On June 29, 2007 National People’s Congress of the People’s Republic of China (NPC) promulgated the Labor Contract Law (LCL), which will take effect on January 1, 2008. The LCL has made many significant changes to current prevailing practices with respect to the use of labor contacts in the workplace.
The LCL includes the following key points:
- In drafting or revising work rules and regulations, an employer must consult with the applicable labor union, employee representatives or the employees. If the work rules are deemed to be inappropriate, the labor union, employee representatives or the employees may raise issues during the consultation process.
- Employers are required to execute a written labor contract with an employee within one month of hiring or face statutory penalties.
- The probationary period of an employee is determined according to the length of term of the labor contract.
- An employer may require an employee to sign a service agreement requiring a period of service for, and imposing an early termination penalty on, an employee who receives training at the employer’s expense.
- Only senior management personnel, senior technical employees or other employees who have access to an employer’s trade secrets may be required to sign confidentiality and noncompete agreements, which may extend for a period of up to two years.
- Three types of labor contracts are authorized: fixed-term contracts, nonfixed-term contracts and project-based contracts.
- Severance payments are required in many circumstances under which an employee is terminated.
China’s current Labor Law, adopted in 1994, includes a general section outlining the basic principles concerning labor contracts. Specific provisions concerning labor contracts, however, have traditionally been addressed in more detail in local-level regulations and ordinances. In many cases, standards and rules on the same labor contract issues varied from one province to another. For example, some provinces allowed a maximum noncompete period of two years, while other provinces provide for three years. The LCL was adopted to address some of these local inconsistencies and to impose uniform standards at a national level.
In April 2006, the NPC’s law committee received approximately 190,000 pages of comments to the draft of the LCL pursuant to public notice including comments from the foreign and domestic business communities, labor unions and the public in general. The public release of the drafts of the LCL was an exercise in transparency for the PRC government and resulted in several drafts and revisions to the LCL. A third draft was submitted to the NPC Standing Committee for final review in early 2007. Foreign invested enterprises should pay special attention to the following key provisions of the LCL.
Employers’ Internal Rules and Regulations on Labor Affairs
Internal rules and regulations affecting the vital interests of employees must be discussed with the applicable labor union or employees’ representatives. The LCL states that when an employer proposes, modifies or adopts internal rules and standards for labor affairs in ways that may affect the employees’ vital interests, those rules and standards must be submitted to either an employees’ representative committee or to all employees for discussion. The employer is then required to negotiate in good faith the final rules and standards with the labor union or the employee representatives. The LCL further defines employees’ “vital interests” as including compensation, work hours, rest and leave, workplace health and safety, insurance and benefits, staff training, labor discipline and work quota management.
The LCL requires employers to publish or specially notify employees of internal rules and standards. Each employee then has the right to raise their concerns with respect to work rules and to seek to modify or improve them through negotiations.
Written Labor Contracts
The LCL requires employers to conclude a written labor contract with an employee within one month from the date on which the employee begins work for the employer. If the employer fails to do so, the employee has the right to claim double salary for the months worked without a written labor contract, up to 12 months salary. Employers are advised to (i) conclude a labor contract when employing any new employees and (ii) renew existing labor contracts in a timely manner to avoid double salary claims. In the written labor contract, in addition to key terms of an employment contract such as the term of employment, compensation and benefits, the LCL requires the location and job description be specified. Such rules may require that a labor contract be amended in the event of a change in work location or job duties.
Fixed-Term Contracts, Nonfixed-Term Contracts and Project-Based Contracts
The LCL establishes three types of terms for labor contracts: fixed term, nonfixed term and project based. The fixed-term contract, the most common, provides for a fixed time period of the employment relationship. Upon the expiration of the fixed term, the employment relationship between employer and employee is automatically terminated if the contract is not renewed or a new contract is not signed. A nonfixed-term contract is a contract without an expiration date. The employer may terminate this type of contract under only very limited circumstances. A project-based labor contract has no expiration date, but sets forth conditions for termination of the contract.
Although fixed-term contracts are preferred by most employers because they give the employer the right to review the relationship with an employee periodically as well as the right to terminate the contract upon expiration, the LCL clearly encourages nonfixed-term contracts. The LCL establishes three factual situations under which an employer must enter into a nonfixed-term contract unless the employee agrees otherwise:
1. when the employee has worked for the employer for more than 10 years;
2. when the employee has worked for the employer for more than 10 years without any labor contract and the employee will reach lawful retirement age fewer than 10 years from the time of signing the contract; or
3. the employee has had two consecutive fixedterm contracts with the employer and the employer has no reason stipulated under the LCL to terminate the employee’s current fixedterm contract.
In addition, if an employer fails to enter into any type of labor contract with an employee within one year from the date on which the employee begins providing services to the employer, the employee will automatically be regarded as having a nonfixedterm contract with the employer.
Under the LCL, employers are obligated to offer nonfixed-term contracts to employees and employees have the right to choose a fixed-term or nonfixed-term contract when any of the above factual situations exists. If an employer fails to do so, the employee has the right to claim double salary for each month during which he or she had the right to a nonfixed-term contract.
