie star who had performed in China. The news report did not specify who the movie star was. Local officials became aware that a foreign movie star who had come to Beijing had been paid USD 8,450,000 via a company set up in the U.S. Local officials and the State Administration of Tax took the view that the movie star should be taxed in Beijing based on the China-US Tax Treaty and “Substance over Form” Principal related to Enterprise Income Tax. As a result, the movie star was required to pay IIT and late payment charges to the Beijing local tax bureau. Key Take-Away Points: From a tax perspective, generally speaking, the tax principles set forth for one type of tax cannot be cross-referenced in the assessment of another type of tax. Therefore, the legal basis for the Beijing local tax authority’ assessment in this case is questionable and the decision thus could be subject to challenge. Should you wish to obtain further information or want to discuss any issues raised in this newsletter with us, please contact: Jonathan Isaacs +852 2846 1968 (Hong Kong) jonathan.isaacs@bakermckenzie.com Zheng Lu +86 21 6105 5922 (Shanghai) zheng.lu@bakermckenzie.com Bofu An +86 10 6535 3852 (Beijing) bofu.an@bakermckenzie.com This Update has been prepared for clients and professional associates of Baker & McKenzie. Whilst every effort has been made to ensure accuracy, this Update is not an exhaustive treatment of the area of law discussed and no responsibility for any loss occasioned to any person acting or refraining from action as a result of material in this Update is accepted by Baker & McKenzie. 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