Following two years of relatively transparent discussion and debate, the National People's Congress passed the much anticipated Employment Contracts Law on 29 June 2007 (in force 1 January 2008).

Much of the new Law (i) restates or elaborates on existing law and practice, (ii) affects the internal operations of government rather than directly imposing obligations on employers or (iii) addresses flagrant malpractices of a type unlikely to be relevant to readers of this e-bulletin.

Nevertheless, there are some changes which will require companies with employees in China to review their employment policies and practices. These changes apply to locally employed expatriate as well as local staff.

We would be pleased to discuss these matters further with clients. In the meantime, below is an outline of four significant areas in which changes have been made.

Permanent employment status now easier to acquire

Compared with common law jurisdictions, the scope under Chinese law for lawfully dismissing permanent staff is relatively narrow. Moreover, whilst the maximum compensation available in China for unlawful dismissal is relatively modest, orders for reinstatement in cases of unlawful dismissal are much more likely to be granted than in common law jurisdictions. This often results in practice in employers feeling pressurised to negotiate substantial settlements for dismissed staff.

Contractual provisions for termination on notice are not effective to avoid such consequences. A practice has however grown up in mainland China of employing staff on fixed term contracts which may either be renewed or not, depending on whether the employer wishes to retain the individual.

It is already the law that individuals employed for more than ten years on a repeatedly renewed fixed term basis are treated as "permanent."

The new Law further restricts the effectiveness of this practice by providing in addition that:

(a) An employee re-hired after the expiry of two consecutive fixed terms (irrespective of the length of these terms) is treated as "permanent."

(b) If no written employment contract has been concluded within one year after the date on which the employee commences work for the employer, then the employee is treated as "permanent."

Probationary periods

The PRC Labour Law has always allowed for probationary periods, with the caveat that, under no circumstances could they exceed six months. Employers used these periods to assess staff and generally dismiss them at will. The new law, however, now requires employers to give reasons for when terminating employment during probationary periods.

The new Law also fixes probationary periods as follows:

  • one month where a fixed term is from three months to one year
  • two months where the fixed term is from one to three years
  • six months where the fixed term exceeds three years (or is on a "non-fixed basis")

(These periods are in substance a codification, for the whole of China, of similar time periods established under 2002 Shanghai Municipal Labour Regulations).

Non-compete covenants

  • The new Law provides that: any post-termination non-compete covenant may not last for longer than two years.
  • the employer shall pay financial compensation to the worker on a monthly basis during the restricted period (the level of compensation appears to be a matter to be set locally).

Employers will need to review their existing employment for compliance. For example, local regulations in Shanghai previously allowed non-compete covenants up to three years. There are certain transitional provisions (details of which are outside the scope of an introductory e-bulletin such as this) but it is clear that all contracts concluded after 1 January 2008 will be subject to the two year cap.

The scope for obtaining remedies other than liquidated damages as a method of enforcement for breach of non-compete covenants remains unclear.


The new Law specifies the following method to calculate severance pay in certain (defined) redundancy situations:

The basic rule is one month's salary for each year worked (with any period exceeding six months counting as a full year).

However, where the employee's wage exceeds three times that of the published average local minimum wage, the new Law provides that the "month's salary" element shall be capped at three times the average, and the deemed length of employment shall be capped at twelve years.

In cases of unlawful dismissal (as opposed to redundancy) the compensation payable is calculated in a similar way but with the maximum amounts being doubled. However, as noted under heading 1 above, the remedy of reinstatement is frequently available in cases of unlawful dismissal.