The LCL sets the employee’s probationary period based upon term of the labor contract. For labor contracts with a term of one year or less, the probationary period may be no longer than one month. For contract terms longer than one year but fewer than three years, the probationary period may not exceed three months. For contract terms longer than three years or nonfixed-term labor contracts, probationary periods should not exceed six months. In addition, the LCL requires that employers pay at least 80 percent or more of an employee’s regular salary during probation, and may not pay less than the minimum wages in the location where the employer is based.
The LCL provides that employers may terminate the employment of a probationary employee without paying severance or giving advanced notice in situations where the employee is deemed to be incompetent, violates employer rules and standards, or is unable to meet the conditions of employment during the probationary period.
The LCL allows an employer to enter into an agreement with an employee requiring the employee to work for a minimum period of time if the employer paid for the employee’s training expenses. An employee violating the agreement may be required to reimburse the employer for the training expenses as stipulated in the contract, but to a maximum amount that the employer actually paid.
Confidentiality Agreements and Noncompete Agreements
The LCL permits confidentiality agreements and noncompete agreements between employers and employees, but limits these to senior management personnel, senior technicians and other employees with an obligation to keep employer information confidential.
The scope, geographical areas and time limits of restrictions on competition shall be agreed upon by the parties up to a maximum of two years. Most importantly, to ensure employees comply with a noncompete agreement, the employer is required to pay consideration. The amount of compensation and liquidated damages is left for the employer and employee to decide and specify in the noncompete agreement.
If an employee breaches a noncompete agreement, the LCL requires only that the employee pay liquidated and other damages caused by the breach. It is silent on whether an employer may seek injunctive relief in the event of a violation of a noncompete clause.
According to the LCL, a labor contract may terminate on terms and conditions agreed upon by the parties or pursuant to law.
A labor contract may be terminated when any of the following conditions occur:
- the labor contract expires;
- the employee begins receiving retirement benefits from the government;
- in the event the employee dies;
- the employer is declared bankrupt in accordance with the law;
- the employer has its business license revoked, is ordered to close or has its qualifications revoked or decides to dissolve; or
- under other conditions or circumstances provided by law.
The LCL requires the employer to pay severance in situations in which the employer declares bankruptcy or is dissolved. It also states that when an employee’s fixed-term contract expires, if the employee declines to continue to work under conditions not less favorable than his or her current contract, the employer’s obligation of paying severance is waived. However, when the employer decides not to continue to employ the employee, the employer has an obligation to pay applicable severance.
Termination Initiated By the Employee
An employee may also terminate a labor contract for many reasons. In addition to having the option of notifying an employer 30 days before leaving a job without cause, an employee may also terminate a labor contract immediately for cause, such as when the employer is violating the law or otherwise harms the employees’ rights or health. If an employee terminates a contract with cause, the employer is required to pay him or her applicable severance. A probationary employee may terminate a contract by giving the employer three days’ prior notice.
Termination Initiated By the Employer
The LCL provides that an employer may terminate a labor contract with the consent and agreement of the employee, for cause, under special circumstances or as a result of a breach of labor contract by the employee.
If the employer proposes to terminate the contract and the employee agrees, the contract can be terminated, but the employer must pay applicable severance. Severance is not necessary if termination is proposed by the employee.
An employer may terminate an employee for cause only when one of the following situations occurs:
1. the employee is proven incompetent during his or her probation period;
2. the employee seriously violates the employer’s internal rules and regulations;
3. the employee has caused severe damage to the employer through his or her gross negligence or self-dealing;
4. the employee is working for more than one employer, which compromises the employee’s ability to do his or her job, and fails to take corrective action when notified by the employer;
5. the employee entered into the contract using fraud, duress or other illegal means; or
6. the employee is subject to a criminal proceeding.
In situations involving termination for cause, the employer has no obligation to pay severance to the employee.
An employer may terminate an employee under special circumstances, provided that the employer gives the employee 30 days’ advance notice and pays applicable severance, if:
1. the employee becomes incapable of working for the employer due to a non-work-related illness or injury, following the statutorily required recovery period;
2. the employee is proven to be incompetent to work for the employer even after training and adjustment of his or her position; and
3. the labor contract cannot be continued because the fundamental facts underlying the employment relationship have undergone substantial change and the parties can no longer reach agreement regarding the contract.
If none of these circumstances apply, an employer may still terminate a contract; however, an employer terminating an employee without statutory or contractual basis is required to pay double the severance amount.
The LCL calculates employee severance as one month’s salary for each year of service to the employer. For more than six months but less than one year’s service period, the severance is one month’s salary. For a service period of fewer than six months, severance is a half-month’s salary. Maximum severance payable to an employee is 12 months salary.
For employees whose salary is three times more than the officially published salary, monthly severance is set at three times the average of the local municipality.
Dispatched or “Seconded” Employees
The LCL provides that employers must not discriminate between dispatched (or seconded) employees and other employees. For example, the recipient employer is required to:
1. inform the dispatched or seconded employees of their compensation;
2. provide them with full labor protection as required for all employees;
3. provide them with overtime pay, bonuses and other benefits if these are offered to regular employees;
4. offer them the same training as other employees;
5. adjust their salaries by the same standards used for other employees. In addition, dispatched or seconded employees have the right to join the labor union of the recipient employer.
It is left for observation as to how the LCL will be applied in practice. In the interim, employers are recommended to understand their obligations under the new law and to make changes to their current labor practices – including the preparation of labor contracts and personnel policy manuals – in a manner that is consistent with the LCL.