Foreign investors recruiting in China should be cautious about respecting Chinese Employment Contract Law (the ECL) and other detailed employment-related laws and regulations in China. Not only are Chinese employees becoming more aware of protecting their rights, but also when disputes arise, Chinese authorities or judges tend to find in favour of local Chinese employees.

The ECL, together with its implementation rules and the Chinese Labour Law of 1994 are the principal employment law statutes in China. They apply to all Chinese workers and foreign nationals who enter into an employment relationship with Companies or Organisations located in China. Foreign employers are probably not bound by the ECL or Chinese Labour law, although specific advice should be sought in this respect, as the application of the law is not entirely clear.

Formation of an employment contract in China and mandatory requirements

The employment relationship is formed on the date when the employee starts work. Written employment contracts are mandatory for full-time employees, although this requirement is often not complied with in practice. An employee is not a full-time employee if he or she is paid by the hour, and works on average less than four hours per day, and 24 hours per week.

The ECL has introduced penalties for failure to enter into a written employment contract to encourage more employers to formalise their arrangements.

If an employee is not given a written employment contract within one month of starting work, he or she can claim double salary for the period of work which is not covered by a written employment contract. If this period exceeds one year, the employment relationship is deemed to be permanent and indefinite.

There are a number of mandatory requirements prescribed by national laws and regulations or local rules. These apply to the employment relationship regardless of the terms of the contract and include:

  • the length of the probationary period (see below);
  • the minimum wage (which varies depending on locality);
  • restrictions on working time: generally no more than eight hours a day or forty hours a week, unless the employee is of management level or a special category, and prior permission of the Labour Authority has been given for more flexible working arrangements;
  • holiday entitlement (which applies after the first year, and is up to 15 days' per year), and;
  • health and safety requirements.

Discrimination law in China

The principle of anti-discrimination (discrimination on the grounds of race, ethnicity, sex, disability, religion, migrant worker or infectious disease status) and the principle of "equal pay for equal work" are set out clearly in Chinese labour law, and specifically in the Employment Promotion Act. China has also ratified the International Labour Organisation's Discrimination (Employment and Occupation) Convention. However, the anti-discrimination law is not well enforced in practice, as the 'law' sets out guidelines rather than mandatory requirements.

Termination of an employment contract in China

Both the employer and the employee must terminate the employment contract in accordance with the conditions set out by the ECL.

During the probationary period

The employer can provide for a probationary period provided that the employment is full-time. The length of this probation period is fixed by the ECL as follows:

Click here to see table

It is not possible to extend the probationary period. During the probationary period, an employment contract can be terminated either by the employer or by the employee. The employee is entitled to terminate the contract without any reason on three days' notice. The employer can terminate the contract with no notice provided that there are legal grounds for a summary dismissal or there is good cause for dismissal on the basis of the illness of the employee or because the employee is unqualified for the post. (See details below).

After the probationary period

After the probationary period, an employee must give thirty days' notice of termination.

If an employer wishes to dismiss an employee, there are - in broad terms - four types of fair dismissal. Dismissal on any other grounds will be unfair. A fair dismissal is one which is either:

  • Effected through negotiation between the parties

This is the easiest way to terminate an employment contract. The employer and employee, through negotiation, can decide the amount of compensation, the procedure of hand-over and the date when the contract is officially terminated.

  • A summary dismissal on permitted grounds without payment of compensation

Permissible grounds for summary dismissal include misconduct, incapability or where a criminal offence has been committed by the employee (whether or not it impacts on employment). Employees dismissed on these grounds are not entitled to any compensation.

Dismissals for misconduct or incapability often give rise to disputes as it can be difficult to prove or establish the grounds of dismissal by the employer.

  • A termination with good cause (as defined by the legislation)

Good cause is established where:

  • The employee cannot continue to work in the original post because of illness or injury for a non-work-related reason. There must also be no other position available to which he/she could be transferred; or
  • The employee is proved to be unqualified for the post, and he/she remains unqualified after training or after having been transferred to another post; or
  • Significant changes have taken place which result in circumstances that are totally different from the conditions when the employment contract was signed. These circumstances would make it practically difficult for the employer to continue the employment contract (this is by nature a catch-all provision which may apply if any of the other instances of good cause cannot be established).

Collective redundancies

A collective redundancy situation is one in which the employer is in serious financial difficulties or has changed its products or operational methods, resulting in the dismissal of 20 or more employees or more than 10% of the workforce.

In order to effect collective redundancies, the employer must consult with the trade union/all employees and must obtain the prior authorisation of the Labour Bureau.

Specific categories of employees have priority to be retained in a collective redundancy situation. Such employees include those with contracts for an indefinite term or longer fixed-term contracts and employees who are the sole earners in a family which includes dependent children or elderly dependents.

If the economic situation improves and the employer decides to recruit again within six months of a collective redundancy exercise, the employer is obliged to recruit the employees previously made redundant if they have the same or appropriate qualifications and abilities as the newly available vacancies.

Unfair dismissal

A dismissal by the employer other than in the circumstances set out above will be regarded as an unfair dismissal. The ECL provides that an unfairly dismissed employee can require reinstatement. If the employee does not wish to be reinstated, or if reinstatement is not possible, the employer must pay damages equal to double the severance pay the employee would have received if the dismissal was lawful (see below). There is no qualifying period of employment for an employee to bring a claim for unfair dismissal.

Entitlement to a severance payment or compensation on dismissal

Other than where an employee resigns, or where there is a summary dismissal, the employer is obliged to make a severance payment. The severance payment is on average one month's salary for each year of service. This is capped by the ECL at three times the local average salary, and up to a maximum of 12 months' salary in total.

There is nothing to prevent an employer providing for a more generous severance payment in order to facilitate the dismissal procedure.

A severance payment is also due where a fixed term contract expires and the employer does not intend to renew it.

What protection is available to employees of an outsourced business?

The ECL has introduced new rules which apply where there is a change of employer. The principle behind the new rules is that changes of the employing company, whether internal (change of name, representatives, shareholders etc) or external (mergers, demergers etc) will not affect the continuation of existing employment contracts. These will continue in full force and effect with the new employer.

Situations where employers' rights of dismissal are limited

The ECL provides for circumstances where an employer cannot dismiss for good cause or for redundancy as follows:

  • Where the employee worked under the risk of occupational disease, or the employee is suspected of suffering an occupational disease and is not referred for a medical check up.
  • Where a medical report confirms that the employee has lost or partially lost the capacity to work due to an occupational disease or a work-related injury suffered while working with the employer;
  • Where the employee has contracted an illness or sustained a non-work-related injury, and he/she is still receiving medical treatment for that illness or injury;
  • Where an employee is pregnant, or within (normally) one year of having given birth; and
  • Where an employee has been working for the employer continuously for not less than 15 years and is less than five years away from his or her statutory retirement age (which is currently 60 for men, and 50 or 55 - depending upon the job - for women).

None of the above circumstances restrict an employer from carrying out a summary dismissal if this is applicable.

Automatic termination of employment contract

The employment contract is terminated automatically when:

  • A fixed term employment expires, and the employer decides not to renew it with the employee. Note that if the employer offers to renew the contract under the same or better terms and conditions of employment, and the employee refuses to renew, the employee will not be entitled to a severance payment;
  • The employee reaches his/her statutory retirement age;
  • The employee dies; or
  • The employer goes bankrupt or its business license is revoked. However, in these circumstances the employer is required to make a severance payment calculated in the same way as if the reason for the termination was good cause.

Conclusion

As the world's second biggest economy, China presents a wealth of opportunities to foreign investors. But these opportunities must be considered against the regulatory environment, including the employment laws that are in place to protect employees.

Detailed employment law is in force in China and this may cause particular issues for foreign employers, to which the application of the law can be ambiguous. Although some employment-related laws, such as those concerning anti-discrimination, are not well enforced, employers may still want to exercise prudent risk management and understand what the parameters of the law are. Where disputes do arise, authorities and judges commonly find in favour of local Chinese employees.

Foreign investors should seek advice and approach recruitment in China bearing in mind the applicable law.